Jekyll_text

ABOUT THE COVER 

1 

The use of the Great Seal of the United 

States is not without significance. At first we 

contemplated having an artist change the 

eagle into a vulture. That, we thought, 

would attract attention and also make a 

statement. Upon reflection, however, we 

realized that the vulture is really harmless. It 

may be ugly, but it is a scavenger, not a 

killer. The eagle, on the other hand, is a 

predator. It is a regal creature to behold, but 

it is deadly to its prey. Furthermore, as 

portrayed on the dollar, it is protected by the 

shield of the United States government even 

though it is independent of it. Finally, it 

holds within its grasp the choice between 

peace or war. The parallels were too great to 

ignore. We decided to keep the eagle. 

G. Edward Griffin is a writer and 

documentary film producer with many 

successful titles to his credit. Listed in Who's 

Who in America, he is well known because of 

his talent for researching difficult topics and 

presenting them in clear terms that all 

(Continued on inside of back cover) 

can

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THE CREATURE 

FROM 

JEKYLL ISLAND 

A Second Look at the 

Federal Reserve 

Third edition 

by G. Edward Griffin 

American Media

Dedicated to the next generation-especially my own brood: 

James, Daniel, Ralph, and Kathleen. 

May this effort help to build for them a better world. 

TABLE OF CONTENTS 

Preface 

Acknowledgments 

Introduction 

i 

iv 

v 

Seventh printing: May 1998 

Sixth printing: September 1997 

Fifth printing: August 1996 

Fourth printing: September 1995 

Third printing: April 1995 

Second printing: November 1994 

First printing: July 1994 

Third edition: May 1998 

Second edition: September 1995 

First edition: July 1994 

© Copyright 1998, 1995 and 1994 by G. Edward Griffin 

Published by American Media 

P.O. Box 4646 

Westlake Village, California 91359-1646 

Library of Congress Catalog Card Number: 98-71615 

ISBN 0-912986-21-2 

Manufactured in the United States 

I. WHAT CREATURE IS THIS? 1 

What is the Federal Reserve System? The answer may 

surprise you. It is not federal and there are no reserves. 

Furthermore, the Federal Reserve Banks are not even banks. The 

key to this riddle is to be found, not at the beginning of the story, 

but in the middle. Since this is not a textbook, we are not 

confined to a chronological structure. The subject matter is not a 

curriculum to be mastered but a mystery to be solved. So let us 

start where the action is. 

1. The Journey to Jekyll Island 3 

2. The Name of the Game Is Bailout 25 

3. Protectors of the Public 41 

4. Home Sweet Loan 67 

5. Nearer to the Heart's Desire 85 

6. Building the New World Order 107 

II. A CRASH COURSE ON MONEY 133 

The eight chapters contained in this and the following 

section deal with material that is organized by topic, not 

chronology. Several of them will jump ahead of events that are 

not covered until later. 

Furthermore, the scope is such that the 

reader may wonder what, if any, is the connection with the 

Federal Reserve System. Please be patient. The importance will 

eventually become clear. It is the author's intent to cover 

concepts and principles before looking at events. Without this 

background, the history of the Federal Reserve is boring. With it, 

the story emerges as an exciting drama which profoundly affects 

our lives today. So let us begin this adventure with a few 

discoveries about the nature of money itself. 

7. The Barbaric Metal 135 

8. Fool's Gold . . .- 155 

9. The Secret Science 171 

10. The Mandrake Mechanism 185

III. THE NEW ALCHEMY 215 

The ancient alchemists sought in vain to convert lead into 

gold. Modern alchemists have succeeded in that quest. The lead 

bullets of war have yielded an endless source of gold for those 

magicians who control the Mandrake Mechanism. The startling 

fact emerges that, without the ability to create fiat money, most 

modern wars simply would not have occurred. As long as the 

Mechanism is allowed to function, future wars are inevitable. 

This is the story of how that came to pass. 

11. The Rothschild Formula 217 

12. Sink the Lusitanial 235 

13. Masquerade in Moscow 263 

14. The Best Enemy Money Can Buy 285 

IV. A TALE OF THREE BANKS 307 

It has been said that those who are ignorant of history are 

doomed to repeat its mistakes. It may come as a surprise to learn 

that the Federal Reserve System is America's fourth central 

bank, not its first. We have been through all this before and, each 

time, the result has been the same. Interested in what happened? 

Then let's set the coordinates of our time machine to the colony 

of Massachusetts and the year 1690. To activate, turn to chapter 

fifteen. 

15. The Lost Treasure Map 309 

16. The Creature Comes to America 325 

17. A Den of Vipers 341 

18. Loaves and Fishes, and Civil War 361 

19. Greenbacks and Other Crimes 377 

V. THE HARVEST 405 

Monetary and political scientists continue to expound the 

theoretical merits of the Federal Reserve System. It has become a 

modern act of faith that economic life simply could not go on 

without it. But the time for theory is past. The Creature moved 

into its final lair in 1913 and has snorted and thrashed about the 

landscape ever since. If we wish to know if it is a creature of 

service or a beast of prey, we merely have to look at what it has 

done. And, after the test of all those years, we can be sure that 

what it has done, it will continue to do. Or, to use the Biblical 

axiom, a tree shall be known by the fruit it bears. Let us now 

examine the harvest. 

20. The London Connection 407 

21. Competition Is A Sin 431 

22. The Creature Swallows Congress 451 

23. Hie Great Duck Dinner 471 

VI. TIME TRAVEL INTO THE FUTURE 505 

In the previous sections of this book, we have travelled 

through time. We began our journey by stepping into the past. 

As we crisscrossed the centuries, we observed wars, treachery, 

profiteering, and political deception. That has brought us to the 

present. Now we are prepared to ride our time machine into the 

future. It will be a hair-raising trip, and much of what lies ahead 

will be unpleasant. But it has not yet come to pass. It is merely 

the projection of present forces. If we do not like what we see, 

we still have an opportunity to change those forces. The future 

will be what we choose to make it. 

24. Doomsday Mechanisms 507 

25. A Pessimistic Scenario 537 

26. A Realistic Scenario 565 

PHOTOGRAPHS 

The seven men who met in secret at Jekyll Island 24 

The Fabian Society stained-glass window 106 

First photo section 208-214 

Period cartoons about the Rothschilds 234 

Items relating to the sinking of the Lusitania . 262 

Second photo section 396-404 

APPENDIX 

A. Structure and Function of the Federal Reserve 590 

B. Natural Laws of Human Behavior in Economics .... 592 

C. Is Ml Subtractive or Accumulative? 594 

BIBLIOGRAPHY 596 

INDEX 602

PREFACE 

Does the world really need another book on the Federal 

Reserve System? 

I have struggled with that question for several years. My 

own library is mute testimony to the fact that there has been no 

shortage of writers willing to set off into the dark forest to do 

battle with the evil dragon. But, for the most part, their books 

have been ignored by the mainstream, and the giant snorter 

remains undaunted in his lair. There seemed to be little reason to 

think that I could succeed where so many others have failed. 

Yet, the idea was haunting. There was no doubt in my mind 

that the Federal Reserve is one of the most dangerous creatures 

ever to stalk our land. Furthermore, as my probing brought me 

into contact with more and more hard data, I came to realize that 

I was investigating one of the greatest "who-dunits" of history. 

And, to make matters worse, I discovered who did it. 

Someone has to get this story through to the public. The 

problem, however, is that the public doesn't want to hear it. After 

all, this is bad news, and we certainly get enough of that as it is. 

Another obstacle to communication is that this tale truly is 

incredible, which means unbelievable. The magnitude by which 

reality deviates from the accepted myth is so great that, for most 

people, it simply is beyond credibility. Anyone carrying this 

message is immediately suspected of paranoia. Who will listen 

to a madman? 

And, finally, there is the subject matter itself. 

It can become 

pretty complex. Well, at least that's how it seems at first. 

Treatises on this topic often read like curriCfllum textbooks for 

banking and finance. It is easy to become ensnared in a sticky 

web of terminology and abstractions. Only monetary professionals 

are motivated to master the new language, and even they 

often find themselves in serious disagreement. For example, in a 

recent letter circulated by a group of monetary experts who, for 

years, have conducted an ongoing exchange of ideas regarding 

monetary reform, the editor said: "It is frustrating that we 

cannot find more agreement among ourselves on this vital issue. 

We seem to differ so much on definitions and on, really, an 

unbiased, frank, honest, correct understanding of just how our 

current monetary system does function/ 7 

So why am I now making my own charge into the dragon's 

teeth? It's because I believe there is a definite change in the wind 

of public attitude. As the gathering economic storm draws 

nearer, more and more people will tune into the weather 

report—even if it is bad news. Furthermore, the evidence of the 

truth of this story is now so overpowering that I trust my readers 

will have no choice but to accept it, all questions of sanity aside. 

If the village idiot says the bell has fallen from the steeple and 

comes dragging the bell behind him, well,. . 

Lastly, I have discovered that this subject is not as complicated 

as it first appeared to be, and I am resolved to avoid the 

pitfall of trodding the usual convoluted path. What follows, 

therefore, will be the story of a crime, not a course on criminology. 

It was intended that this book would be half its present size 

and be completed in about one year. From the beginning, 

however, it took on a life force of its own, and I became but a 

servant to its will. It refused to stay within the confines 

prescribed and, like the genie released from its bottle, grew to 

enormous size. When the job was done and it was possible to 

assess the entire manuscript, I was surprised to realize that four 

books had been written instead of one. 

First, there is a crash course on money, the basics of banking 

and currency. Without that, it would be impossible to understand 

the fraud that now passes for acceptable practice within 

the banking system. 

Second, there is a book on how the world's central banks 

the Federal Reserve being one of them—are catalysts for war. 

That is what puts real fire into the subject, because it shows that 

we are dealing, not with mere money, but with blood, human 

suffering, and freedom itself. 

is 

Third, there is a history of central banking in America. That 

essential to a realization that the concept behind the Federal 

Reserve was tried three times before in America. We need to 

know that and especially need to know why those institutions 

were eventually junked. 

Finally, there is an analysis of the Federal Reserve itself and 

its dismal record since 1913. This is probably the least important 

part of all, but it is the reason we are here. It is the least 

important, not because the subject lacks significance, but 

11

ecause it has been written before by writers far more qualified 

and more skilled than I. As mentioned previously, however, 

those volumes generally have remained unread except by 

technical historians, and the Creature has continued to dine 

upon its hapless victims. 

There are seven discernible threads that are woven throughout 

the fabric of this study. They represent the reasons for 

abolition of the Federal Reserve System. When stated in their 

purest form, without embellishment or explanation, they sound 

absurd to the casual observer. It is the purpose of this book, 

however, to show that these statements are all-too-easy to 

substantiate. 

The Federal Reserve System should be abolished for the 

following reasons: 

• It is incapable of accomplishing its stated objectives. 

(Chapter 1.) 

• It is a cartel operating against the public interest. (Chapter 3.) 

• It is the supreme instrument of usury. (Chapter 10.) 

• It generates our most unfair tax. (Chapter 10.) 

• It encourages war. (Chapter 14.) 

• It destabilizes the economy. (Chapter 23.) 

• It is an instrument of totalitarianism. (Chapters 5 and 26.) 

This is a story about limitless money and hidden global 

power. The good news is that it is as fascinating as any work of 

fiction could be, and this, I trust, will add both pleasure and 

excitement to the learning process. 

The bad news is that every detail of what follows is true. 

m 

G. Edward Griffin 

ACKNOWLEDGMENTS 

A writer who steals the work of another is called a plagiarist. 

One who takes from the works of many is called a researcher. That 

is a roundabout way of saying I am deeply indebted to the efforts of 

so many who have previously grappled this topic. It is impossible 

to acknowledge them except in footnote and bibliography. Without 

the cumulative product of their efforts, it would have taken a 

lifetime to pull together the material you are about to read. 

In addition to the historical facts, however, there are numerous 

concepts which, to the best of my knowledge, are not to be found in 

prior literature. Primary among these are the formulation of certain 

"natural laws" which, it seemed to me, were too important to leave 

buried beneath the factual data. You will easily recognize these and 

other editorial expressions as the singular product of my own 

perceptions for which no one else can be held responsible. 

I would like to give special thanks to Myril Creer and Jim Toft 

for having first invited me to give a lecture on this subject and, thus, 

forcing me to delve into it at some depth; and to Herb Joiner for 

encouraging me, after the speech, to "take it on the road." This 

book is the end result of a seven-year journey that began with those 

first steps. Wayne C. Rickert deserves a special medal for his 

financial support to get the project started and for his incredible 

patience while it crawled toward completion. Thanks to Bill Jasper 

for providing copies of numerous hard-to-locate documents. 

Thanks, also, to Linda Perlstein and Melinda Wiman for keeping 

my business enterprises functioning during my preoccupation with 

this project And a very personal thanks to my wife, Patricia, for 

putting up with my periods of long absence while completing the 

manuscript, for meticulous proofreading, and for a most perceptive 

critique of its development along the way. 

Finally, I would like to acknowledge those readers of the first 

three printings who have assisted in the refinement of this work 

Because of their efforts most of the inevitable errata have been 

corrected for the second edition. Even so, it would be foolhardy to 

think that there are no more errors within the following pages. I 

have tried to be meticulous with even the smallest detail, but one 

cannot harvest such a huge crop without dropping a few seeds. 

Therefore, corrections and suggestions from new readers are sincerely 

invited. In my supreme optimism, I would like to think that 

they will be incorporated into future editions of this book. 

IV

INTRODUCTION 

The following exchange was published in the British humor 

magazine, Punch, on April 3, 1957. It is reprinted here as an 

appropriate introduction and as a mental exercise to limber the 

mind for the material contained in this book. 

Q. What are banks for? 

A. To make money. 

Q. For the customers? 

A. For the banks. 

Q. Why doesn't bank advertising 

mention this? 

A. It would not be in good taste. 

But it is mentioned by implication 

in references to reserves of 

$249,000,000 or thereabouts. 

That is the money that they have 

made. 

Q. Out of the customers? 

A. I suppose so. 

Q. They also mention Assets of 

$500,000,000 or thereabouts. 

Have they made that too? 

A. Not exactly. That is the 

money they use to make money. 

Q. I see. And they keep it in a 

safe somewhere? 

A. Not at all. They lend it to 

customers. 

Q. Then they haven't got it? 

A. No. 

Q. Then how is it Assets? 

A. They maintain that it would 

be if they got it back. 

Q. But they must have some 

money in a safe somewhere? 

A. Yes, usually $500,000,000 or 

thereabouts. This is called 

Liabilities. 

Q. But if they've got it, how can 

they be liable for it? 

A. Because it isn't theirs. 

Q. Then why do they have it? 

A. It has been lent to them by 

customers. 

Q. You mean customers lend 

banks money? 

A. In effect. They put money 

into their accounts, so it is really 

lent to the banks. 

Q. And what do the banks do 

with it? 

A. Lend it to other customers. 

Q. But you said that money they 

lent to other people was Assets? 

A. Yes. 

Q. Then Assets and Liabilities 

must be the same thing? 

A. You can't really say that. 

Q. But you've just said it. If I put 

$100 into my account the bank is 

liable to have to pay it back, so 

it's Liabilities. But they go and 

lend it to someone else, and he is 

liable to have to pay it back, so 

it's Assets. It's the same $100, 

isn't it? 

A. Yes. But ... 

Q. Then it cancels out. It means, 

doesn't it, that banks haven't 

really any money at all? 

A. Theoretically.. . 

Q. Never mind theoretically. 

And if they haven't any money, 

where do they get their 

Reserves of $249,000,000 or 

thereabouts? 

A. I told you. That is the money 

they have made. 

Q. How? 

A. Well, when they lend your 

$100 to someone they charge 

him interest. 

Q. How much? 

A. It depends on the Bank Rate. 

Say five and a-half per cent. 

That's their profit. 

Q. Why isn't it my profit? Isn't it 

my money? 

A. It's the theory of banking 

practice that ... 

Q. When I lend them my $100 

why don't I charge them interest? 

A. You do. 

Q. You don't say. How much? 

A. It depends on the Bank Rate. 

Say half a per cent. 

Q. Grasping of me, rather? 

A. But that's only if you're not 

going to draw the money out 

again. 

Q. But of course, I'm going to 

draw it out again. If I hadn't 

wanted to draw it out again I 

could have buried it in the garden, 

couldn't I? 

A. They wouldn't like you to 

draw it out again. 

Q. Why not? If I keep it there 

you say ifs a Liability. Wouldn't 

they be glad if I reduced their 

Liabilities by removing it? 

A. No. Because if you remove it 

they can't lend it to anyone else. 

Q. But if I wanted to remove it 

they'd have to let me? 

A. Certainly. 

Q. But suppose they've already 

lent it to another customer? 

A. Then they'll let you have 

someone else's money. 

Q. But suppose he wants his too 

. . . and they've let me have it? 

A. You're being purposely obtuse. 

Q. I think I'm being acute. What 

if everyone wanted their money 

at once? 

A. It's the theory of banking 

practice that they never would. 

Q. So what banks bank on is not 

having to meet their commitments? 

A. I wouldn't say that. 

Q. Naturally. Well, if there's 

nothing else you think you can 

tell me ...? 

A. Quite so. Now you can go off 

and open a banking account. 

Q. Just one last question. 

A. Of course. 

Q. Wouldn't I do better to go off 

and open up a bank? 

VI

Section I 

WHAT CREATURE 

IS THIS? 

What is the Federal Reserve System? The answer 

may surprise you. It is not federal and there are 

no reserves. Furthermore, the Federal Reserve 

Banks are not even banks. The key to this riddle is 

to be found, not at the beginning of the story, but 

in the middle. Since this is not a textbook, we are 

not confined to a chronological structure. The 

subject matter is not a curriculum to be mastered 

but a mystery to be solved. So let us start where 

the action is.

Chapter One 

THE JOURNEY TO 

JEKYLL ISLAND 

The secret meeting on Jekyll Island in Georgia at 

which the Federal Reserve was conceived; the 

birth of a banking cartel to -protect its members 

from competition; the strategy of haw to convince 

Congress and the public that this cartel was an 

agency of the United States government. 

The New Jersey railway station was bitterly cold that night. 

Flurries of the year's first snow swirled around street lights. 

November wind rattled roof panels above the track shed and gave 

a long, mournful sound among the rafters. 

It was approaching ten P.M., and the station was nearly empty 

except for a few passengers scurrying to board the last Southbound 

of the day. The rail equipment was typical for that year of 1910, 

mostly chair cars that converted into sleepers with cramped upper 

and lower berths. For those with limited funds, coach cars were 

coupled to the front. They would take the brunt of the engine's 

noise and smoke that, somehow, always managed to seep through 

unseen cracks. A dining car was placed between the sections as a 

subtle barrier between the two classes of travelers. By today's 

standards, the environment was drab. Chairs and mattresses were 

hard. Surfaces were metal or scarred wood. Colors were dark green 

and gray. 

In their hurry to board the train and escape the chill of the 

wind, few passengers noticed the activity at the far end of the 

platform. At a gate seldom used at this hour of the night was a 

Spectacular sight. Nudged against the end-rail bumper was a long 

car that caused those few who saw it to stop and stare. Its gleaming 

black paint was accented with polished brass hand rails, knobs, 

frames, and filigrees. The shades were drawn, but through the open 

door, one could see mahogany paneling, velvet drapes, plush

THE CREATURE FROM JEKYLL ISLAND 

armchairs, and a well stocked bar. Porters with white serving coats 

were busying themselves with routine chores. And there was the 

distinct aroma of expensive cigars. Other cars in the station bore 

numbers on each end to distinguish them from their dull brothers. 

But numbers were not needed for this beauty. On the center of each 

side was a small plaque bearing but a single word: ALDRICH. 

The name of Nelson Aldrich, senator from Rhode Island, was 

well known even in New Jersey. By 1910, he was one of the most 

powerful men in Washington, D.C., and his private railway car 

often was seen at the New York and New Jersey rail terminals 

during frequent trips to Wall Street. Aldrich was far more than a 

senator. He was considered to be the political spokesman for big 

business. As an investment associate of J.F. Morgan, he had 

extensive holdings in banking, manufacturing, and public utilities. 

His son-in-law was John D. Rockefeller, Jr. Sixty years later, his 

grandson, Nelson Aldrich Rockefeller, would become Vice- 

President of the United States. 

When Aldrich arrived at the station, there was no doubt he was 

the commander of the private car. 

Wearing a long, fur-collared 

coat, a silk top hat, and carrying a silver-tipped walking stick, he 

strode briskly down the platform with his private secretary, 

Shelton, and a 

cluster of porters behind them hauling assorted 

trunks and cases. 

No sooner had the Senator boarded his car when several more 

passengers arrived with similar collections of luggage. The last 

man appeared just moments before the final "aaall aboarrrd." He 

was carrying a shotgun case. 

While Aldrich was easily recognized by most of the travelers 

who saw him stride through the station, the other faces were not 

familiar. These strangers had been instructed to arrive separately, 

to avoid reporters, and, should they meet inside the station, to 

pretend they did not know each other. After boarding the train, 

they had been told to use first names only so as not to reveal each 

other's identity. As a result of these precautions, not even the 

private-car porters and servants knew the names of these guests. 

Back at the main gate, there was a double blast from the 

engine's whistle. Suddenly, the gentle sensation of motion; the 

excitement of a journey begun. But, no sooner had the train cleared 

the platform when it shuttered to a stop. Then, to everyone's 

surprise, it reversed direction and began moving toward the station 

THE JOURNEY TO JEKYLL ISLAND 5 

again. Had they forgotten something? Was there a problem with 

the engine? 

A sudden lurch and the slam of couplers gave the answer. They 

had picked up another car at the end of the train. Possibly the mail 

car? In an instant the forward motion was resumed, and all 

thoughts returned to the hip ahead and to the minimal comforts of 

the accommodations. 

And so, as the passengers drifted off to sleep that night to the 

rhythmic clicking of steel wheels against rail, little did they dream 

that, riding in the car at the end of their train, were seven men who 

represented an estimated one-fourth of the total wealth of the entire 

world. 

This was the roster of the Aldrich car that night: 

1. Nelson W. Aldrich, Republican "whip" in the Senate, Chairman 

of the National Monetary Commission, business associate of J.P, 

Morgan, father-in-law to John D. Rockefeller, Jr.; 

2. Abraham Piatt Andrew, Assistant Secretary of the United States 

Treasury; 

3. Frank A. Vanderlip, president of the National City Bank of New 

York, the most powerful of the banks at that time, representing 

William Rockefeller and the international investment banking 

house of Kuhn, Loeb & Company; 

4. Henry P. Davison, senior partner of the J.P. Morgan Company; 

5. Charles D. Norton, president of J.P. Morgan's First National Bank 

of New York; 

6. Benjamin Strong, head of J.P. Morgan's Bankers Trust Company; 

and 

7. Paul M. Warburg, a partner in Kuhn, Loeb & Company, a 

representative of the Rothschild banking dynasty in England 

and France, and brother to Max Warburg who was head of the 

Warburg banking consortium in Germany and the Netherlands. 

1. In private correspondence between the author and Andrew L. Gray, the Grand 

Nephew of Abraham P. Andrew, Mr. Gray claims that Strong was not in 

attendance. On the other hand, Frank Vanderlip—who was there—says in his 

memoirs that he was. How could Vanderlip be wrong? Gray's response: "He was 

in his late seventies when he wrote the book and the essay in question. . . Perhaps 

the wish was father to the thought." If Vanderlip truly was in error, it was perhaps 

not so significant after all because, as Gray admits: "Strong would have been among 

those few to be let in on the secret." In the absence of further confirmation to the 

contrary, we are compelled to accept Vanderlip's account.

THE CREATURE FROM JEKYLL ISLAND 

CONCENTRATION OF WEALTH 

Centralization of control over financial resources was far 

advanced by 1910. In the United States, there were two main focal 

points of this control: the Morgan group and the Rockefeller group. 

Within each orbit was a maze of commercial banks, acceptance 

banks, and investment firms. In Europe, the same process had 

proceeded even further and had coalesced into the Rothschild 

group and the Warburg group. An article appeared in the New York 

Times on May 3, 1931, commenting on the death of George Baker, 

one of Morgan's closest associates. It said: "One-sixth of the total 

wealth of the world was represented by members of the Jekyll 

Island Club." The reference was only to those in the Morgan group, 

(members of the Jekyll Island Club), It did not include the 

Rockefeller group or the European financiers. When all of these are 

combined, the previous estimate that one-fourth of the world's 

wealth was represented by these groups is probably conservative. 

In 1913, the year that the Federal Reserve Act became law, a 

subcommittee of the House Committee on Currency and Banking, 

under the chairmanship of Arsene Pujo of Louisiana, completed its 

investigation into the concentration of financial power in the 

United States. Pujo was considered to be a spokesman for the oil 

interests, part of the very group under investigation, and did 

everything possible to sabotage the hearings. In spite of his efforts, 

however, the final report of the committee at large was devastating: 

Your committee is satisfied from the proofs submitted ... that 

there is an established and well defined identity and community of 

interest between a few leaders of finance . . . which has resulted in great 

and rapidly growing concentration of the control of money and credit 

in the hands of these few men. . . 

Under our system of issuing and distributing corporate securities 

the investing public does not buy directly from the corporation. The 

securities travel from the issuing house through middlemen to the 

investor. It is only the great banks or bankers with access to the 

mainsprings of the concentrated resources made up of other people's 

money, in the banks, trust companies, and life insurance companies, 

and with control of the machinery for creating markets and 

distributing securities, who have had the power to underwrite or 

guarantee the sale of large-scale security issues. The men who through 

their control over the funds of our railroad and industrial companies 

are able to direct where such funds shall be kept, and thus to create 

these great reservoirs of the people's money are the ones who are in a 


position to tap those reservoirs for the ventures in which they are 

interested and to prevent their being tapped for purposes which they 

do not approve.... 

When we consider, also, in this connection that into these 

reservoirs of money and credit there flow a large part of the reserves of 

the banks of the country, that they are also the agents and 

correspondents of the out-of-town banks in the loaning of their 

surplus funds in the only public money market of the country, and 

that a small group of men and their partners and associates have now 

further strengthened their hold upon the resources of these 

institutions by acquiring large stock holdings therein, by 

representation on their boards and through valuable patronage, we 

begin to realize something of the extent to which this practical and 

effective domination and control over our greatest financial, railroad 

and industrial corporations has developed, largely within the past five 

years, and that it is fraught with peril to the welfare of the country. 

Such was the nature of the wealth and power represented by 

those seven men who gathered in secret that night and travelled in 

the luxury of Senator Aldrich's private car. 

DESTINATION JEKYLL ISLAND 

As the train neared its destination of Raleigh, North Carolina, 

the next afternoon, it slowed and then stopped in the switching 

yard just outside the station terminal. Quickly, the crew threw a 

switch, and the engine nudged the last car onto a siding where, just 

as quickly, it was uncoupled and left behind. When passengers 

stepped onto the platform at 

the terminal a few moments later, 

their train appeared exactly as it had been when they boarded. 

They could not know that their travelling companions for the night, 

at that very instant, were joining still 

another train which, within 

the hour, would depart Southbound once again. 

The elite group of financiers was embarked on a thousand-mile 

journey that led them to Atlanta, then to Savannah and, finally, to 

the small town of Brunswick, Georgia. At first, it would seem that 

Brunswick was an unlikely destination. Located on the Atlantic 

seaboard, it was primarily a fishing village with a small but lively 

port for cotton and lumber. It had a population of only a few 

thousand people. But, by that time, the Sea Islands that sheltered 

I- Herman E. Krooss, ed., Documentary History of Currency and Banking in tJie United 

States (New York: Chelsea House, 1983), Vol. Ill, "Final Report from the Pujo 

Committee, February 28, 1913," pp. 222-24.

8 THE CREATURE FROM JEKYLL ISLAND THE JOURNEY TO JEKYLL ISLAND 

the coast from South Carolina to Florida already had become 

popular as winter resorts for the very wealthy. One such island, just 

off the coast of Brunswick, had recently been purchased by J.P. 

Morgan and several of his business associates, and it was here that 

they came in the fall and winter to hunt ducks or deer and to escape 

the rigors of cold weather in the North. It was called Jekyll Island. 

When the Aldrich car was uncoupled onto a siding at the small 

Brunswick station, it was, indeed, conspicuous. Word travelled 

quickly to the office of the town's weekly newspaper. While the 

group was waiting to be transferred to the dock, several people 

from the paper approached and began asking questions. Who were 

Mr. Aldrich's guests? Why were they here? Was there anything 

special happening? Mr. Davison, who was one of the owners of 

Jekyll Island and who was well known to the local paper, told them 

that these were merely personal friends and that they had come for 

the simple amusement of duck hunting. Satisfied that there was no 

real news in the event, the reporters returned to their office. 

Even after arrival at the remote island lodge, the secrecy 

continued. For nine days the rule for first-names-only remained in 

effect. Full-time caretakers and servants had been given vacation, 

and an entirely new, carefully screened staff was brought in for the 

occasion. This was done to make absolutely sure that none of the 

servants might recognize by sight the identities of these guests. It is 

difficult to imagine any event in history—including preparation for 

war—that was shielded from public view with greater mystery and 

secrecy. 

The purpose of this meeting on lekyll Island was not to hunt 

ducks. Simply stated, it was to come to an agreement on the 

structure and operation of a banking cartel. The goal of the cartel, 

as is true with all of them, was to maximize profits by minimizing 

competition between members, to make it difficult for new competitors 

to enter the field, and to utilize the police power of 

government to enforce the cartel agreement. In more specific terms, 

the purpose and, indeed, the actual outcome of this meeting was to 

create the blueprint for the Federal Reserve System. 

THE STORY IS CONFIRMED 

For many years after the event, educators, commentators, and 

historians denied that the Jekyll Island meeting ever took place. 

Even now, the accepted view is that the meeting was relatively 

unimportant, and only paranoid unsophisticates would try to make 

anything out of it. Ron Chemow writes: "The Jekyll Island meeting 

would be the fountain of a thousand conspiracy theories." Little 

by little, however, the story has been pieced together in amazing 

detail, and it has come directly or indirectly from those who 

actually were there. Furthermore, if what they say about their own 

purposes and actions does not constitute a classic conspiracy, then 

there is little meaning to that word. 

The first leak regarding this meeting found its way into print in 

1916. It appeared in Leslie's Weekly and was written by a young 

financial reporter by the name of B.C. Forbes, who later founded 

Forbes Magazine. The article was primarily in praise of Paul 

Warburg, and it is likely that Warburg let the story out during 

conversations with the writer. At any rate, the opening paragraph 

contained a 

dramatic but highly accurate summary of both the 

nature and purpose of the meeting: 

Picture a party of the nation's greatest bankers stealing out of New 

York on a 

private railroad car under cover of darkness, stealthily 

hieing hundreds of miles South, embarking on a mysterious launch, 

sneaking on to an island deserted by all but a few servants, living there 

a full week under such rigid secrecy that the names of not one of them 

was once mentioned lest the servants learn the identity and disclose to 

the world this strangest, most secret expedition in the history of 

American finance. 

I am not romancing. I am giving to the world, for the first time, the 

real story of how the famous Aldrich currency report, the foundation 

of our new currency system, was written. 

In 1930, Paul Warburg wrote a massive book—1750 pages in 

all—entitled The Federal Reserve System, Its Origin and Growth. In this 

tome, he described the meeting and its purpose but did not 

mention either*its location or the names of those who attended. But 

he did say: "The results of the conference were entirely confidential. 

Even the fact there had been a meeting was not permitted to 

become public." Then, in a footnote he added: "Though eighteen 

years have since gone by, I do not feel free to give a description of 

1 . Ron Chernow, The House of Morgan: An American Banking Dynasty and the Rise of 

Modern Finance (New York: Atlantic Monthly Press, 1990), p. 129. 

I "Men Who Are Making America/' by B.C. Forbes, Leslies Weekly, October 19, 

1916, p. 423. 

I

10 THE CREATURE FROM JEKYLL ISLAND 


this most interesting conference concerning which Senator Aldrich 

In the February 9, 1935, issue of the Saturday Evening Post, an 

pledged all participants to secrecy." 1 

article appeared written by Frank Vanderlip. In it he said: 

An interesting insight to Paul Warburg's attendance at the 

Jekyl] Island meeting came 

Despite my views about the value to society of greater publicity 

thirty-four years later, in a book written 

for the affairs of corporations, there was an occasion, near the close of 

by his son, James. James had been appointed by F.D.R. as Director 

1910, when I was as secretive—indeed, as furtive—as any 

of the Budget and, during World War II, as head of the Office of 

conspirator.. . . I do not feel it is any exaggeration to speak of our secret 

War Information. In his book he described how his father, who 

expedition to Jekyll Island as the occasion of the actual conception of 

didn't know one end of a gun from the other, borrowed a shotgun 

what eventually became the Federal Reserve System.... 

from a friend and carried it with him to the train 

We were told to leave our last names behind us. We were told, 

to disguise himself 

as a duck hunter. 

further, that we should avoid dining together on the night of our 

departure. We were instructed to come one at a time and as 

This part of the story was corroborated in the official biography 

unobtrusively as possible to the railroad tenninal on the New Jersey 

of Senator Aldrich, written by Nathaniel Wright Stephenson: 

littoral of the Hudson, where Senator Aldrich's private car would be in 

In the autumn of 1910, six men [in addition to Aldrich] 

readiness, attached to the rear 

went 

end of a train for the South.... 

out to 

shoot ducks. That is to say, they told the world that was 

Once aboard the private car we began to observe the taboo that 

their purpose. 

Mr. Warburg, who was of the number, gives an amusing 

had been fixed on last names. We addressed one another as "Ben/' 

account of his 

feelings when he boarded a private "Paul/ 7 

"Nelson/' "Abe"—it is Abraham Piatt Andrew. Davison and I 

car in Jersey City, bringing with 

him all the accoutrements of a duck adopted even deeper disguises, abandoning our first names. 

shooter. The 

On the 

joke was in the fact 

that he had never shot a duck theory that we were always right, he became Wilbur and I became 

in his life and had no intention of 

shooting any.... The duck shoot was a blind. 3 

Orville, after those two aviation pioneers, the Wright brothers.... 

The servants and train crew may have known the identities of one 

Stephenson continues with a description of the encounter at 

or two of us, but they did not know all, and it was the names of all 

Brunswick station. He tells us that, shortly after they arrived, the 

printed together that would have made our mysterious journey 

station master walked into the private car and shocked 

significant in 

them by Washington, in Wall Street, 

his 

even in London. Discovery, 

apparent knowledge of the 

we knew, simply must not happen, 

identities 

or else all our time and effort 

of everyone on board. To 

make matters 

would be wasted. If it were to be exposed publicly that our particular 

even worse, he said that a group of reporters were 

group had got together and written a banking bill, that bill would have 

waiting outside. Davison took charge. "Come outside, old man," he 

no chance whatever of passage by Congress. 

said, "and I will tell you a story.' 7 No one claims to know what story 

was told standing on the railroad 

THE 

ties that morning, 

STRUCTURE WAS PURE CARTEL 

but a few 

moments later Davison returned with a broad 

The composition of the Jekyll Island meeting was a classic 

smile on his face. 

"It's all right," he said reassuringly. "They 

example of cartel structure. A cartel is a 

won't 

group of independent 

give us away." 

Stephenson continues: "The businesses which join together 

rest 

to coordinate the production, 

is silence. The reporters dispersed, 

and the secret 

pricing, 

of the strange 

or marketing of their members. The purpose of a cartel is to 

journey was not divulged. No 

one asked him how he 

reduce 

managed 

competition and thereby increase profitability. This is 

it and he did not volunteer the 

information.' 

accomplished through a shared monopoly over their industry 

which forces the public to pay higher prices for their goods or 

1. Paul Warburg, The Federal Reserve System 

services than would be otherwise required under free-enterprise 

Its Origin and Growth (New York- 

Macmil an, 1930), Vol. I, p. 58. It is apparent that Warburg wrote this line two years 

competition. 

before the book was published. 

2. James Warburg, The Long Road Home (New York: Doubleday, 1964) p 29 

1- "From 

3. Nathaniel 

Farm Boy to Financier," by Frank A. Vanderlip, The Saturday Evening 

Wright Stephenson, Nelson W. Aldrich in American Politics '(New York- 

Post, Feb. 9, 

Scnbners, 

1933, 

1930; 

pp. 25, 70. The identical story was told two years later in 

rpt. New York: Kennikat Press, 1971), p. 373. 

Vanderlip's book bearing the same title as the article 

4. Stephenson, p. 376. 

(New York: D. Appleton- 

Century Company, 1935), pp. 210-219.

12 THE CREATURE FROM JEKYLL ISLAND THE JOURNEY TO JEKYLL ISLAND 13 

Here were representatives of the world's leading banking 

consortia: Morgan, Rockefeller, Rothschild, Warburg, and Kuhn- 

Loeb. They were often competitors, and there is little doubt that 

there was considerable distrust between them and skillful maneuvering 

for favored position in any agreement. But they were driven 

together by one overriding desire to fight their common enemy. 

The enemy was competition. 

In 1910, the number of banks in the United States was growing 

at a phenomenal rate. In fact it had more than doubled to over 

twenty thousand in just the previous ten years. Furthermore, most 

of them were springing up in the South and West, causing the New 

York banks to suffer a steady decline of market share. Almost all 

banks in the 1880s were national banks, which means they were 

chartered by the federal government. Generally, they were located 

in the big cities, and were allowed by law to issue their own 

currency in the form of bank notes. Even as early as 1896, however, 

the number of non-national banks had grown to sixty-one per cent, 

and they already held fifty-four per cent of the country's total 

banking deposits. By 1913, when the Federal Reserve Act was 

passed, those numbers were seventy-one per cent non-national 

banks holding fifty-seven per cent of the deposits. 1 

In the eyes of 

those duck hunters from New York, this was a trend that simply 

had to be reversed. 

Competition also was coming from a new trend in industry to 

finance future growth out of profits rather than from borrowed 

capital. This was the outgrowth of free-market interest rates which 

set a realistic balance between debt and thrift. Rates were low 

enough to attract serious borrowers who were confident of the 

success of their business ventures and of their ability to repay, but 

they were high enough to discourage loans for frivolous ventures 

or those for which there were alternative sources of funding—for 

example, one's own capital. That balance between debt and thrift 

was the result of a limited money supply. Banks could create loans 

in excess of their actual deposits, as we shall see, but there was a 

limit to that process. And that limit was ultimately determined by 

the supply of gold they held. Consequently, between 1900 and 

1910, seventy per cent of the funding for American corporate 

1. See Gabriel Kolko, Vie Triumph of Conservatism (New York: The Free Press of 

Glencoe, a division of the MacmUIan Co., 1963), p. 140. 

growth was generated internally, making industry increasingly 

independent of the banks. Even the federal government was 

becoming thrifty. It had a growing stockpile of gold, was systemati- 

redeeming the Greenbacks—which had been issued during 

cally 

the Civil War—and was rapidly reducing the national debt. 

Here was another trend that had to be halted. What the bankers 

wanted—and what many businessmen wanted also—was to intervene 

in the free market and tip the balance of interest rates 

downward, to favor debt over thrift. To accomplish this, the money 

supply simply had to be disconnected from gold and made more 

plentiful or, as they described it, more elastic. 

THE SPECTER OF BANK FAILURE 

The greatest threat, however, came, not from rivals or private 

capital formation, but from the public at large in the form of what 

bankers call a run on the bank. This is because, when banks accept a 

customer's deposit, they give in return a "balance" in his account. 

This is the equivalent of a promise to pay back the deposit anytime 

he wants. Likewise, when another customer borrows money from 

the bank, he also is given an account balance which usually is 

withdrawn immediately to satisfy the purpose of the loan. This 

creates a ticking time bomb because, at that point, the bank has 

issued more promises to "pay-on-demand" than it 

has money in 

the vault. Even though the depositing customer thinks he can get 

his money any time he wants, in reality it has been given to the 

borrowing customer and no longer is available at the bank. 

The problem is compounded further by the fact that banks are 

allowed to loan even more money than they have received in 

deposit. The mechanism for accomplishing this seemingly impossible 

feat will be described in a later chapter, but it is a fact of modern 

banking that promises-to-pay often exceed savings deposits by a 

factor of ten-to-one. And, because only about three per cent of these 

accounts are actually retained in the vault in the form of cash—the 

rest having been put into even more loans and investments—the 

bank's promises exceed its ability to keep those promises by a factor 

of over three hundred-to-one. As long as only a small percentage 

1. William Greider, Secrets of the Temple (New York: Simon and Schuster, 1987), p. 

274, 275. Also Kolko, p. 145, 

2. Another way of putting it is that their reserves are underfunded by over 

33,333% (10-to-1 divided by .03 = 333.333-to-l . That divided by .01 = 33333%.)


of depositors request their money at one time, no one is the wiser. 

But if public confidence is shaken, and if more than a few per cent 

attempt to withdraw their funds, the scheme is finally exposed. The 

bank cannot keep all its promises and is forced to close its doors. 

Bankruptcy usually follows in due course. 

CURRENCY DRAINS 

The same result could happen—and, prior to the Federal 

Reserve System, often did happen-êven without depositors making 

a run on the bank. Instead of withdrawing their funds at the 

teller's window, they simply wrote checks to purchase goods or 

services. People receiving those checks took them to a bank for 

deposit. If that bank happened to be the same one from which the 

check was drawn, then all was well, because it was not necessary to 

remove any real money from the vault. But if the holder of the 

check took it to another bank, it was quickly passed back to the 

issuing bank and settlement was demanded between banks. 

This is not a one-way street, however. While the Downtown 

Bank is demanding payment from the Uptown Bank, the Uptown 

Bank is also clearing checks and demanding payment from the 

Downtown bank. As long as the money flow in both directions is 

equal, then everything can be handled with simple bookkeeping. 

But if the flow is not equal, then one of the banks will have to 

actually send money to the other to make up the difference. If the 

amount of money required exceeds a few percentage points of the 

bank's total deposits, the result is the same as a run on the bank by 

depositors. This demand of money by other banks rather than by 

depositors is called a currency drain. 

In 1910, the most common cause of a bank having to declare 

bankruptcy due to a currency drain was that it followed a loan 

policy that was more reckless than that of its competitors. More 

money was demanded from it because more money was loaned by 

it. It was dangerous enough to loan ninety per cent of their 

customers' savings (keeping only one dollar in reserve out of every 

ten), but that had proven to be adequate most of the time. Some 

banks, however, were tempted to walk even closer to the precipice. 

They pushed the ratio to ninety-too per cent, ninety-^ per cent, 

ninety-mwe per cent. After all, the way a bank makes money is to 

collect interest, and the only way to do that is to make loans. The 

more loans, the better. And, so, there was a practice among some of 

the more reckless banks to "loan up," as they call it. 

another way of saying to push dawn their reserve ratios. 

A BANKERS' UTOPIA 

Which was 

If all banks could be forced to issue loans in the same ratio to 

their reserves as other banks did, then, regardless of how small that 

ratio was, the amount of checks to be cleared between them would 

No major currency drains would ever 

balance in the long run. 

occur. The entire banking industry might collapse under such a 

system, but not individual banks—at least not those that were part 

of the cartel. 

All would walk the same distance from the edge, 

obligations. The 

regardless of how close it was. Under such uniformity, no individual 

bank could be blamed for failure to meet its 

blame could be shifted, instead, to the "economy" or "government 

policy" or "interest rates" or "trade deficits" or the "exchangevalue 

of the dollar" or even to the "capitalist system" itself. 

But, in 1910, such a bankers' utopia had not yet been created. If 

the Downtown bank began to loan at a greater ratio to its reserves 

than its competitors, the amount of checks which would come back 

to it for payment also would be greater. Thus, the bank which 

pursued a more reckless lending policy had to draw against its 

reserves in order to make payments to the more conservative banks 

and, when those funds were exhausted, it usually was forced into 

bankruptcy- 

Historian John Klein tells us that "The financial panics of 1873, 

1884, 1893, and 1907 were in large part an outgrowth of ... reserve 

pyramiding and excessive deposit creation by reserve city ... 

banks. These panics were triggered by the currency drains that took 

place in periods of relative prosperity when banks were loaned 

up." In other words, the "panics" and resulting bank failures were 

caused, not by negative factors in the economy, but by currency 

drains on the banks which were loaned up to the point where they 

had practically no reserves at all. The banks did not fail because the 

system was weak. The system failed because the banks were weak. 

This was another common problem that brought these seven 

men over a thousand miles to a tiny island off the shore of Georgia. 

Each was a potentially fierce competitor, but uppermost in their 

minds were the so-called panics and the very real 1,748 bank 

I 

See Vera C. Smith, The Rationale of Central Banking (London: P.S. King & Son, 

1936), p. 36.


failures of the preceding two decades. Somehow, they had to join 

forces. A method had to be devised to enable them to continue to 

make more promises to pay-on-demand than they could keep. To 

do this, they had to find a way to force all banks to walk the same 

distance from the edge, and, when the inevitable disasters 

happened, to shift public blame away from themselves. By making 

it appear to be a problem of the national economy rather than of 

private banking practice, the door then could be opened for the use 

of tax money rather than their own funds for paying off the losses. 

Here, then, were the main challenges that faced that tiny but 

powerful group assembled on Jekyll Island: 

1. How to stop the growing influence of small, rival banks and to 

insure that control over the nation's financial resources would 

remain in the hands of those present; 

2. How to make the money supply more elastic in order to reverse 

the trend of private capital formation and to recapture the 

industrial loan market; 

3. How to pool the meager reserves of the nation's banks into one 

large reserve so that all banks will be motivated to follow the 

same loan-to-deposit ratios. This would protect at least some of 

them from currency drains and bank runs; 

4. Should this lead eventually to the collapse of the whole banking 

system, then how to shift 

banks to the taxpayers. 

THE CARTEL ADOPTS A NAME 

Everyone knew that the solution to all 

the losses from the owners of the 

these problems was a 

cartel mechanism that had been devised and already put into 

similar operation in Europe. As with all cartels, it had to be created 

by legislation and sustained by the power of government under the 

deception of protecting the consumer. The most important task 

before them, therefore, can be stated as objective number five: 

5. How to convince Congress that the scheme was a measure to 

protect the public. 

The task was a delicate one. The American people did not like 

the concept of a cartel. The idea of business enterprises joining 

together to fix prices and prevent competition was alien to the 

free-enterprise system, It could never be sold to the voters. But, if 

the word cartel was not used, if 

the venture could be described 

with words which are emotionally neutral-perhaps even allurine—then 

half the battle would be won. 

The first decision, therefore, was to follow the practice adopted 

in Europe. Henceforth, the cartel would operate as a central bank. 

And even that was to be but a generic expression. For purposes of 

public relations and legislation, 

they would devise a name that 

would avoid the word bank altogether and which would conjure 

the image of the federal government itself. Furthermore, to create 

the impression that there would be no concentration of power, they 

would establish regional branches of the cartel and make that a 

main selling point. Stephenson tells us: "Aldrich entered this 

discussion at Jekyll Island an ardent convert to the idea of a central 

bank His desire was to transplant the system of one of the great 

European banks, say the Bank of England, bodily to America." But 

political expediency required that such plans be concealed from the 

public. As John Kenneth Galbraith explained it "It was his 

[Aldrich's] thought to outflank the opposition by having not one 

central bank but many. And the word bank would itself be 

avoided." 

With the exception of Aldrich, all of those present were 

bankers, but only one was an expert on the European model of a 

central bank. Because of this knowledge, Paul Warburg became the 

dominant and guiding mind throughout all of the discussions. 

Even a casual perusal of the literature on the creation of the Federal 

Reserve System is sufficient to find that he was, indeed, the cartel's 

mastermind. Galbraith says "... Warburg has, with some justice, 

been called the father of the system." 3 Professor Edwin Seligman, a 

member of the international banking family of J. & W. Seligman, 

and head of the Department of Economics at Columbia University, 

writes that "... in its fundamental features, the Federal Reserve Act 

is the work of Mr. Warburg more than any other man in the 

country ,A 

I J 

Soh P h 

3 

n Ke^;th 2lbraith, Money: Whence It Came, Where If Went (Boston, 

Houghton Mifflin, 1975), p. 122. 

3. Galbraith, p. 123. . -„, 

4. The Academy of Political Science, Proceedings, 1914, Vol. 4, No. 4, p. 387.


THE REAL DADDY WARBUCKS 

Paul Moritz Warburg was a leading member of the investment 

banking firm of MM. Warburg & Company of Hamburg, 

Germany, and Amsterdam, the Netherlands. He had come to the 

United States only nine years previously. Soon after arrival, however, 

and with funding provided mostly by the Rothschild group, 

he and his brother, Felix, had been able to buy partnerships in the 

New York investment banking firm of Kuhn, Loeb & Company, 

while continuing as partners in Warburg of Hamburg. Within 

twenty years, Paul would become one of the wealthiest men in 

America with an unchallenged domination over the country's 

railroad system. 

At this distance in history, it is difficult to appreciate the 

importance of this man. But some understanding may be had from 

the fact that the legendary character, Daddy Warbucks, in the 

comic strip Little Orphan Annie, was a contemporary commentary 

on the presumed benevolence of Paul Warburg, and the almost 

magic ability to accomplish good through the power of his unlimited 

wealth. 

A third brother, Max Warburg, was the financial adviser of the 

Kaiser and became Director of the Reichsbank in Germany. This 

was, of course, a central bank, and it was one of the cartel models 

used in the construction of the Federal Reserve System. The 

Reichsbank, incidentally, a few years later would create the massive 

hyperinflation that occurred in Germany, wiping out the middle 

class and the entire German economy as well. 

Paul Warburg soon became well known on Wall Street as a 

persuasive advocate for a central bank in America. Three years 

before the Jekyll Island meeting, he had published several pamphlets. 

One was entitled Defects and Needs of Our Banking System, 

and the other was A Plan for A Modified Central Bank, These 

attracted wide attention in both financial and academic circles and 

set the intellectual climate for all future discussions regarding 

banking legislation. In these treatises, Warburg complained that the 

American monetary system was crippled by its dependency on 

gold and government bonds, both of which were in limited supply. 

What America needed, he argued, was an elastic money supply that 

1. Anthony Sutton, Wall Street and FDR (New Rochelle, New Ycrk: Arlington House, 

1975), p. 92. 

could be expanded and contracted to accommodate the fluctuating 

needs of commerce. The solution, he said, was to follow the 

German example whereby banks could create currency solely on 

the basis of "commercial paper," which is banker language for 

I O.U.s from corporations. 

Warburg was tireless in his efforts. He was a featured speaker 

before scores of influential audiences and wrote a steady stream of 

published articles on the subject. In March of that year, for example, 

The Neiv York Times published an eleven-part series written by 

Warburg explaining and expounding what he called the Reserve 

Bank of the United States. 1 

THE MESSAGE WAS PLAIN FOR THOSE WHO 

UNDERSTOOD 

Most of Warburg's writing and lecturing on this topic was 

eyewash for the public. To cover the fact that a central bank is 

merely a cartel which has been legalized, its proponents had to lay 

down a thick smoke screen of technical jargon focusing always on 

would supposedly benefit commerce, the public, and the 

how it 

nation; how it would lower interest rates, provide funding for 

needed industrial projects, and prevent panics in the economy. 

There was not the slightest glimmer that, underneath it all, was a 

master plan which was designed from top to bottom to serve 

private interests at the expense of the public. 

This was, nevertheless, the cold reality, and the more perceptive 

bankers were well aware of it. In an address before the 

American Bankers Association the following year, Aldrich laid it 

out for anyone who was really listening to the meaning of his 

words. He said: "The organization proposed is 

not a bank, but a 

cooperative union of all the banks of the country for definite 

purposes." 2 Precisely. A union of banks. 

Two years later, in a speech before that same group of bankers, 

A. Barton Hepburn of Chase National Bank was even more candid. 

He said: "The measure recognizes and adopts the principles of a 

central bank. Indeed, if it works out as the sponsors of the law 

hope, it will make all incorporated banks together joint owners of a 

1. See J. 

Lawrence Laughlin, The Federal Reserve Act: Us Origin and Problems (New 

York: Macmillan, 1933), p. 9. 

2. The full text of the speech is reprinted by Herman E. Krooss and Paul A. 

Samuel son, Vol. 3, p. 1202.



central dominating power." 

of a cartel as one is likely to find. 

And that is about as good a definition 

In 1914, one year after the Federal Reserve Act was passed into 

law, Senator Aldrich could afford to be less guarded in his remarks. 

In an article published in luly of that year in a magazine called The 

Independent, he boasted: "Before the passage of this Act, the New 

York bankers could only dominate the reserves of New York. Now 

we are able to dominate the bank reserves of the entire country." 

MYTH ACCEPTED AS HISTORY 

The accepted version of history is that the Federal Reserve was 

created to stabilize our economy. One of the most widely-used 

textbooks on this subject says: "It sprang from the panic of 1907, 

with its alarming epidemic of bank failures: the country was fed up 

once and for all with the anarchy of unstable private banking." 

Even the most naive student must sense a grave contradiction 

between this cherished view and the System's actual performance. 

Since its inception, it has presided over the crashes of 1921 and 

1929; the Great Depression of '29 to '39; recessions in '53, '57, '69, 

'75, and '81; a stock market "Black Monday" in '87; and a 1000% 

inflation which has destroyed 90% of the dollar's purchasing 

power. 

Let us be more specific on that last point. By 1990, an annual 

income of $10,000 was required to buy what took only $1,000 in 

1914. That incredible loss in value was quietly transferred to the 

federal government in the form of hidden taxation, and the Federal 

Reserve System was the mechanism by which it was accomplished. 

Actions have consequences. The consequences of wealth confiscation 

by the Federal-Reserve mechanism are now upon us. In the 

current decade/ corporate debt is soaring; personal debt is greater 

than ever; both business and personal bankruptcies are at an 

all-time high; banks and savings and loan associations are failing in 

1 . Quoted by KoLko, Triumph, p. 235. 

Z Paul A. SamueLson, Economics, 8th ed. (New York: McGraw-Hill, 1970), p. 272. 

3. See "Money, Banking, and Biblical Ethics/' by Ronald H. Nash, Durell Journal of 

Money and Banking, February, 1990. 

4. When one considers that the income tax had just been introduced in 1913 and 

that such low figures were completely exempt, an income at that time of $1,000 

actually was the equivalent of earning $15,400 now, before paying 35% taxes. When 

the amount now taken by state and local governments is added to the total bite, the 

figure is close to $20,000. 

larger numbers than ever before; interest on the national debt is 

consuming half of our tax dollars; heavy industry has been largely 

replaced by overseas competitors; we are facing an international 

trade deficit for the first time in our history; 75% of downtown Los 

Angeles and other metropolitan areas is now owned by foreigners; 

and over half of our nation is in a state of economic recession. 

FIRST REASON TO ABOLISH THE SYSTEM 

That is the scorecard eighty years after the Federal Reserve was 

created supposedly to stabilize our economy! There can be no 

argument that the System has failed in its stated objectives. 

Furthermore, after all this time, after repeated changes in personnel, 

after operating under both political parties, after numerous 

experiments in monetary philosophy, after almost a hundred 

revisions to its charter, and after the development of countless new 

formulas and techniques, there has been more than ample opportunity 

to work out mere procedural flaws. It is not unreasonable to 

conclude, therefore, that the System has failed, not because it needs 

a new set of rules or more intelligent directors, but because it 

incapable ofachieving its stated objectives. 

If an institution is incapable of achieving its objectives, there is 

no reason to preserve it—unless it can be altered in some way to 

change its capability. That leads to the question: why is the System 

incapable of achieving its stated objectives? The painful answer is: 

those were never its true objectives. When one realizes the circumstances 

under which it 

was created, when one contemplates the 

identities of those who authored it, and when one studies its actual 

performance over the years, it becomes obvious that the System is 

merely a cartel with a government facade. There is no doubt that 

those who run it are motivated to maintain full employment, high 

productivity, low inflation, and a generally sound economy. They 

are not interested in killing the goose that lays such beautiful 

golden eggs. But, when there is a conflict between the public 

interest and the private needs of the cartel—a conflict that arises 

almost daily—the public will be sacrificed. That is the nature of the 

beast. It is foolish to expect a cartel to act in any other way. 

This view is not encouraged by Establishment institutions and 

has become their apparent mission to convince the 

publishers. It 

American people that the system is not intrinsically flawed. It 

merely has been in the hands of bumbling oafs. For example, 

is


23 

William Greider was a former Assistant Managing Editor for The 

the problem goes undiscussed and almost entirely uncomprehended. 

Washington Post. His book, Secrets of The Temple, was published in 

The Federal Reserve System is a legal private monopoly of the money 

1987 by Simon and Schuster. It was critical of the Federal Reserve 

supply operated for the benefit of the few under the guise of 

because of its failures, but, according to Greider, these were not 

protecting and promoting the public interest. 

caused by any defect in the System itself, but merely because the 

The real significance of the journey to Jekyll Island and the 

economic factors are "sooo complicated" that the good men who 

have struggled to make the System work have just not yet been able 

creature that was hatched there was inadvertently summarized by 

the words of Paul Warburg's admiring biographer, Harold Kellock: 

to figure it all out. But, don't worry, folks, they're working on it! 

Paul M. Warburg is probably the mildest-mannered man that ever 

That is exactly the kind of powder-puff criticism which is acceptable 

personally conducted a revolution. It was a bloodless revolution: he 

in our mainstream media. Yet, Greider's own research points 

did not attempt to rouse the populace to arms. He stepped forth armed 

to an entirely different interpretation. Speaking of the System's 

simply with an idea. And he conquered. That's the amazing thing. A 

origin, he says: 

shy, sensitive man, he imposed his idea on a nation of a hundred 

million people. 

As new companies prospered without Wall Street, so did the hew 

regional banks that handled their funds, New York's concentrated SUMMARY 

share of bank deposits was still huge, about half the nation's total, but 

it was declining steadily. Wall Street was still "the biggest kid on the 

The basic plan for the Federal Reserve System was drafted at a 

secret meeting held in November of 1910 at the private resort of J.P. 

block," but less and less able to bully the others. 

Morgan on Jekyll Island off the coast of Georgia. Those who 

This trend was a crucial fact of history, a misunderstood reality 

attended represented the great financial institutions of Wall Street 

that completely alters the political meaning of the reform legislation 

and, indirectly, Europe as well. The reason for secrecy was simple. 

that created the Federal Reserve. At the time, the conventional wisdom 

in Congress, widely shared and sincerely espoused by 

Had it been known that rival factions of the banking community 

Progressive 

reformers, was that a government institution would finally harness the 

had joined together, the public would have been alerted to the 

"money trust," disarm its powers, and establish broad democratic 

possibility that the bankers were plotting an agreement in restraint 

control over money and credit. . . . The results were nearly the opposite. 

of trade—which, of course, is exactly what they were doing. What 

The money reforms enacted in 1913, in fact, helped to preserve the 

emerged was a cartel agreement with five objectives: stop the 

status quo, to stabilize the old order. Money-center bankers would not 

growing competition from the nation's newer banks; obtain a 

only gain dominance over the new central bank, but would also enjoy 

franchise to create money out of nothing for the purpose of lending; 

new insulation against instability and their own decline. Once the Fed 

get control of the reserves of all banks so that the more reckless 

was in operation, the steady diffusion of financial power halted. Wall 

Street maintained its dominant position—and even enhanced 

ones would not be exposed to currency drains and bank runs; get 

it. 

the taxpayer to pick up the cartel's inevitable losses; and convince 

Anthony Sutton, former Research Fellow at the Hoover Institution 

for War, Revolution and Peace, and also Professor of Econom- 

Congress that the purpose was to protect the public. It was realized 

that the bankers would have to become partners with the politicians 

and that the structure of the cartel would have to be a central 

ics at California State University, Los Angeles, provides a 

somewhat deeper analysis. He writes: 

bank. The record shows that the Fed has failed to achieve its stated 

Warburg's revolutionary plan to get American Society to go to 

objectives- That is because those were never its true goals. As a 

work for Wall Street was astonishingly simple. Even today,... academic 

banking cartel, and in terms of the five objectives stated above, it 

theoreticians cover their blackboards with meaningless equations, and 

has been an Unqualified success. 

the general public struggles in bewildered confusion with inflation 

and the coming credit collapse, while the quite simple explanation of 

1. Sutton, Wall Street and F.D.R., p, 94. 

2. Harold Kellock, "Warburg, the Revolutionist/' The Century Magazine, May 1915, 

Greider, 275. 

p. 79.

, 

Nelson 

W. Aldrich 

JekyU Island Museum 

UPl/Beltmar, 

Henry P. Davison (L) and Charles D. Norton (R) 

Chapter Two 

THE NAME OF THE 

GAME IS BAILOUT 

Jekyll Island Museum 

Abraham Piatt Andrew 

The seven men who attended the secret meetining on Jekyii 

Island, where the Federal Reserve System was conceived, 

represented an estimated one-fourth of the total wealth of ttt 

entire world. They were: 

1 

Nelson W. Aldrich, Republican "whip" in the Senate, 

Chairman of the National Monetary Commission, 

father-in-law to John D. Rockefeller, Jr.; 

Henry P. Davison, Sr. Partner of J. P. Morgan Company; 

Charles D. Norton, Pres. of 1st National Bank of New Yof. 

A. Piatt Andrew, Assistant Secretary of the Treasury; 

Frank A. Vanderlip, President of the National City Bank ci 

New York, representing William Rockefeller. 

Benjamin Strong, head of J. P. Morgan's Bankers Trust 

Company, later to become head of the System; 

Paul M. Warburg, a partner in Kuhn, Loeb & Company, 

representing the Rothschilds and Warburgs in Europe. 

The analogy of a spectator sporting event as a 

means of explaining the rules by which taxpayers 

are required to pick up the cost of bailing out the 

banks when their loans go sour. 

It was stated in the previous chapter that the Jekyll Island 

group which conceived the Federal Reserve System actually created 

a national cartel which was dominated by the larger banks. It 

was also stated that a primary objective of that cartel was to involve 

the federal government as an agent for shifting the inevitable losses 

from the owners of those banks to the taxpayers. That, of course, is 

one of the more controversial assertions made in this book. Yet, 

there is little room for any other interpretation when one confronts 

the massive evidence of history since the System was created. Let 

us, therefore, take another leap through time. Having jumped to 

the year 1910 to begin this story, let us now return to the present 

era. 

To understand how banking losses are shifted to the taxpayers, 

it is first necessary to know a little bit about how the scheme was 

designed to work There are certain procedures and formulas 

which must be understood or else the entire process seems like 

chaos. It is as though we had been isolated all our lives on a South 

Sea island with no knowledge of the outside world. Imagine what it 

would then be like the first time we travelled to the mainland and 

witnessed a game of professional football. We would stare with 

incredulity at men dressed like aliens from another planet; throwing 

their bodies against each other; tossing a funny shaped object 

back and forth; fighting over it as though it were of great value, yet, 

Island Museum 

Frank A. Vanderlip 

Benjamin Strong 

UPl/B&ttmann 

Jekyll Island Museum 

Paul M. Warburg 

occasionally kicking it out of the area as though it were worthless 

and despised; chasing each other, knocking each other to the 

ground and then walking away to regroup for another surge; all


this with tens of thousand of spectators riotously shouting in 

unison for no apparent reason at all. Without a basic understanding 

that this was a game and without knowledge of the rules of that 

game, the event would appear as total chaos and universal 

madness. 

The operation of our monetary system through the Federal 

Reserve has much in common with professional football. First, 

there are certain plays that are repeated over and over again with 

only minor variations to suit the special circumstances. Second, 

there are definite rules which the players follow with great 

precision. Third, there is a clear objective to the game which is 

uppermost in the minds of the players. And fourth, if the spectators 

are not familiar with that objective and if they do not understand 

the rules, they will never comprehend what is going on. Which, as 

far as monetary matters is concerned, is 

the common state of the 

vast majority of Americans today. 

Let us, therefore, attempt to spell out in plain language what 

that objective is and how the players expect to achieve it. To 

demystify the process, we shall present an overview first. After the 

concepts are clarified, we then shall follow up with actual examples 

taken from the recent past. 

The name of the game is Bailout. As stated previously, the 

objective of this game is to shift the inevitable losses from the 

owners of the larger banks to the taxpayers. The procedure by 

which this is accomplished is as follows: 

RULES OF THE GAME 

The game begins when the Federal 

Reserve System allows 

commercial banks to create checkbook money out of nothing. 

(Details regarding how this incredible feat is accomplished are 

given in chapter ten entitled The Mandrake Mechanism.) The banks 

derive profit from this easy money, not by spending it, but by 

lending it to others and collecting interest. 

When such a loan is placed on the bank's books it is shown as 

an asset because it is earning interest and, presumably, someday 

will be paid back. At the same time an equal entry is mad,? on the 

liability side of the ledger. That is because the newly created 

checkbook money now is in circulation, and most of it will end up 

in other banks which will return the canceled checks to the issuing 

bank for payment. Individuals may also bring some of this check- 

THE NAME OF THE GAME IS BAILOUT 27 

book money back to the bank and request cash. The issuing bank, 

therefore, has a potential money pay-out liability equal to the 

amount of the loan asset. 

When a borrower cannot repay and there are no assets which 

can be taken to compensate, the bank must write off that loan as a 

loss- However, since most of the money originally was created out 

of nothing and cost 

the bank nothing except bookkeeping overhead, 

there is little of tangible value that is actual lost. It is primarily 

a bookkeeping entry. 

A bookkeeping loss can still be undesirable to a bank because it 

causes the loan to be removed from the ledger as an asset without a 

reduction in liabilities. The difference must come from the equity of 

those who own the bank. In other words, the loan asset is removed, 

but the money liability remains. The original checkbook money is 

still circulating out there even though the borrower cannot repay, 

and the issuing bank still has the obligation to redeem those checks. 

The only way to do this and balance the books once again is to 

draw upon the capital which was invested by the bank's stockholders 

or to deduct the loss from the bank's current profits. In either 

case, the owners of the bank lose an amount equal to the value of 

the defaulted loan. So, to them, the loss becomes very real. If the 

bank is forced to write off a large amount of bad loans, the amount 

could exceed the entire value of the owners' equity. 

happens, the game is over, and the bank is insolvent. 

When that 

This concern would be sufficient to motivate most bankers to be 

very conservative in their loan policy, and in fact most of them do 

act with great caution when dealing with individuals and small 

businesses. But the Federal Reserve System, the Federal Deposit 

Insurance Corporation, and the Federal Deposit Loan Corporation 

now guarantee that massive loans made to large corporations and 

to other governments will not be allowed to fall entirely upon the 

bank's owners should those loans go into default. This is done 

under the argument that, if these corporations or banks are allowed 

to fail, the nation would suffer from vast unemployment and 

economic disruption. More on that in a moment. 

THE PERPETUAL-DEBT PLAY 

The end result of this policy is that the banks have little motive 

to be cautious and are protected against the effect of their 

own 

folly. The larger the loan, the better it is, because it will produce the

— 

28 THE CREATURE FROM JEKYLL ISLAND THE NAME OF THE GAME IS BAILOUT 29 

greatest amount of profit with the least amount of effort. A single 

loan to a third-world country netting hundreds of millions of 

dollars in annual interest is just as easy to process—if not easier 

than a loan for $50,000 to a local merchant on the shopping mall. If 

the interest is paid, it's gravy time. If the loan defaults, the federal 

government will "protect the public" and, through various mechanisms 

described shortly, will make sure that the banks continue to 

receive their interest. 

The individual and the small businessman find it increasingly 

difficult to borrow money at reasonable rates, because the banks 

can make more money on loans to the corporate giants and to 

foreign governments. Also, the bigger loans are safer for the banks, 

because the government will make them good even if they default. 

There are no such guarantees for the small loans. The public will 

not swallow the line that bailing out the little guy is necessary to 

save the system. The dollar amounts are too small. Only when the 

figures become mind-boggling does the ploy become plausible. 

It is important to remember that banks do not really want to 

have their loans repaid, except as evidence of the dependability of 

the borrower. They make a profit from interest on the loan, 

repayment of the loan. If a loan is paid off, the bank merely has to 

find another borrower, and that can be an expensive nuisance. It is 

much better to have the existing borrower pay only the interest and 

never make payments on the loan itself. That process is called 

rolling over the debt. One of the reasons banks prefer to lend to 

governments is that they do not expect those loans ever to be 

repaid. When Walter Wriston was chairman of the Citicorp Bank in 

1982, he extolled the virtue of the action this way: 

If we had a truth-in-Government act comparable to the 

truth-in-advertising law, every note issued by the Treasury would be 

obliged to include a sentence stating: "This note will be redeemed with 

the proceeds from an identical note which will be sold to the public 

when this one comes due." 

When this activity is carried out in the United States, as it is 

weekly, it is described as a Treasury bill auction. But when 

basically the same process is conducted abroad in a foreign 

language, our news media usually speak of a country's "rolling 

over its debts." The perception remains that some form of disaster 

is inevitable. It is not. 

not 

To see why, it is only necessary to understand the basic facts of 

government borrowing. The first is that there are few recorded 

instances in history of government—any government—actually 

getting out of debt. Certainly in an era of $100-billion deficits, no 

one lending money to our Government by buying a Treasury bill 

expects that it will be paid at maturity in any way except by our 

Government's selling a new bill of like amount. 

THE DEBT ROLL-OVER PLAY 

Since the system makes it profitable for banks to make large, 

unsound loans, that is the kind of loans which banks will make. 

Furthermore, it is predictable that most unsound loans eventually 

will go into default. When the borrower finally declares that he 

cannot pay, the bank responds by rolling over the loan. This often is 

stage managed to appear as a concession on the part of the bank 

but, in reality, it is a significant forward move toward the objective 

of perpetual interest. 

Eventually the borrower comes to the point where he can no 

longer pay even the interest. Now the play becomes more complex. 

The bank does not want to lose the interest, because that is its 

stream of income. But it cannot afford to allow the borrower to go 

into default either, because that would require a write-off which, in 

turn, could wipe out the owners' equity and put the bank out of 

business. So the bank's next move is to create additional money out 

of nothing and lend that to the borrower so he will have enough to 

continue paying the interest, which by now must be paid on the 

original 

loan plus the additional loan as well. What looked like 

certain disaster suddenly is converted by a brilliant play into a 

major score. This not only maintains the old loan on the books as an 

asset, it 

actually increases the apparent size of that asset and also 

results in higher interest payments, thus, greater profit to the bank. 

THE UP-THE-ANTE PLAY 

Sooner or later, the borrower becomes restless. He is not 

interested in making interest payments with nothing left for 

himself. He comes to realize that he is merely working for the bank 

and, once again, interest payments stop. The opposing teams go 

into a huddle to plan the next move, then rush to the scrimmage 

1. "Banking Against Disaster/' by Walter B. Wriston, The New York Times, Septem 

ber 14,1982.


line where they hurl threatening innuendoes at each other. The 

borrower simply cannot, will not pay. Collect if you can. The lender 

threatens to blackball the borrower, to see to it that he will never 

again be able to obtain a loan. Finally, a "compromise" is worked 

out. As before, the bank agrees to create still 

more money out of 

nothing and lend that to the borrower to cover the interest on both 

of the previous loans but, this time, they up the ante to provide still 

additional money for the borrower to spend on something other than 

interest. That is a perfect score. The borrower suddenly has a fresh 

supply of money for his purposes plus enough to keep making 

those bothersome interest payments. The bank, on the other hand, 

now has still larger assets, higher interest income, and greater profits. 

What an exciting game! 

THE RESCHEDULING PLAY 

The previous plays can be repeated several times until the 

reality finally dawns on the borrower that he is sinking deeper and 

deeper into the debt pit with no prospects of climbing out. This 

realization usually comes when the interest payments become so 

large they represent almost as much as the entire corporate 

earnings or the country's total tax base. This time around, roll-overs 

with larger loans are rejected, and default seems inevitable. 

But wait. What's this? The players are back at the scrimmage 

line. There is a great confrontation. Referees are called in. Two 

shrill blasts from the horn tell us a score has been made for both 

sides. A voice over the public address system announces: "This 

loan has been rescheduled/' 

Rescheduling usually means a combination of a lower interest 

rate and a longer period for repayment. The effect is primarily 

cosmetic. It reduces the monthly payment but extends the period 

further into the future. This makes the current burden to the 

borrower a little easier to carry, but it also makes repayment of the 

capital even more unlikely. It postpones the day of reckoning but, 

in the meantime, you guessed it: The loan remains as an asset, and 

the interest payments continue. 

THE PROTECT-THE-PUBLIC PLAY 

Eventually the day of reckoning arrives. The borrower realizes 

he can never repay the capital and flatly refuses to pay interest on it. 

It is time for the Final Maneuver. 


According to the Banking Safety Digest, which specializes in 

rating the safety of America's banks and S&Ls, most of the banks 

involved with "problem loans" are quite profitable businesses: 

Note that, exceptfor third-world loans, most of the large banks in the 

country are operating quite profitably. In contrast with the 

continually-worsening S&L crisis, the banks' profitability has been the 

engine with which they have been working off (albeit slowly) their 

overseas debt... At last year's profitability levels, the banking 

industry could, in theory, "buy out" the entirety of their own Latin 

American loans within two years. 

The banks can absorb the losses of their 

bad loans to multinational 

corporations and foreign governments, but that is not 

according to the rules. It would be a major loss to the stockholders 

who would receive little or no dividends during the adjustment 

period, and any chief executive officer who embarked upon such a 

course would soon be looking for a new job. That this is not part of 

the game plan is evident by the fact that, while a small portion of 

the Latin American debt has been absorbed, the banks are continuing 

to make gigantic loans to governments in other parts of the 

world, particularly Africa, Red China, and Eastern European 

nations. For reasons which will be analyzed in chapter four, there is 

little hope that the performance of these loans will be different than 

those in Latin America. But the most important reason for 

absorbing the losses is that there is 

not 

a standard play that can still 

breathe life back into those dead loans and reactivate the bountiful 

income stream that flows from them. 

Here's how it works. The captains of both teams approach the 

referee and the Game Commissioner to request that the game be 

extended. The reason given is that this is in the interest of the 

public, the spectators who are having such a wonderful time and 

who will be sad to see the game ended. They request also that, 

while the spectators are in the stadium enjoying themselves, the 

parking-lot attendants be ordered to quietly remove the hub caps 

from every car. These can be sold to provide money for additional 

salaries for all the players, including the referee and, of course, the 

Commissioner himself. That is only fair since they are now 

1- "Overseas Lending ... Trigger for A Severe Depression?" The Banking Safety 

Digest (U.S. Business Publishing/Veribanc, Wakefield, Massachusetts), August, 

1989, p. 3.


working overtime for the benefit of the spectators. When the deal is 

finally struck, the horn will blow three times, and a roar of joyous 

relief will sweep across the stadium. 

In a somewhat less recognizable form, the same play may look 

like this: The president of the lending bank and the finance officer 

of the defaulting corporation or government will join together and 

approach Congress. They will explain that the borrower has 

exhausted his ability to service the loan and, without assistance 

from the federal government, there will be dire consequences for 

the American people. Not only will there be unemployment and 

hardship at home, there will be massive disruptions in world 

markets. And, since we are now so dependent on those markets, 

our exports will drop, foreign capital will dry up, and we will 

suffer greatly. What is needed, they will say, is for Congress to 

provide money to the borrower, either directly or indirectly, 

allow him to continue to pay interest on the loan and to initiate new 

spending programs which will be so profitable he will soon be able 

to pay everyone back. 

As part of the proposal, the borrower will agree to accept the 

direction of a third-party referee in adopting an austerity program 

to make sure that none of the new money is wasted. The bank also 

will agree to write off a small part of the loan as a gesture of its 

willingness to share the burden. This move, of course, will have 

been foreseen from the very beginning of the game, and is a small 

step backward to achieve a giant stride forward. After all, the 

amount to be lost through the write-off was created out of nothing 

in the first place and, without this Final Maneuver, the entirety 

would be written off. Furthermore, this modest write down is 

dwarfed by the amount to be gained through restoration of the 

income stream. 

THE GUARANTELD-PAYMENT PLAY 

One of the standard variations of the Final Maneuver is for the 

government, not always to directly provide the funds, but to 

provide the credit for the funds. That means to guarantee future 

payments should the borrower again default. Once Congress 

agrees to this, the government becomes a co-signer to the loan, and 

the inevitable losses are finally lifted from the ledger of the bank 

and placed onto the backs of the American taxpayer. 

to 


Money now begins to move into the banks through a complex 

system of federal agencies, international agencies, foreign aid, and 

direct subsidies. All of these mechanisms extract payments from 

the American people and channel them to the deadbeat borrowers 

who then send them to the banks to service their loans. Very little 

of this money actually comes from taxes. Almost all of it is 

generated by the Federal Reserve System. When this newly created 

money returns to the banks, it quickly moves out again into the 

economy where it mingles with and dilutes the value of the money 

already there. The result is the appearance of rising prices but 

which, in reality, is a lowering of the value of the dollar. 

The American people have no idea they are paying the bill. 

They know that someone is stealing their hub caps, but they think it 

is the greedy businessman who raises prices or the selfish laborer 

who demands higher wages or the unworthy farmer who demands 

too much for his crop or the wealthy foreigner who bids up our 

prices. They do not realize that these groups also are victimized by a 

monetary system which is constantly being eroded in value by and 

through the Federal Reserve System, 

Public ignorance of how the game is really played was dramatically 

displayed during a recent Phil Donahue TV show. The topic 

was the Savings and Loan crisis and the billions of dollars that it 

would cost the taxpayer. A man from the audience rose and asked 

angrily: "Why can't the government pay for these debts instead of 

the taxpayer?" And the audience of several hundred people 

actually cheered in enthusiastic approval! 

PROSPERITY THROUGH INSOLVENCY 

Since large, corporate loans are often guaranteed by the federal 

government, one would think that the banks which make those 

loans would never have a problem. Yet, many of them still manage 

to bungle themselves into insolvency. As we shall see in a later 

section of this study, insolvency actually is inherent in the system 

itself, a system called fractional-reserve banking. 

Nevertheless, a bank can operate quite nicely in a state of 

insolvency so long as its customers don't know it. Money is 

brought into being and transmuted from one imaginary form to 

another by mere entries on a ledger, and creative bookkeeping can 

always make the bottom line appear to balance. The problem arises 

when depositors decide, for whatever reason, to withdraw their


money. Lo and behold, there isn't enough to go around and, when 

that happens, the cat is finally out of the bag. The bank must close 

its doors, and the depositors still waiting in line outside are ... well, 

just that: still waiting. 

The proper solution to this problem is to require the banks, like 

all other businesses, to honor their contracts. If they tell their 

customers that deposits are 

"payable upon demand," then they 

should hold enough cash to make good on that promise, regardless 

of when the customers want it or how many of them want it. In 

other words, they should keep cash in the vault equal to 100% of 

their depositors' accounts. When we give our hat to the hat-check 

girl and obtain a receipt for it, we don't expect her to rent it out 

while we eat dinner hoping she'll get it back—or one just like it—in 

time for our departure. We expect all the hats to remain there all the 

time so there will be no question of getting ours back precisely 

when we want it. 

On the other hand, if the bank tells us it is going to lend our 

deposit to others so we can earn a little interest on it, then it should 

also tell us forthrightly that we cannot have our money back on 

demand. Why not? Because it is loaned out and not in the vault any 

longer. Customers who earn interest on their accounts should be 

told that they have time deposits, not demand deposits, because the 

bank will need a stated amount of time before it will be able to 

recover the money which was loaned out. 

None of this is difficult to understand, yet bank customers are 

seldom informed of it. They are told they can have their money any 

time they want it and they are paid interest as well. Even if they do 

not receive interest, the bank does, and this is how so many 

customer services can be offered at little or no direct cost. Occasionally, 

a thirty-day or sixty-day delay will be mentioned as a 

possibility, but that is greatly inadequate for deposits which have 

been transformed into ten, twenty, or thirty-year loans. The banks 

are simply playing the odds that everything will work out most of 

the time. 

We shall examine this issue in greater detail in a later section 

but, for now, it is sufficient to know that total disclosure is not how 

the banking game is played. The Federal Reserve System has 

legalized and institutionalized the dishonesty of issuing more hat 

checks than there are hats and it has devised complex methods of 

disguising this practice as a perfectly proper and normal feature of 


banking. Students of finance are told that there simply is no other 

way for the system to function. Once that premise is accepted, then 

all attention can be focused, not on the inherent fraud, but on ways 

and means to live with it and make it as painless as possible. 

Based on the assumption that only a small percentage of the 

depositors will 

ever want to withdraw their money at the same 

time, the Federal Reserve allows the nation's commercial banks to 

operate with an incredibly thin layer of cash to cover their promises 

to pay "on demand." When a bank runs out of money and is unable 

to keep that promise, the System then acts as a lender of last resort. 

That is banker language meaning it stands ready to create money 

out of nothing and immediately lend it to any bank in trouble. 

(Details on how that is accomplished are in chapter eight.) But there 

are practical limits to just how far that process can work. Even the 

Fed will not support a bank that has gotten itself so deeply in the 

hole it has no realistic chance of digging out. When a bank's 

bookkeeping assets finally become less than its liabilities, the rules 

of the game call for transferring the losses to the depositors 

themselves. This means they pay twice: once as taxpayers and again 

as depositors. The mechanism by which this is accomplished is 

called the Federal Deposit Insurance Corporation. 

THE FDIC PLAY 

The FDIC guarantees that every insured deposit will be paid 

back regardless of the financial condition of the bank. The money to 

do this comes out of a special fund which is derived from 

assessments against participating banks. The banks, of course, do 

not pay this assessment. As with all other expenses, the bulk of the 

cost ultimately is passed on to their customers in the form of higher 

service fees and lower interest rates on deposits. 

The FDIC is usually described as an insurance fund, but that is 

deceptive advertising at its worst. One of the primary conditions of 

insurance is that it must avoid what underwriters call "moral 

hazard/' That is a situation in which the policyholder has little 

incentive to avoid or prevent that which is being insured against 

When moral hazard is present, it is normal for people to become 

careless, and the likelihood increases that what is being insured 

against will actually happen. An example would be a government 

Program forcing everyone to pay an equal amount into a fund to 

Protect them from the expense of parking fines. One hesitates even



to mention this absurd proposition lest some enterprising politician 

should decide to put it on the ballot. Therefore, let us hasten to 

point out that, if such a numb-skull plan were adopted, two things 

would happen: (1) just about everyone soon would be getting 

parking tickets and (2), since there now would be so many of them, 

the taxes to pay for those tickets would greatly exceed the previous 

cost of paying them uritfwut the so-called protection. 

The FDIC operates exactly in this fashion. Depositors are told 

their insured accounts are protected in the event their bank should 

become insolvent. To pay for this protection, each bank is assessed 

a specified percentage of its total deposits. That percentage is the 

same for all banks regardless of their previous record or how risky 

their loans. Under such conditions, it does not pay to be cautious. 

The banks making reckless loans earn a higher rate of interest than 

those making conservative loans. They also are far more likely to 

collect from the fund, yet they pay not one cent more. Conservative 

banks are penalized and gradually become motivated to make 

more risky loans to keep up with their competitors and to get their 

"fair 

share" of the fund's protection. Moral hazard, therefore, is 

built right into the system. As with protection against parking 

tickets, the FDIC increases the likelihood that what is being insured 

against will actually happen. It is not a solution to the problem, it is 

part of the problem. 

REAL INSURANCE WOULD BE A BLESSING 

A true deposit-insurance program which was totally voluntary 

and which geared its rates to the actual risks would be a blessing. 

Banks with solid loans on their books would be able to obtain 

protection for their depositors at reasonable rates, because the 

chances of the insurance company having to pay would be small. 

Banks with unsound loans, however, would have to pay much 

higher rates or possibly would not be able to obtain coverage at any 

price. Depositors, therefore, would know instantly, without need to 

investigate further, that a bank without insurance is not a place 

where they want to put their money. In order to attract deposits, 

banks would have to have insurance. In order to have insurance at 

rates they could afford, they would have to demonstrate to the 

insurance company that their financial affairs 

are in good order. 

Consequently, banks which failed to meet the minimum standards 

of sound business practice would soon have no customers and 

would be forced out of business. A voluntary, private insurance 

program would act as a powerful regulator of the entire banking 

industry far more effectively and honestly than any political 

scheme ever could. Unfortunately, such is not the banking world of 

today. 

The FDIC "protection" is not insurance in any sense of the 

word. It is merely part of a political scheme to bail out the most 

influential members of the banking cartel when they get into 

financial difficulty. As we have already seen, the first line of 

defense in this scheme is to have large, defaulted loans restored to 

life by a Congressional pledge of tax dollars. If that should fail and 

the bank can no longer conceal its insolvency through creative 

bookkeeping, it is almost certain that anxious depositors will soon 

line up to withdraw their money—which the bank does not have. 

The second line of defense, therefore, is to have the FDIC step in 

and make those payments for them. 

Bankers, of course, do not want this to happen. It is a last resort. 

If the bank is rescued in this fashion, management is fired and what 

is left of the business usually is absorbed by another bank. 

Furthermore, the value of the stock will plummet, but this will 

affect the small stockholders only. Those with controlling interest 

and those in management know long in advance of the pending 

catastrophe and are able to sell 

the bulk of their shares while the 

price is still high. The people who create the problem seldom suffer 

the economic consequences of their actions. 

THE FDIC WILL NEVER BE ADEQUATELY FUNDED 

The FDIC never will have enough money to cover its potential 

liability for the entire banking system. If that amount were in 

existence, it could be held by the banks themselves, and an 

insurance fund would not even be necessary. Instead, the FDIC 

operates on the same assumption as the banks: that only a small 

percentage will ever need money at the same time. So the amount 

held in reserve is never more than a few percentage points of the 

total liability. Typically, the FDIC holds about $1.20 for every $100 

of covered deposits. At the time of this writing, however, that 

figure had slipped to only 70 cents and was still 

means that the financial exposure is 

dropping. That 

about 99.3% larger than the 

safety net which is supposed to catch it. The failure of just one or

38 THE CREATURE FROM JEKYLL ISLAND THE NAME OF THE GAME IS BAILOUT 39 

two large banks in the system could completely wipe out the entire 

fund. 

And it gets even worse. Although the ledger may show that so 

many millions or billions are in the fund, that also is but creative 

bookkeeping. By law, the money collected from bank assessments 

must be invested in Treasury bonds, which means it is loaned to the 

government and spent immediately by Congress. In the final stage 

of this process, therefore, the FDIC itself runs out of money and 

turns, first to the Treasury, then to Congress for help. This step, of 

course, is an act of final desperation, but it is usually presented in 

the media as though it were a sign of the system's great strength. 

U.S. News & World Report blandly describes it this way: "Should the 

agencies need more money yet, Congress has pledged the full faith 

and credit of the federal government/' 1 

Gosh, gee whiz. Isn't that 

wonderful? It sort of makes one feel rosy all over to know that the 

fund is so well secured. 

Let's see what "full faith and credit of the federal government" 

actually means. Congress, already deeply in debt, has no money 

either. It doesn't dare openly raise taxes for the shortfall, so it 

applies for an additional loan by offering still more Treasury bonds 

for sale. The public picks up a portion of these I.O.U.s, and the 

Federal Reserve buys the rest. If there is a monetary crisis at hand 

and the size of the loan is 

issue. 

great, the Fed will pick up the entire 

But the Fed has no money either. So it responds by creating out of 

nothing an amount of brand new money equal to the I.O.U.s and, 

through the magic of central banking, the FDIC is finally funded. 

This new money gushes into the banks where it is used to pay off 

the depositors. From there it floods through the economy diluting 

the value of all money and causing prices to rise. The old paycheck 

doesn't buy as much any more, so we learn to get along with a little 

bit less. But, see? The bank's doors are open again, and all the 

depositors are happy—until they return to their cars and discover 

the missing hub caps! 

That is what is meant by "the full faith and credit of the federal 

government." 

1. "How Safe Are Deposits in Ailing Banks, S&L's?" U.S. News & World Report, 

March 25, 1985, p. 73. 

SUMMARY 

Although national monetary events may appear mysterious 

and chaotic, they are governed by well-established rules which 

bankers and politicians rigidly follow. The central fact to understanding 

these events is that all the money in the banking system 

has been created out of nothing through the process of making 

loans. A defaulted loan, therefore, costs the bank little 

of tangible 

value, but it shows up on the ledger as a reduction in assets without 

a corresponding reduction in liabilities. If the bad loans exceed the 

size of the assets, the bank becomes technically insolvent and must 

close its doors. The first rule of survival, therefore, is to avoid 

writing off large, bad loans and, if possible, to at least continue 

receiving interest payments on them. To accomplish that, the 

endangered loans are rolled over and increased in size. This 

provides the borrower with money to continue paying interest plus 

fresh funds for new spending. The basic problem is not solved, but 

it is postponed for a little while and made worse. 

The final solution on behalf of the banking cartel is to have the 

federal government guarantee payment of the loan should the 

borrower default in the future. This is accomplished by convincing 

Congress that not to do so would result in great damage to the 

economy and hardship for the people. From that point forward, the 

burden of the loan is removed from the bank's ledger and 

transferred to the taxpayer. Should this effort fail and the bank be 

forced into insolvency, the last resort is to use the FDIC to pay off 

the depositors. The FDIC is not insurance, because the presence of 

"moral hazard" makes the thing it supposedly protects against 

more likely to happen. A portion of the FDIC funds are derived 

from assessments against the banks. Ultimately, however, they are 

paid by the depositors themselves. When these funds run out, the 

balance is provided by the Federal Reserve System in the form of 

freshly created new money. This floods through the economy 

causing the appearance of rising prices but which, in reality, is the 

lowering of the value of the dollar. The final cost of the bailout, 

therefore, is passed to the public in the form of a hidden tax called 

inflation. 

So much for the rules of the game. In the next chapter we shall 

look at the scorecard of the actual play itself.

Chapter Three 

PROTECTORS OF THE 

PUBLIC 

The Game-Called-Bailout as it actually has been 

applied to specific cases including Venn Central, 

Lockheed, New York City, Chrysler, Commonwealth 

Bank of Detroit, First Pennsylvania Bank, 

Continental Illinois, and others. 

In the previous chapter, we offered the whimsical analogy of a 

sporting event to clarify the maneuvers of monetary and political 

scientists to bail out those commercial banks which comprise the 

Federal-Reserve cartel. The danger in such an approach is that it 

could leave the impression the topic is frivolous. So, let us abandon 

the analogy and turn to reality. Now that we have studied the 

hypothetical rules of the game, it is time to check the scorecard of 

the actual play itself, and it will become obvious that this is no 

trivial matter. A good place to start is with the rescue of a 

consortium of banks which were holding the endangered loans of 

Penn Central Railroad. 

PENN CENTRAL 

Penn Central was the nation's largest railroad with 96,000 

employees and a payroll of $20 million a week. In 1970, it also 

became the nation's biggest bankruptcy. It was deeply in debt to 

just about every bank that was willing to lend it money, and that 

list included Chase Manhattan, Morgan Guaranty, Manufacturers 

Hanover, First National City, Chemical Bank, and Continental 

Illinois. Officers of the largest of those banks had been appointed to 

Penn Central's board of directors as a condition for obtaining 

funds, and they gradually had acquired control over the railroad's 

management The banks also held large blocks of Penn Central 

stock in their trust departments. 

The arrangement was convenient in many ways, not the least of 

which was that the bankers sitting on the board of directors were

— 

42 THE CREATURE FROM JEKYLL ISLAND PROTECTORS OF THE PUBLIC 43 

privy to information, long before the public received it, which 

would affect the market price of Perm Central's stock. Chris Welles, 

in The Last Days of the Club, describes what happened: 

On May 21, a month before the railroad went under, David Bevan, 

Penn Central's chief financial officer, privately informed 

representatives of the company's banking creditors that its 

financial 

condition was so weak it would have to postpone an attempt to raise 

$100 million in desperately needed operating funds through a bond 

issue. Instead, said Bevan, the railroad would seek some kind of 

government loan guarantee. In other words, unless the railroad could 

manage a federal bailout, it would have to close down. The following 

day, Chase Manhattan's trust department sold 134,300 shares of its 

Penn Central holdings. Before May 28, when the public was informed 

of the postponement of the bond issue, Chase sold another 128,000 

shares. David Rockefeller, the bank's chairman, vigorously denied 

Chase had acted on the basis of inside information. 

More to the point of this study is the fact that virtually all of the 

major management decisions which led to Penn Central's demise 

were made by or with the concurrence of its board of directors, 

which is to say, by the banks that provided the loans. In other 

words, the bankers were not in trouble because of Penn Central's 

poor management, they were Penn Central's poor management. An 

investigation conducted in 1972 by Congressman Wright Patman, 

Chairman of the House Banking and Currency Committee, 

revealed the following: The banks provided large loans for disastrous 

expansion and diversification projects. They loaned additional 

millions to the railroad so it could pay dividends to its 

stockholders. This created the false appearance of prosperity and 

artificially inflated the market price of its stock long enough to 

dump it 

on the unsuspecting public. Thus, the banker-managers 

were able to engineer a three-way bonanza for themselves. They (1) 

received dividends on essentially worthless stock, (2) earned 

interest on the loans which provided the money to pay those 

dividends, and (3) were able to unload 1.8 million shares of 

stock after the dividends, of course—at unrealistically high 

prices. Reports from the Securities and Exchange Commission 

1. Chris Welles, The Last Days of the Club (New York: E.P. Dutton, 1975), pp. 398-99. 

2 "Penn Central/' 1971 Congressional Quarterly Almanac (Washington, D.C.: Congressional 

Quarterly, 1971), p. 838. 

showed that the company's top executives had disposed of their 

stock in this fashion at a personal savings of more than $1 million. 

Had the railroad been allowed to go into bankruptcy at that 

point and been forced to sell off its assets, the bankers still would 

have been protected. In any liquidation, debtors are paid off first, 

stockholders last; so the manipulators had dumped most of their 

stock while prices were relatively high. That is a common practice 

among corporate raiders who use borrowed funds to seize control 

of a company, bleed off its assets to other enterprises which they 

abo control, and then toss the debt-ridden, dying carcass upon the 

remaining stockholders or, in this case, the taxpayers. 

THE PUBLIC BE DAMNED 

In his letter of transmittal accompanying the staff report, 

Congressman Patman provided this summary: 

It was as though everyone was a part of a close knit club in which 

Penn Central and its officers could obtain, with very few questions 

asked, loans for almost everything they desired both for the company 

and for their own personal interests, where the bankers sitting on the 

Board asked practically no questions as to what was going on, simply 

allowing management to destroy the company, to invest in 

questionable activities, and to engage in some cases in illegal activities. 

These banks in return obtained most of the company's lucrative 

banking business. The attitude of everyone seemed to be, while the 

game was going on, that all these dealings were of benefit to every 

member of the club, and the railroad and the public be damned. 

The banking cartel, commonly called the Federal Reserve 

System, was created for exactly this kind of bailout. Arthur Burns, 

who was the Fed's chairman, would have preferred to provide a 

direct infusion of newly created money, but that was contrary to 

the rules at that time. In his own words: "Everything fell through. 

We couldn't lend it to them ourselves under the law.. . . 

I worked on 

this thing in other ways."^ 

The company's cash crisis came to a head over a weekend and, 

in order to avoid having the corporation forced to file for bankruptcy 

on Monday morning, Burns called the homes of the heads of 

the Federal Reserve banks around the country and told them to get 

1- "Penn Central: Bankruptcy Filed After Loan Bill Fails/' 1970 Congressional 

Quarterly Almanac (Washington, D.C.: Congressional Quarterly, 1970), p. 811. 

2- Quoted by Welles, pp. 404-05. 

3- Quoted by Welles, p. 407.


the word out immediately that the System was anxious to help. On 

Sunday, William Treiber, who was the first vice-president of the 

New York branch of the Fed, contacted the chief executives of the 

ten largest banks in New York and told them that the Fed's 

Discount Window would be wide open the next morning. Translated, 

that means the Federal Reserve System was prepared to 

create money out of nothing and then immediately loan it 

to the 

commercial banks so they, in turn, could multiply and re-lend it to 

Perm Central and other corporations, such as Chrysler, which were 

in similar straits. Furthermore, the rates at which the Fed would 

make these funds available would be low enough to compensate 

for the risk, ^peaking of what transpired on the following Monday, 

Burns boasted: "I kept the Board in session practically all day to 

change regulation Q so that money could flow into CDs at the 

banks." Looking back at the event, Chris Welles approvingly 

describes it as "what is by common consent the Fed's finest hour." 

Finest hour or not, the banks were not that interested in the 

proposition unless they could be assured the taxpayer would 

co-sign the loans and guarantee payment. So the action inevitably 

shifted back to Congress. Perm Central's executives, bankers, and 

union representatives came in droves to explain how the railroad's 

continued existence was in the best interest of the public, of the 

working man, of the economic system itself. The Navy Department 

spoke of protecting the nation's "defense resources." Congress, of 

course, could not callously ignore these pressing needs of the 

nation. It responded by ordering a retroactive, 13 Vi per cent pay 

raise for all 

union employees. After having added that burden to 

the railroad's cash drain and putting it even deeper into the hole, it 

then passed the Emergency Rail Services Act of 1970 authorizing 

$125 million in federal loan guarantees. 

None of this, of course, solved the basic problem, nor was it 

really intended to. Almost everyone knew that, eventually, the 

railroad would be "nationalized," which is a euphemism for 

becoming a black hole into which tax dollars disappear. This came 

1. For an explanation of the multiplier effect, see chapter eight, The Mandrake 

Mechanism. 

2. Welles, pp. 407-08. 

3. "Congress Clears Railroad Aid Bill, Acts on Strike," 1970 Congressional Almanac 

(Washington, DC: 1970), pp. 810-16. 

PROTECTORS OF THE PUBLIC 45 

to pass with the creation of AMTRAK in 1971 and CONRAIL in 

1973- AMTRAK took over the passenger services of Perm Central, 

and CONRAIL assumed operation of its freight services, along 

with five other Eastern railroads. CONRAIL technically is a private 

corporation. When it was created, however, 85% of its stock was 

held by the government. The remainder was held by employees. 

Fortunately, the government's stock was sold in a public offering in 

1987. AMTRAK continues under political control and operates at a 

loss. It is sustained by government subsidies—which is to say by 

taxpayers. In 1997, Congress dutifully gave it another $5.7 billion 

and by 1998, liabilities exceeded assets by an estimated $14 billion. 

CONRAIL, on the other hand, since it was returned to the private 

sector, has experienced an impressive turnaround and has been 

running at a profit— paying taxes instead of consuming them. 

LOCKHEED 

In that same year, 1970, the Lockheed Corporation, which was 

the nation's largest defense contractor, was teetering on the verge 

of bankruptcy. The Bank of America and several smaller banks had 

loaned $400 million to the Goliath and they were not anxious to 

lose the bountiful interest-income stream that flowed from that; nor 

did they wish to see such a large bookkeeping asset disappear from 

their ledgers. In due course, the banks joined forces with Lockheed's 

management, stockholders, and labor unions, and the group 

descended on Washington. Sympathetic politicians were told that, 

if Lockheed were allowed to fail, 31,000 jobs would be lost, 

hundreds of sub contractors would go down, thousands of suppliers 

would be forced into bankruptcy, and national security would 

be seriously jeopardized. What the company needed was to borrow 

more money and lots of it. But, because of its current financial 

predicament, no one was willing to lend. The answer? In the 

interest of protecting the economy and defending the nation, the 

government simply had to provide either the money or the credit. 

A bailout plan was quickly engineered by Treasury Secretary 

John B. Connally which provided the credit. The government 

agreed to guarantee payment on an additional $250 million in 

loans—an amount which would put Lockheed 60% deeper into the 

debt hole than it had been before. But that made no difference now. 

Unce the taxpayer had been made a co-signer to the account, the 

banks had no qualms about advancing the funds.


The not-so-obvious part of this story is that the government 

now had a powerful motivation to make sure Lockheed would be 

awarded as many defense contracts as possible and that those 

contracts would be as profitable as possible. This would be an 

indirect method of paying off the banks with tax dollars, but doing 

so in such a way as not to arouse public indignation. Other defense 

contractors which had operated more efficiently would lose business, 

but that could not be proven. Furthermore, a slight increase in 

defenses expenditures would hardly be noticed. 

By 1977, Lockheed had, indeed, paid back this loan, and that 

fact was widely advertised as proof of the wisdom and skill of all 

the players, including the referee and the game commissioner. A 

deeper analysis, however, must include two facts. First, there is no 

evidence that Lockheed's operation became more cost efficient 

during these years. Second, every bit of the money used to pay 

back the loans came from defense contracts which were awarded 

by the same government which was guaranteeing those loans. 

Under such an arrangement, it makes little difference if the loans 

were paid back or not. 

Taxpayers were doomed to pay the bill 

either way. 

NEW YORK CITY 

Although the government of New York City is not a corporation 

in the usual sense, it functions as one in many respects, 

particularly regarding debt 

In 1975, New York had reached the end of its credit rope and 

was unable even to make payroll. The cause was not mysterious. 

New York had long been a welfare state within itself, and success 

in city politics was traditionally achieved by lavish promises of 

benefits and subsidies for "the poor." Not surprisingly, the city also 

was notorious for political corruption and bureaucratic fraud. 

Whereas the average large city employed thirty-one people per 

one-thousand residents, New York had forty nine. That's an excess 

of fifty-eight per cent. The salaries of these employees far outstripped 

those in private industry. While an X-ray technician in a 

private hospital earned $187 per week, a porter working for the city 

earned $203. The average bank teller earned $154 per week, but a 

change maker on the city subway received $212. And municipal 

fringe benefits were fully twice as generous as those in private 

industry within the state. On top of this mountainous overhead 

were heaped additional costs for free college educations, subsidized 

housing, free medical care, and endless varieties of welfare 

programs. 

City taxes were greatly inadequate to cover the cost of this 

utopia- Even after transfer payments from Albany and Washington 

added state and federal taxes to the take, the outflow continued to 

exceed the inflow. There were now only three options: increase city 

taxes, reduce expenses, or go into debt. The choice was never in 

serious doubt. By 1975, New York had floated so many bonds it 

had saturated the market and could find no more lenders. Two 

billion dollars of this 

debt was held by a small group of banks, 

dominated by Chase Manhattan and Citicorp. 

When the payment of interest on these loans finally came to a 

halt, it was time for serious action. The bankers and the city fathers 

traveled down the coast to Washington and put their case before 

Congress. The largest city in the world could not be allowed to go 

bankrupt, they said. Essential services would be halted and millions 

of people would be without garbage removal, without 

transportation, even without police protection. Starvation, disease, 

and crime would run rampant through the city. It would be a 

disgrace to America. David Rockefeller at Chase Manhattan persuaded 

his friend Helmut Schmidt, Chancellor of West Germany, 

to make a statement to the media that the disastrous situation in 

New York could trigger an international financial crisis. 

Congress, understandably, did not want to turn New York into 

a zone of anarchy, nor to disgrace America, nor to trigger a 

world-wide financial panic. So, in December of 1975, it passed a bill 

authorizing the Treasury to make direct loans to the city up to $2.3 

billion, an amount which would more than double the size of its 

current debt to the banks. Interest payments on the old debt 

resumed immediately. All of this money, of course, would first 

have to be borrowed by Congress which was, itself, deeply in debt. 

And most of it would be created, directly or indirectly, by the 

Federal Reserve System. That money would be taken from the 

taxpayer through the loss of purchasing power called inflation, but 

at least the banks could be repaid, which is the object of the game. 

There were several restrictions attached to this loan, including 

^ austerity program and a systematic repayment schedule. None 

°f these conditions was honored. New York City has continued to 

be a welfare utopia, and it is unlikely that it will ever get out of debt.


CHRYSLER 

By 1978, the Chrysler Corporation was on the verge of bankruptcy. 

It had rolled over its debt to the banks many times, and the 

game was nearing an end. In spite of an OPEC oil embargo which 

had pushed up the cost of gasoline and in spite of the increasing 

popularity of small-automobile imports, the company had continued 

to build the traditional gas hog. It was now saddled with a 

mammoth inventory of unsaleable cars and with a staggering debt 

which it had acquired to build those cars. 

The timing was doubly bad. America was also experiencing 

high interest rates which, coupled with fears of U.S. military 

involvement in Cambodia, had led to a slump in the stock market. 

Banks felt the credit crunch keenly and, in one of those rare 

instances in modern history, the money makers themselves were 

scouring for money. 

Chrysler needed additional cash to stay in business. It was not 

interested in borrowing just enough to pay the interest on its 

existing loans. To make the game worth playing, it wanted over a 

billion dollars in new capital. But, in the prevailing economic 

environment, the banks were hard pressed to create anything close 

to that kind of money. 

Managers, bankers, and union leaders found common cause in 

Washington. If one of the largest corporations in America was 

allowed to fold, think of the hardship to thousands of employees 

and their families; consider the damage to the economy as shock 

waves of unemployment move across the country; tremble at the 

thought of lost competition in the automobile market, of only two 

major brands from which to choose instead of three. 

Well, could anyone blame Congress for not wanting to plunge 

innocent families into poverty nor to upend the national economy 

nor to deny anyone their Constitutional right to freedom-of-choice? 

So a bill was passed directing the Treasury to guarantee up to $1.5 

billion in new loans to Chrysler. The banks agreed to write down 

$600 million of their old loans and to exchange an additional $700 

million for preferred stock. Both of these moves were advertised as 

evidence the banks were taking a terrible loss but were willing to 

yield in order to save the nation. It should be noted, however, that 

the value of the stock which was exchanged for previously uncollectable 

debt rose drastically after the settlement was announced to 

the public. Furthermore, not only did interest payments resume on 

the balance of the old loans, but the banks now replaced the written 

down portion with fresh loans, and these were far superior in 

quality because they were fully guaranteed by the taxpayers. So 

valuable was this guarantee that Chrysler, in spite of its previously 

poor debt performance, was able to obtain loans at 10.35% interest 

while its more solvent competitor, Ford, had to pay 13.5%. Applying; 

the difference of 3.15% to one and-a-half billion dollars, with a 

declining balance continuing for only six years, produces a savings 

in excess of $165 million. That is a modest estimate of the size of the 

federal subsidy. The real value was far greater because, without it, 

ihe corporation would have ceased to exist, and the banks would 

have taken a loss of almost their entire loan exposure. 

FEDERAL DEPOSIT INSURANCE CORPORATION 

It will be recalled from the previous chapter that the FDIC is not 

a true insurance program and, because it has been politicized, it 

embodies the principle of moral hazard and it actually increases the 

likelihood that bank failures will occur. 

The FDIC has three options when bailing out an insolvent bank. 

The first is called a payoff. It involves simply paying off the insured 

depositors and then letting the bank fall to the mercy of the 

liquidators. This is the option usually chosen for small banks with 

no political clout The second possibility is called a sell off, and it 

involves making arrangements for a larger bank to assume all the 

real assets and liabilities of the failing bank. Banking services are 

uninterrupted and, aside from a change in name, most customers 

are unaware of the transaction. This option is generally selected for 

small and medium banks. In both a payoff and a sell off, the FDIC 

takes over the bad loans of the failed bank and supplies the money 

to pay back the insured depositors. 

The third option is called bailout, and this is the one which 

deserves our special attention. Irvine Sprague, a former director of 

the FDIC, explains: "In a bailout, the bank does not close, and 

everyone— insured or not—is fully protected.... Such privileged 

treatment is accorded by FDIC only rarely to an elect few/' 1 

That's right, he said everyone—insured or not—is fully protected. 

The banks which comprise the elect few generally are the 

1- Irvine H. Sprague, Bailout: An Insider's Account of Bank Failures and Rescues (New 

York: Basic Books, 1986), p, 23.


large ones. It is only when the number of dollars at risk becomes 

mind numbing that a bailout can be camouflaged as protection of 

the public. Sprague says: 

The FDI Act gives the FDIC board sole discretion to prevent a 

bank from failing, at whatever cost. The board need only make the 

finding that the insured bank is in danger of failing and "is essential to 

provide adequate banking service in its community."... FDIC boards 

have been reluctant to make an essentiality finding unless they 

perceive a clear and present danger to the nation's financial system. 

Favoritism toward the large banks is obvious at many levels. 

One of them is the fact that, in a bailout, the FDIC covers all 

deposits, whether insured or not. That is 

significant, because the 

banks pay an assessment based only on their insured deposits. So, if 

un insured deposits are covered also, that coverage is free—more 

precisely, paid by someone else. What deposits are tminsured? 

Those in excess of $100,000 and those held outside the United 

States. Which banks hold the vast majority of such deposits? The 

large 

operations. 

ones, of course, particularly those with extensive overseas 

The bottom line is that the large banks get a whopping 

free ride when they are bailed out. Their uninsured accounts are 

paid by FDIC, and the cost of that benefit is passed to the smaller 

banks and to the taxpayer. This is not an oversight. Part of the plan 

at Jekyll Island was to give a competitive edge to the large banks. 

UNITY BANK 

The first application of the FDIC essentiality rule was, in fact, an 

exception. In 1971, Unity Bank and Trust Company in the Roxbury 

section of Boston found itself hopelessly insolvent, and the federal 

agency moved in. This is what was found: Unity's capital was 

depleted; most of its loans were bad; its loan collection practices 

were weak; and its personnel represented the worst of two worlds: 

overstaffing and inexperience. The examiners reported that there 

were two persons for every job, and neither one had been taught 

the job. 

With only $11.4 million on its books, the bank was small by 

current standards. Normally, the depositors would have been paid 

back, and the stockholders—like 

1. Sprague, pp. 27-29. 

the owners of any other failed 

2. The Bank of America is the exception. Despite its size, it has not acquired foreign 

deposits to the same degree as its competitors. 

business venture—would have lost their investment. As Sprague, 

himself, admitted: "If market discipline means anything, stockholders 

should be wiped out when a bank fails. Our assistance would 

nave the side effect ... of keeping the stockholders alive at 

government expense." But Unity Bank was different. It was 

located in a black neighborhood and was minority owned. As is 

often the case when government agencies are given discretionary 

powers, decisions are determined more by political pressures than 

by logic or merit, and Unity was a perfect example. In 1971, the 

specter of rioting in black communities still haunted the halls of 

Congress. Would the FDIC allow this bank to fail and assume the 

awesome responsibility for new riots and bloodshed? Sprague 

answers: 

Neither Wille [another director] nor I had any trouble viewing the 

problem in its broader social context. We were willing to look for a 

creative solution.... My vote to make the "essentiality" finding and 

thus save the little bank was probably foreordained, an inevitable 

legacy of Watts.... The Watts riots ultimately triggered the essentiality 

doctrine. 

On July 22, 1971, the FDIC declared that the continued operation 

of Unity Bank was, indeed, essential and authorized a direct 

infusion of $1 .5 million. Although appearing on the agency's ledger 

as a loan, no one really expected repayment. In 1976, in spite of the 

FDIC's own staff report that the bank's operations continued "as 

slipshod and haphazard as ever/' the agency rolled over the "loan" 

for another five years. Operations did not improve and, on June 30, 

1982, the Massachusetts Banking Commissioner finally revoked 

Unity's charter. There were no riots in the streets, and the FDIC 

quietly wrote off the sum of $4,463,000 as the final cost of the 

bailout. 

COMMONWEALTH BANK OF DETROIT 

The bailout of the Unity Bank of Boston was the exception to 

the rule that small banks are dispensable while the giants must be 

saved at all costs. From that point forward, however, the FDIC 

game plan was strictly according to Hoyle. The next bailout 

occurred in 1972 involving the $1.5 billion Bank of the Common- 

Wealth of Detroit. Commonwealth had funded most of its 

I' 

2 

- 

Sprague, pp. 41^2. 

#"*., p. 48.


phenomenal growth through loans from another bank, Chase 

Manhattan in New York. When Commonwealth went belly up, 

princes. Better to have financial power concentrated in Saudi 

Arabia than in Detroit. The bank continued to flounder and, in 

largely due to securities speculation and self dealing on the part of 

1983, what was left of it was resold to the former Detroit Bank & 

its management, Chase seized 39% of its common stock and 

Trust Company, now called Comerica. Thus the dreaded concentration 

of local power was realized after all, but not until Chase 

actually took control of the bank in an attempt to find a way to get 

its money back. FDIC director Sprague describes the inevitable 

Manhattan was able to walk away from the deal with most of its 

sequel: 

losses covered. 

Chase officers ... suggested that Commonwealth was a public 

FIRST PENNSYLVANIA BANK 

interest problem that the government agencies should resolve. That 

The 1980 bailout of the First Pennsylvania Bank of Philadelphia 

unsubtle hint was the way Chase phrased its request for a bailout by 

the government.... Their proposal would come down was next. First Perm was the nation's twenty-third largest bank 

to bailing out 

the shareholders, the Largest of which was Chase. 

with assets in excess of $9 billion. It was six times the size of 

Commonwealth; nine hundred times larger than Unity. It was also 

The bankers argued that Commonwealth must not be allowed 

the nation's oldest bank, dating back to the Bank of North America 

to fold because it provided "essential" banking services to the 

which was created by the Continental Congress in 1781. 

community. That was justified on two counts: (1) it served many 

The bank had experienced rapid growth and handsome profits 

minority neighborhoods and, (2) there were not enough other 

largely due to the aggressive leadership of its chief executive 

banks in the city to absorb its operation without creating an 

officer, John Bunting, who had previously been an economist with 

unhealthy concentration of banking power in the hands of a few. It 

the Federal Reserve Bank of Philadelphia. Bunting was the epitome 

was unclear what the minority issue had to do with it inasmuch as 

of the era's go-go bankers. He vastly increased earnings ratios by 

every neighborhood in which Commonwealth had a branch was 

reducing safety margins, taking on risky loans, and speculating in 

served by other banks as well. Furthermore, if Commonwealth 

the bond market. As long as the economy expanded, these 

were to be liquidated, many 

gambles 

of those branches undoubtedly would 

were profitable, and the stockholders loved 

have been purchased by competitors, and service to the communities 

would have continued. Judging by the absence 

him dearly. When his 

gamble in the bond market turned sour, however, 

of attention 

the bank 

plunged into a negative 

given 

cash flow. 

to this issue during discussions, it is apparent that it was 

By 1979, First Perm was forced 

to sell off 

merely thrown in for good measure, and no several 

one took it very 

of its profitable subsidiaries in order to obtain 

operating funds, 

seriously. 

and it was carrying $328 million in questionable 

loans. 

In any event, the FDIC did not want to be accused of being 

That was $16 million more than the entire stockholder 

investment. 

indifferent to the needs of Detroit's minorities and it certainly did 

The bank was insolvent, and the time had arrived to hit 

up 

not want to be a destroyer of free-enterprise competition. So, on 

the taxpayer for the loss. 

January 17, 1972, Commonwealth was bailed out with a $60 million 

The bankers went to Washington and presented their case. 

Fhey 

loan plus numerous federal guarantees. Chase absorbed some 

were joined by spokesmen from the nation's top three: Bank 

losses, primarily as a result of Commonwealth's weak bond 

of America, Citibank, and of course the ever-present Chase Manhattan. 

portfolio, but those were minor compared to what would have 

They argued that, not only was the bailout of First Penn 

been lost without FDIC intervention. 

essential" for the continuation of banking services in Philadelphia, 

rt 

Since continuation of the bank was necessary to prevent 

was also critical to the preservation of world economic stability. 

concentration of financial power, FDIC engineered its sale to the 

£ bank was so large, they said, if it were allowed to fall, it would 

First Arabian Corporation, a Luxembourg firm funded by Saudi 

^ct as the first domino leading to an international financial crisis. At 

r sfr, 

the directors of the FDIC resisted that theory and earned the 

^gry impatience of the Federal Reserve. Sprague recalls:

. 

— 


We were far from a decision on how to proceed. There was strong 

pressure from the beginning not to let the bank fail. Besides hearing 

from the bank itself, the other large banks, and the comptroller, we 

heard frequently from the Fed. I recall at one session, Fred Schultz, the 

Fed deputy chairman, argued in an ever rising voice, that there were 

no alternatives—we had to save the bank. He said, "Quit wasting time 

talking about anything else!''. . 

The Fed's role as lender of last resort first generated contention 

between the Fed and FDIC during this period. The Fed was lending 

heavily to First Pennsylvania, fully secured, and Fed Chairman Paul 

Volcker said he planned to continue funding indefinitely until we 

could work out a merger or a bailout to save the bank. 

The directors of the FDIC did not want to cross swords with the 

Federal Reserve System, and they most assuredly did not want to 

be blamed for tumbling the entire world economic system by 

allowing the first domino to fall. "The theory had never been 

tested/ 7 

said Sprague. "I was not sure I wanted it to be just then." 

So, in due course, a bailout package was put together which 

featured a $325 million loan from FDIC, interest free for the first 

year and at a subsidized rate thereafter; about half the market rate. 

Several other banks which were financially tied to First Penn, and 

which would have suffered great losses if it had folded, loaned an 

additional $175 million and offered a $1 billion line of credit FDIC 

insisted on this move to demonstrate that the banking industry 

itself was helping and that it had faith in the venture. To bolster 

that faith, the Federal Reserve opened its Discount Window 

offering low-interest funds for that purpose. 

The outcome of this particular bailout was somewhat happier 

than with the others, at least as far as the bank is concerned. At the 

end of the five-year taxpayer subsidy, the FDIC loan was fully 

repaid. The bank has remained on shaky ground, however, and the 

final page of this episode has not yet been written. 

CONTINENTAL ILLINOIS 

Everything up to this point was but mere practice for the big 

event which was yet to come. In the early 1980s, Chicago's 

Continental Illinois was the nation's seventh largest bank. With 

assets of $42 billion and with 12,000 employees working in offices 

1. Sprague, pp. 88-89. 

2. Ibid., p. 89. 

in almost every major country in the world, its loan portfolio had 

undergone spectacular growth. Its net income on loans had literally 

doubled in just five years and by 1981 had rocketed to an annual 

figure of $254 million. It had become the darling of the market 

analysts and even had been named by Dun's Review as one of the 

five best managed companies in the country. These opinion leaders 

failed to perceive that the spectacular performance was due, not to 

an expertise in banking or investment, but to the financing of shaky 

business enterprises and foreign governments which could not 

obtain loans anywhere else. But the public didn't know that and 

wanted in on the action. For awhile, the bank's common stock 

actually sold at a premium over others which were more prudently 

managed. 

The gaudy fabric began to unravel during the Fourth of July 

weekend of 1982 with the failure of the Perm Square Bank in 

Oklahoma. That was the notorious shopping-center bank that had 

booked a billion dollars in oil and gas loans and resold them to 

Continental just before the collapse of the energy market Other 

loans also began to sour at the same time. The Mexican and 

Argentine debt crisis was coming to a head, and a series of major 

corporate bankruptcies were receiving almost daily headlines. 

Continental had placed large chunks of its easy money with all of 

them. When these events caused the bank's credit rating to drop, 

cautious depositors began to withdraw their funds, and new 

funding dwindled to a trickle. The bank became desperate for cash 

to meet its daily expenses. In an effort to attract new money, it 

began to offer unrealistically high rates of interest on its CDs. Loan 

officers were sent to scour the European and Japanese markets and 

to conduct a public relations campaign aimed at convincing market 

managers that the bank was calm and steady. David Taylor, the 

bank's chairman at that time, said: "We had the Continental Illinois 

Reassurance Brigade and we fanned out all over the world." 1 

In the fantasy land of modern finance, glitter is often more 

important than substance, image more valuable than reality. The 

bank paid the usual quarterly dividend in August, in spite of the 

feet that this intensified its cash crunch. As with the Perm Central 

Railroad twelve years earlier, that move was calculated to project 

a^ image of business-as-usual prosperity. And the ploy worked 

?' Quoted by Chernow, p. 657.


for a while, at least. By November, the public's confidence had been 

restored, and the bank's stock recovered to its pre-Penn Square 

level. By March of 1983, it had risen even higher. But the worst was 

yet to come. 

By the end of 1983, the bank's burden of non-performing loans 

had reached unbearable proportions and was growing at an 

alarming rate. By 1984, it was $2.7 billion. That same year, the bank 

sold off its profitable credit-card operation to make up for the loss 

of income and to obtain money for paying stockholders their 

expected quarterly dividend. The internal structure was near 

collapse, but the external facade continued to look like business as 

usual. 

The first crack in that facade appeared at 11:39 A.M. On 

Tuesday, May 8, Reuters, the British news agency, moved a story 

on its wire service stating that banks in the Netherlands, West 

Germany, Switzerland, and Japan had increased their interest rate 

on loans to Continental and that some of them had begun to 

withdraw their funds. The story also quoted the bank's official 

statement that rumors of pending bankruptcy were "totally preposterous." 

Within hours, another wire, the Commodity News Service, 

reported a second rumor: that a Japanese bank was interested in 

buying Continental. 

WORLD'S FIRST ELECTRONIC BANK RUN 

As the sun rose the following morning, foreign investors began 

to withdraw their deposits. A billion dollars in Asian money 

moved out that first day* The next day—a little more than 

twenty-four hours following Continental's assurance that bankruptcy 

was totally preposterous, its 

long-standing customer, the 

Board of Trade Clearing Corporation, located just down the 

street—withdrew $50 million. Word of the defection spread 

through the financial wire services, and the panic was on. It became 

the world's first global electronic bank run. 

By Friday, the bank had been forced to borrow $3.6 billion from 

the Federal Reserve in order to cover its escaping deposits. A 

consortium of sixteen banks, lead by Morgan Guaranty, offered a 

generous thirty-day line of credit, but all of this was far short of the 

need. Within seven more days, the outflow surged to over 

$6 billion. 

PROTECTORS OF THE PUBLIC 57 

In the beginning, almost all of this action was at the institutional 

level: other banks and professionally managed funds which closely 

monitor every minuscule detail of the financial markets. The 

general public had no inkling of the catastrophe, even as it 

unfolded. Chernow says: "The Continental run was like some 

rnodernistic fantasy: there were no throngs of hysterical depositors, 

just cool nightmare flashes on computer screens." Sprague writes: 

"Inside the bank, all was calm, the teller lines moved as always, and 

bank officials recall no visible sign of trouble—except in the wire 

room- Here the employees knew what was happening as withdrawal 

order after order moved on the wire, bleeding Continental 

to death. Some cried." 

This was the golden moment for which the Federal Reserve and 

the FDIC were created. Without government intervention, Continental 

would have collapsed, its stockholders would have been 

wiped out, depositors would have been badly damaged, and the 

financial world would have learned that banks, not only have to 

talk about prudent management, they actually have to adopt it. 

Future banking practices would have been severely altered, and the 

long-term economic benefit to the nation would have been enormous. 

But with government intervention, the discipline of a free 

market is suspended, and the cost of failure or fraud is politically 

passed to the taxpayers. Depositors continue to live in a dream 

world of false security, and banks can operate recklessly and 

fraudulently with the knowledge that their political partners in 

government will come to their rescue when they get into trouble. 

FDIC GENEROSITY WITH TAX DOLLARS 

One of the challenges at Continental was that, while only four 

per cent of its liability was covered by FDIC "insurance," the 

regulators felt compelled to cover the entire exposure. Which 

means that the bank paid insurance premiums into the fund based 

on only four per cent of its total coverage, and the taxpayers now 

would pick up the other ninety-six per cent. FDIC director Sprague 

explains: 

Although Continental Illinois had over $30 billion in deposits, 90 

percent were uninsured foreign deposits or large certificates 

substantially exceeding the $100,000 insurance limit. Off-book 

1- 

Chernow, p. 658, 

2- 

Sprague, p. 153.

. 


liabilities swelled Continental's real size to $69 billion. In this massive 

liability structure only some $3 billion within the insured limit was 

scattered among 850,000 deposit accounts. So it was in our power and 

entirely legal simply to pay off the insured depositors, let everything 

else collapse, and stand back to watch the carnage. 

That course was never seriously considered by any of the 

players. From the beginning, there were only two questions: how to 

come to Continental's rescue by covering its total liabilities and, 

equally important, how to politically justify such a fleecing of the 

taxpayer. As pointed out in the previous chapter, the rules of the 

game require that the scam must always be described as a heroic 

effort to protect the public. In the case of Continental, the sheer size 

of the numbers made the ploy relatively easy. There were so many 

depositors involved, so many billions at risk, so many other banks 

interlocked, it could be claimed that the economic fabric of the 

entire nation—of the world itself—was at stake. And who could 

say that it was not so. Sprague argues the case in familiar terms: 

An early morning meeting was scheduled for Tuesday, May 15, at 

the Fed.... We talked over the alternatives. They were few—none 

really.... [Treasury Secretary] Regan and [Fed Chairman] Volcker 

raised the familiar concern about a national banking collapse, that is, a 

chain reaction if Continental should fail. Volcker was worried about an 

international crisis. We all were acutely aware that never before had a 

bank even remotely approaching Continentars size closed. No one 

knew what might happen in the nation and in the world. It was no 

time to find out just for the purpose of intellectual curiosity. 

THE FINAL BAILOUT PACKAGE 

The bailout was predictable from the start. There would be 

some preliminary lip service given to the necessity of allowing the 

banks themselves to work out their own problem. That would be 

followed by a plan to have the banks and the government share the 

burden. And that finally would collapse into a mere publicrelations 

illusion. In the end, almost the entire cost of the bailout 

would be assumed by the government and passed on to the 

taxpayer. 

At the May 15 meeting, Treasury Secretary Regan spoke 

eloquently about the value of a 

free market and the necessity of 

having the banks mount their own rescue plan, at least for a part of 

the money. To work out that plan, a summit meeting was arranged 

the next morning among the chairmen of the seven largest banks: 

Morgan Guaranty, Chase Manhattan, Citibank, Bank of America, 

Chemical Bank, Bankers Trust, and Manufacturers Hanover. The 

meeting was perfunctory at best. The bankers knew full well that 

the Reagan Administration would not risk the political embarrassment 

of a major bank failure. That would make the President and 

the Congress look bad at re-election time. But, still, some kind of 

tokenism was called for to preserve the Administration's conservative 

image. So, with urging from the Fed and the Treasury, the 

consortium agreed to put up the sum of $500 million—an average 

of only $71 million for each, far short of the actual need. Chernow 

describes the plan as "make-believe" and says "they pretended to 

mount a rescue." Sprague supplies the details: 

The bankers said they wanted to be in on any deal, but they did 

not want to lose any money. They kept asking for guarantees. They 

wanted it to look as though they were putting money in but, at the 

same time, wanted to be absolutely sure they were not risking 

anything.. . 

. 

By 7:30 A.M. we had made little progress. We were certain 

the situation would be totally out of control in a few hours. 

Continental would soon be exposing itself to a new business day, and 

the stock market would open at ten o'clock. Isaac [another FDIC 

director] and I held a hallway conversation. We agreed to go ahead 

without the banks. We told Conover [the third FDIC director] the plan 

and he concurred.. . 

[Later], we got word from Bernie McKeon, our regional director in 

New York, that the bankers had agreed to be at risk. Actually, the risk 

was remote since our announcement had promised 100 percent 

insurance. 

The final bailout package was a whopper. Basically, the government 

took over Continental Illinois and assumed all of its losses. 

Specifically, the FDIC took $4.5 billion in bad loans and paid 

Continental $3-5 billion for them. The difference was then made up 

b y the infusion of $1 billion in fresh capital in the form of stock 

Purchase. The bank, therefore, now had the federal government as 

a stockholder controlling 80 per cent of its shares, and its bad loans 

had been dumped onto the taxpayer. In effect, even though 

1. Sprague, p. 184. 

2. Ibid., pp. 154-55, 183. 

* Chernow, p. 659. 

2 

- 

Sprague, pp. 159-60.


Continental retained the appearance of a private institution, it had 

been nationalized. 

LENDER OF LAST RESORT 

Perhaps the most important part of the bailout, however, was 

that the money to make it possible was created—directly or 

indirectly— by the Federal Reserve System. If the bank had been 

allowed to fail, and the FDIC had been required to cover the losses, 

the drain would have emptied the entire fund with nothing left to 

cover the liabilities of thousands of other banks. In other words, 

this one failure alone, if it were allowed to happen, would have 

wiped out the entire FDIC! That's one reason the bank had to be 

kept operating, losses or no losses, and that's why the Fed had to be 

involved in the bail out In fact, that was precisely the reason the 

System was created at Jekyll Island: to manufacture whatever 

amount of money might be necessary to cover the losses of the 

cartel. The scam could never work unless the Fed was able to create 

money out of nothing and pump it into the banks along with 

"credit" and "liquidity" guarantees. Which means, if the loans go 

sour, the money is eventually extracted from the American people 

through the hidden tax called inflation. That's the meaning of the 

phrase "lender of last resort." 

FDIC director Irvine Sprague, while discussing the press release 

which announced the Continental bail-out package, describes 

the Fed's role this way: 

The third paragraph ... granted 100 percent insurance to all 

depositors, including the uninsured, and all general creditors.... The 

next paragraph ... 

set forth the conditions under which the Fed, as 

lender of last resort, would make its loans. .. . . The Fed would lend to 

Continental to meet "any extraordinary liquidity requirements." That 

would include another run. All agreed that Continental could not be 

saved without 100 percent insurance by FDIC and unlimited liquidity 

support by the Federal Reserve. No plan would work without these 

two elements. 

By 1984, "unlimited liquidity support" had translated into the 

staggering sum of $8 billion. By early 1986, the figure had climbed 

to $9.24 billion and was still rising. While explaining this fleecing of 

the taxpayer to the Senate Banking Committee, Fed Chairman Paul 

Volcker said: "The operation is the most basic function of the 

1. Sprague, pp. 162-63. 

Federal 

Reserve. It was why it was founded." 

With those words, 

he has confirmed one of the more controversial assertions of this 

book. 

SMALL BANKS BE DAMNED 

It has been mentioned previously that the large banks receive a 

free ride on their FDIC coverage at the expense of the small banks. 

There could be no better example of this than the bail out of 

Continental Illinois. In 1983, the bank paid a premium into the fund 

of only $6.5 million to protect its insured deposits of $3 billion. The 

actual 

liability, however—including its institutional and overseas 

deposits—was ten times that figure, and the FDIC guaranteed 

payment on the whole amount As Sprague admitted, "Small banks 

pay proportionately far more for their insurance and have far less 

chance of a Continental-style bailout." 

How true. Within the same week that the FDIC and the Fed 

were providing billions in payments, stock purchases, loans, and 

guarantees for Continental Illinois, it closed down the tiny Bledsoe 

County Bank of Pikeville, Tennessee, and the Planters Trust and 

Savings Bank of Opelousas, Louisiana. During the first half of that 

year, forty-three smaller banks failed without an FDIC bailout. In 

most cases, a merger was arranged with a larger bank, and only the 

uninsured deposits were at risk. The impact of this inequity upon 

the banking system is enormous. It sends a message to bankers and 

depositors alike that small banks, if they get into trouble, will be 

allowed to fold, whereas large banks are safe regardless of how 

poorly or fraudulently they are managed. As a New York investment 

analyst stated to news reporters, Continental Illinois, even 

though it had just failed, was "obviously the safest bank in the 

country to have your money in." 

Nothing could be better calculated 

to drive the small independent banks out of business or to 

force them to sell out to the giants. And that, in fact, is exactly what 

has been happening. Since 1984, while hundreds of small banks 

have been forced out of business, the average size of the banks 

which remain—with government protection—has more than 

doubled. It will be recalled that this advantage of the big banks 

* Quoted by Greider, p. 628. 

3 âgue /P .250. 

New Continental Illinois Facing Uncertain Future/' by Keith E. Leighty, Associated 

Press, Thousand Oaks, Calif., News Chronicle, May 13, 1985, p. 18.

, 


over their smaller competitors was also one of the objectives of the 

holding company. The FDIC pumped $130 million into its main 

Jekyll Island plan. 

banking unit and took warrants for 55% ownership. The pattern 

Perhaps the most interesting—and depressing—aspect of the j^d been set. By accepting stock in a failing bank in return for 

Continental Illinois bailout was the lack of public indignation over 

bailing it out, the government had devised an ingenious way to 

the principle of using taxes and inflation to protect the banking 

nationalize banks without calling it that. Issuing stock sounds like a 

industry. Smaller banks have complained of the unfair advantage 

business transaction in the private sector. And the public didn't 

given to the larger banks, but not on the basis that the government 

seem to notice the reality that Uncle Sam was going into banking. 

should have let the giant fall. Their lament was that it should now 

protect them in the same paternalistic fashion. Voters and 

SECOND REASON TO ABOLISH THE FEDERAL RESERVE 

politicians 

were silent on the issue, apparently awed 

A sober evaluation of this long and continuing record leads to 

by the sheer size of 

the second reason for abolishing the Federal Reserve System: Far 

the numbers and the specter of economic chaos. Decades of public 

education had left their mark. After all, wasn't this exactly what 

from being a protector of the public, it is a cartel operating against the 

public interest. 

government schools have taught is the proper function of government? 

Wasn't this the American way? Even Ronald Reagan, SUMMARY 

viewed as the national champion of economic conservatism, 

ITie game called bailout is not a whimsical figment of the 

praised the action. From aboard Air Force One on the way to 

imagination, it is for real. Here are some of the big games of the 

California, the President said: "It was a thing that we should do and 

season and their final scores. 

we did it. It was in the best interest of all concerned." 

In 1970, Perm Central railroad became bankrupt. The banks 

The Reagan endorsement brought into focus one of the most which loaned the money had taken over its board of directors and 

amazing phenomena of the 20th century: the process by which had driven it further into the hole, all the while extending bigger 

America has moved to the Left toward statism while marching and bigger loans to cover the losses. Directors concealed reality 

behind the political banner of those who speak the language of from the stockholders and made additional loans so the company 

opposing statism. William Greider, a former writer for the liberal 

could pay dividends to keep up the false front. During this time, 

Washington Post and The Rolling Stone, complains: 

the directors and their banks unloaded their stock at unrealistically 

high prices. 

The 

When the truth became public, the 

nationalization of Continental was, 

stockholders were 

in fact, a quintessential act 

left 

of modern liberalism—the state intervening in behalf of private 

holding the empty bag. The bailout, which was engineered by 

interests and a broad public purpose. In this supposedly conservative 

the Federal Reserve, involved government subsidies to other banks 

era, federal authorities were setting aside the harsh verdict of market 

to grant additional loans. Then Congress was told that the collapse 

competition (and grossly expanding their own involvement in the 

of Perm Central would be devastating to the public interest. 

private economy). . . 

Congress responded by granting $125 million in loan guarantees so 

In the past, conservative scholars and pundits had objected loudly 

that banks would not 

at any 

be at risk. The railroad eventually failed 

federal intervention in the private economy, particularly 

emergency assistance for failing companies. Now, they hardly seemed 

anyway, but the bank loans were covered. Perm Central was 

to notice. Perhaps they would have been more vocal if the deed had 

nationalized into AMTRAK and continues to operate at a loss. 

been done by someone other than the conservative champion, Ronald 

In 1970, as Lockheed faced bankruptcy, Congress heard 

Reagan. 

essentially the same story. Thousands would be unemployed, 

Four years after the bailout of Continental Illinois, the same 

subcontractors would go out of business, and the public would 

suffer 

play was used in the rescue of BankOklahoma, which was a bank 

greatly. So Congress agreed to guarantee $250 million in new 

loans, which put Lockheed 60% deeper into debt than before. Now 

1. "Reagan Calls Rescue of Bank No Bailout/' New York Times, July 29, 1984. 

that government was guaranteeing the loans, it had to make sure 

2. Greider, p. 631. ' 

Lockheed became profitable. This was accomplished by granting

64 THE, CREATURE FROM JEKYLL ISLAND PROTECTORS OF THE PUBLIC 65 

lucrative defense contracts at non-competitive bids. The banks 

were paid back. 

In 1975, New York City had reached the end of its credit rope. It 

had borrowed heavily to maintain an extravagant bureaucracy and 

a miniature welfare state. Congress was told that the public would 

be jeopardized if city services were curtailed, and that America 

would be disgraced in the eyes of the world. So Congress authorized 

additional direct loans up to $2.3 billion, which more than 

doubled the size of the current debt. The banks continued to receive 

their interest. 

In 1978, Chrysler was on the verge of bankruptcy. Congress 

was informed that the public would suffer greatly if the company 

folded, and that it would be a blow to the American way if 

freedom-of-choice were reduced from three to two makes of 

automobiles. So Congress guaranteed up to $1.5 billion in new 

loans. The banks reduced part of their loans and exchanged another 

portion for preferred stock. News of the deal pushed up the market 

value of that stock and largely offset the loan write-off. The banks' 

previously uncollectable debt was converted into a governmentbacked, 

interest-bearing asset. 

In 1972, the Commonwealth Bank of Detroit—with $1.5 billion 

in assets, became insolvent. It had borrowed heavily from the 

Chase Manhattan Bank in New York to invest in high-risk and 

potentially high-profit ventures. Now that it was in trouble, so was 

Chase. The bankers went to Washington and told the FDIC the 

public must be protected from the great financial hardship that 

would follow if Commonwealth were allowed to close. So the FDIC 

pumped in a $60 million loan plus federal guarantees of repayment. 

Commonwealth was sold to an Arab consortium. Chase took 

a minor write down but converted most of its potential loss into 

government-backed assets. 

In 1979, the First Pennsylvania Bank of Philadelphia became 

insolvent. With assets in excess of $9 billion, it was nine-times the 

size of Commonwealth. It, too, had been an aggressive player in the 

'80s. Now the bankers and the Federal Reserve told the FDIC that 

the public must be protected from the calamity of a bank failure of 

this size, that the national economy was at stake, perhaps even the 

entire world. So the FDIC gave a $325 million loan—interest-free 

for the first year, and at half the market rate thereafter. The Federal 

Reserve offered money to other banks at a subsidized rate for the 

specific purpose of relending to First Perm. With that enticement, 

they advanced $175 million in immediate loans plus a $1 billion 

line of credit. 

In 1982, Chicago's Continental Illinois became insolvent. It was 

the nation's seventh largest bank with $42 billion in assets. The 

previous year, its profits had soared as a result of loans to high-risk 

business ventures and foreign governments. Although it had been 

the darling of market analysts, it quickly unraveled when its cash 

flow turned negative, and overseas banks began to withdraw 

deposits. It was the world's first electronic bank run. Federal 

Reserve Chairman Volcker told the FDIC that it would be unthinkable 

to allow the world economy to be ruined by a bank failure of 

this magnitude. So, the FDIC assumed $4.5 billion in bad loans and, 

in return for the bailout, took 80% ownership of the bank in the 

form of stock. In effect, the bank was nationalized, but no one 

called it that. The United States government was now in the 

banking business. 

All of the money to accomplish these bailouts was made 

possible by the Federal Reserve System acting as the "lender of last 

resort." That was one of the purposes for which it had been created. 

We must not forget that the phrase "lender of last resort" means 

that the money is created out of nothing, resulting in the confiscation 

of our nation's wealth through the hidden tax called inflation.

Chapter Four 

HOME, SWEET LOAN 

The history of increasing government intervention 

in the housing industry; the stifling of 

free-market forces in residential real estate; the 

resulting crisis in the S&L industry; the bailout of 

that industry with money taken from the taxpayer. 

As we have seen in previous chapters, the damage done by the 

banking cartel is made possible by the fact that money can be 

created out of nothing. It also destroys our purchasing power 

through the hidden tax called inflation. The mechanism by which it 

works is hidden and subtle. 

Let us turn, now, from the arcane world of central banking to 

the giddy world of savings-and-loan institutions. By comparison, 

the problem in the savings-and-loan industry is easy to comprehend. 

It is simply that vast amounts of money are disappearing into 

the black hole of government mismanagement, and the losses must 

eventually be paid by us. The end result is the same in both cases. 

SOCIALISM TAKES ROOT IN AMERICA 

It all began with a concept. The concept took root in America 

largely as a result of the Great Depression of the 1930s. American 

politicians were impressed at how radical Marxists were able to 

attract popular support by blaming the capitalist system for the 

country's woes and by promising a socialist Utopia. They admired 

and feared these radicals; admired them for their skill at mass 

psychology; feared them lest they become so popular as to win a 

plurality at the ballot box. It was not long before many political 

hgures began to mimic the soap-box orators, and the voters 

enthusiastically put them into office. 

While the extreme and violent aspects of Communism generally 

were rejected, the more genteel theories of socialism became 

Popular among the educated elite. It was they who would naturally 

become the leaders in an American socialist system. Someone had

— 

68 THE CREATURE FROM JEKYLL ISLAND HOME, SWEET LOAN 69 

to look after the masses and tell them what to do for their own 

good, and many with college degrees and those with great wealth 

became enamored by the thought of playing that role. And so, the 

concept became widely accepted at all levels of American life—the 

"downtrodden masses" as well as the educated elite—that it was 

desirable for the government to take care of its citizens and to 

protect them in their economic affairs. 

And so, when more than 1900 S&Ls went belly-up in the Great 

Depression, Herbert Hoover—and a most willing Congress 

created the Federal Home Loan Bank Board to protect depositors in 

the future. It began to issue charters to institutions that would 

submit to its regulations, and the public was led to believe that 

government regulators would be more wise, prudent, and honest 

than private managers. A federal charter became a kind of government 

seal of approval. The public, at last, was being protected. 

Hoover was succeeded by FDR in the White House who 

became the epitome of the new breed. Earlier in his political career, 

he had been the paragon of free enterprise and individualism. He 

spoke out against big government and for the free market, but in 

mid life he reset his sail to catch the shifting political wind. He went 

down in history as a pioneer of socialism in America. 

It was FDR who took the next step toward government 

paternalism in the S&L industry—as well as the banking industry— 

by establishing the Federal Deposit Insurance Corporation 

(FDIC) and the Federal Saving and Loan Insurance Corporation 

(FSLIC). From that point forward, neither the public nor the 

managers of the thrifts needed to worry about losses. Everything 

would be reimbursed by the government. 

A HOUSE ON EVERY LOT 

At about the same time, loans on private homes became 

subsidized through the Federal Housing Authority (FHA) which 

allowed S&Ls to make loans at rates lower than would have been 

possible without the subsidy. This was to make it easier for 

everyone to realize the dream of having their own home. While the 

Marxists were promising a chicken in every pot, the New Dealers 

were winning elections by pushing for a house on every lot. 

In the beginning, many people were able to purchase a home 

who, otherwise, might not have been able to do so or who would 

have had to wait longer to accumulate a higher down payment. On 

the other hand, the FHA-induced easy credit began to push up the 

price of houses for the middle class, and that quickly offset any real 

advantage of the subsidy. The voters, however, were not perceptive 

enough to understand this canceling effect and continued to vote 

for politicians who promised to expand the system. 

The next step was for the Federal Reserve Board to require 

banks to offer interest rates lower than those offered by S&Ls. The 

result was that funds moved from the banks into the S&Ls and 

became abundantly available for home loans. This was a deliberate 

national policy to favor the home industry at the expense of other 

industries that were competing for the same investment dollars. It 

may not have been good for the economy as a whole but it was 

good politics. 

ABANDONMENT OF THE FREE MARKET 

These measures effectively removed real estate loans from the 

free market and placed them into the political arena, where they 

have remained ever since. The damage to the public as a result of 

this intervention would be delayed a long time in coming, but 

when it came, it would be cataclysmic. 

The reality of government disruption of the free market cannot 

be overemphasized, for it is at the heart of our present and future 

crisis. We have savings institutions that are controlled by government 

at every step of the way. Federal agencies provide protection 

against losses and lay down rigid guidelines for capitalization 

levels, number of branches, territories covered, management policies, 

services rendered, and interest rates charged. The additional 

cost to S&Ls of compliance with this regulation has been estimated 

by the American Bankers Association at about $11 billion per year, 

which represents a whopping 60% of all their profits. 

On top of that, the healthy component of the industry must 

spend over a billion dollars each year for extra premiums into the 

so-called insurance fund to make up for the failures of the 

unhealthy component, a form of penalty for success. When some of 

the healthy institutions attempted to convert to banks to escape this 

Penalty, the regulators said no. Their cash flow was needed to 

support the bailout fund. 

!NSURANCE FOR THE COMMON MAN? 

The average private savings deposit is about $6,000. Yet, under 

the Carter administration, the level of FDIC insurance was raised


from $40,000 to $100,000 for each account. Those with more than 

that merely had to open several accounts, so, in reality, the sky was 

the limit. Clearly this had nothing to do with protecting the 

common man. The purpose was to prepare the way for brokerage 

houses to reinvest huge blocks of capital at high rates of interest 

virtually without risk. It was, after all, insured by the federal 

government. 

In 1979, Federal Reserve policy had pushed up interest rates, 

and the S&Ls had to keep pace to attract deposits. By December of 

1980, they were paying 15.8% interest on their money-market 

certificates. Yet, the average rate they were charging for new 

mortgages was only 12.9%. Many of their older loans were still 

crunching away at 7 or 8% and, to compound the problem, some of 

those were in default, which means they were really paying 0%. 

The thrifts were operating deep in the red and had to make up the 

difference somewhere. 

The weakest S&Ls paid the highest interest rates to attract 

depositors and they are the ones which obtained the large blocks of 

brokered funds. Brokers no longer cared how weak the operation 

was, because the funds were fully insured. They just cared about 

the interest rate. 

On the other hand, the S&L managers reasoned that they had to 

make those funds work miracles for the short period they had 

them. It was their only chance to dig out, and they were willing to 

take big risks. For them also, the government's insurance program 

had removed any chance of loss to their depositors, so many of 

them plunged into high-profit, high-risk real-estate developments. 

Deals began to go sour, and 1979 was the first year since the 

Great Depression of the 1930s that the total net worth of federally 

insured S&Ls became negative. And that was despite expansion 

almost everywhere else in the economy. The public began to 

worry. 

FULL FAITH AND CREDIT 

The protectors in Washington responded in 1982 with a joint 

resolution of Congress declaring that the full faith & credit of the 

United States government stood behind the FSLIC. That was a 

reassuring phrase, but many people had the gnawing feeling that 

somehow, we were going to pay for it ourselves. And they were 

right. Consumer Reports explained: 

Behind the troubled banks and the increasingly troubled 

insurance agencies stands "the full faith and credit" of the 

Government—in effect, a promise, sure to be honored by Congress, 

that all citizens will chip in through taxes or through inflation to make 

all depositors whole. 

The plight of the S&Ls was dramatically brought to light in 

Ohio in 1985 when the Home State Savings Bank of Cincinnati 

collapsed as a result of a potential $150 million loss in a Florida 

securities firm. This triggered a run, not only on the thirty-three 

branches of Home State, but on many of the other S&Ls as well. The 

news impacted international markets where overseas speculators 

dumped paper dollars for other currencies, and some rushed to 

buy gold. 

Within a few days, depositors demanding their money caused 

$60 million to flow out of the state's $130 million "insurance" fund 

which, true to form for all government protection schemes, was 

terribly inadequate. If the run had been allowed to continue, the 

fund likely would have been obliterated the next day. It was time 

for a political fix. 

Chi March 15, Ohio Governor Richard Celeste declared one of 

the few "bank holidays" since the Great Depression and closed all 

seventy-one of the state-insured thrifts. He assured the public there 

was nothing to worry about. He said this was merely a "cooling-off 

period . . . until we can convincingly demonstrate the soundness of 

our system." Then he flew to Washington and met with Paul 

Volcker, chairman of the Federal Reserve Board, and with Edwin 

Gray, chairman of the Federal Home Loan Bank Board, to request 

federal assistance. They assured him it was available. 

A few days later, depositors were authorized to withdraw up to 

$750 from their accounts. On March 21, President Reagan calmed 

the world money markets with assurances that the crisis was over. 

Furthermore, he said, the problem was "limited to Ohio." 2 

This was not the first time there had been a failure of statesponsored 

insurance funds. The one in Nebraska was pulled down 

^ 1983 when the Commonwealth Savings Company of Lincoln 

failed. It had over $60 million in deposits, but the insurance fund 

1. " 

How Safe Are 

2. - 

Your Deposits?", Consumer Reports, August, 1988, p. 503. 

Ohio Bank Crisis That Ruffled World/' US. News & World Report, April 1, 1985, 

P-ll


had less than $2 million to cover, not just Commonwealth, but the 

whole system. Depositors were lucky to get 65 cents on the dollar, 

and even that was expected to take up to 10 yeaTs. 

AN INVITATION TO FRAUD 

In the early days of the Reagan administration, government 

regulations were changed so that the S&Ls were no longer 

restricted to the issuance of home mortgages, the sole reason for 

their creation in the first place. In fact, they no longer even were 

required to obtain a down payment on their loans. They could now 

finance 100% of a deal—or even more. Office buildings and 

shopping centers sprang up everywhere regardless of the need. 

Developers, builders, managers, and appraisers made millions. The 

field soon became overbuilt and riddled with fraud. Billions of 

dollars disappeared into defunct projects. In at least twenty-two of 

the failed S&Ls, there is evidence that the Mafia and CIA were 

involved. 

Fraud is not necessarily against the law. In fact, most of the 

fraud in the S&L saga was, not only legal, it was encouraged by the 

government. The Garn-St Germain Act allowed the thrifts to lend 

an amount of money equal to the appraised value of real estate 

rather than the market value. It wasn't long before appraisers were 

receiving handsome fees for appraisals that were, to say the least, 

unrealistic. But that was not fraud, it was the intent of the 

regulators. The amount by which the appraisal exceeded the 

market value was defined as "appraised equity" and was counted 

the same as capital. 

Since the S&Ls were required to have $1 in 

capital for every $33 held in deposits, an appraisal that exceeded 

market value by $1 million could be used to pyramid $33 million in 

deposits from Wall Street brokerage houses. And the anticipated 

profits from those funds was one of the ways in which the S&Ls 

were supposed to recoup their losses without the government 

having to cough up the money—which it didn't have. In effect the 

government was saying: "We can't make good on our protection 

scheme, so go get the money yourself by putting the investors at 

risk. Not only will we back you up if you fail, we'll show you 

exactly how to do it." 

1. "How Safe Are Deposits in Ailing Banks, S&Ls?/' U.S. 'News & World Report, 

March 25, 1985, p. 74. 

THE FALLOUT BEGINS 

In 

HOME, SWEET LOAN 73 

spite of the accounting gimmicks which were created to 

make the walking-dead S&Ls look healthy, by 1984 the fallout 

began- The FSLIC closed one institution that year and arranged for 

the merger of twenty-six others which were insolvent. In order to 

persuade healthy firms to absorb insolvent ones, the government 

provides cash settlements to compensate for the liabilities. By 1984, 

these 

subsidized mergers were costing the FDIC over $1 billion per 

year. Yet, that was just the small beginning. 

Between 1980 and 1986, a total of 664 insured S&Ls failed. 

Government regulators had promised to protect the public in the 

event of losses, but the losses were already far beyond what they 

could handle. They could not afford to close down all the insolvent 

thrifts because they simply didn't have enough money to cover the 

pay out. In March of 1986, the FSLIC had only 3 cents for every 

dollar of deposits. By the end of that year, the figure had dropped 

to two-tenths of a penny for each dollar "insured." Obviously, they 

had to keep those thrifts in business, which meant they had to 

invent even more accounting gimmicks to conceal the reality. 

Postponement of the inevitable made matters even worse. 

Keeping the S&Ls in business was costing the FSLIC $6 million per 

day. By 1988, two years later, the thrift industry as a whole was 

losing $9.8 million per day, and the unprofitable ones—the corpses 

which were propped up by the FSLIC—were losing $35.6 million 

per day. And, still, the game continued. 

By 1989, the FSLIC no longer had even two-tenths of a penny 

for each dollar insured. Its reserves had vanished altogether. Like 

the thrifts it supposedly protected, it was, itself, insolvent and 

looking for loans. It had tried offering bond issues, but these fell far 

short of its 

tailed 

needs. Congress had discussed the problem but had 

to provide new funding. The collapse of Lincoln Savings 

brought the crisis to a head. There was no money, period. 

THE FED USURPS THE ROLE OF CONGRESS 

In February, an agreement was reached between Alan 

Greenspan, Chairman of the Federal Reserve Board, and M. Danny 

Wall, Chairman of the Federal Home Loan Bank Board, to have 

Fizzling FSLIC" by Shirley Hobbs Scheibla, Barron's, Feb. 9, 1987, p. 16.


$70 million of bailout funding for Lincoln Savings come directly 

from the Federal Reserve. 

This was a major break in precedent. Historically, the Fed has 

served to create money only for the government or for banks. If it 

were the will of the people to bail out a savings institution, then it is 

up to Congress to approve the funding. If Congress does not have 

the money or cannot borrow it from the public, then the Fed can 

create it (out of nothing, of course) and give it to the government. 

But, in this instance, the Fed was usurping the role of Congress and 

making political decisions entirely on its own. There is no basis in 

the Federal Reserve Act for this action. Yet, Congress remained 

silent, apparently out of collective guilt for its own paralysis. 

Finally, in August of that year, Congress was visited by the 

ghost of FDR and sprang into action. It passed the Financial 

Institutions Reform and Recovery Act (FIRREA) and allocated a 

minimum of $66 billion for the following ten years, $300 billion 

over thirty years. Of this amount, $225 billion was to come from 

taxes or inflation, and $75 billion was to come from the healthy 

S&Ls. It was the biggest bailout ever, bigger than the combined cost 

for Lockheed, Chrysler, Penn Central, and New York City. 

In the process, the FSLIC was eliminated because it was 

hopelessly insolvent and replaced by the Savings Association 

Insurance Fund. Also created was the Banking Insurance Fund for 

the protection of commercial banks, and both are now administered 

by the FDIC. 

As is often the case when previous government control fails to 

produce the desired result, the response of Congress is to increase 

the controls. Four entirely new layers of bureaucracy were added to 

the existing tangled mess: the Resolution Trust Oversight Board, to 

establish strategies for the RTC; the Resolution Funding Corporation, 

to raise money to operate the RTC; The Office of Thrift 

Supervision, to supervise thrift institutions even more than they 

had been; and the Oversight Board for the Home Loan Banks, the 

purpose of which remains vague but probably is to make sure that 

the S&Ls continue to serve the political directive of subsidizing the 

home industry. When President Bush signed the bill, he said: 

This legislation will safeguard and stabilize America's financial 

system and put in place permanent reforms so these problems wiU 

never happen again. Moreover, it says to tens of millions of 

savings-and-loan depositors, "You will not be the victim of others' 

mistakes. We will 

secure." 


see— guarantee—that your insured deposits are 

THE ESTIMATES ARE SLIGHTLY WRONG 

By the middle of the following year, it was clear that the $66 

billion funding would be greatly inadequate. Treasury spokesmen 

were now quoting $130 billion, about twice the original estimate. 

How much is $130 billion? In 1990, it was 30% more than the 

salaries of all the schoolteachers in America. It was more than the 

combined profits of all the Fortune-500 industrial companies. It 

would send 1.6 million students through the best four-year colleges, 

including room and board. And the figure did not even 

include the cost of liquidating the huge backlog of thrifts already 

seized nor the interest that had to be paid on borrowed funds. 

Within only a few days of the announced increase, the Treasury 

again revised the figure upward from $130 billion to $150 billion. 

As Treasury Secretary Nicholas Brady told the press, "No one 

should assume that the estimates won't change. They will." 

Indeed, the estimates continued to change with each passing 

week. The government had sold or merged 223 insolvent thrifts 

during 1988 and had given grossly inadequate estimates of the cost. 

Financiers such as Ronald Perelman and the Texas investment 

partnership called Temple-Inland, Inc., picked up many of these at 

fantastic bargains, especially considering that they were given cash 

subsidies and tax advantages to sweeten the deal. At the time, 

Danny Wall, who was then Chairman of the Federal Home Loan 

Bank Board, announced that these deals "took care" of the worst 

thrift problems. He said the cost of the bailout was $39 billion. The 

Wall Street Journal replied: 

Wrong again. The new study, a compilation of audits prepared by 

the Federal Deposit Insurance Corporation, indicates that the total cost 

of the so-called Class of '88 will be $90 billion to $95 billion, including 

tax benefits granted the buyers and a huge amount of interest on 

government debt to help finance this assistance.... 

But the 1988 thrift rescues' most expensive flaw doesn't appear to 

be the enrichment of tycoons. Rather it's that none of the deals ended 

or even limited the government's exposure to mismanagement by the 

new owners, hidden losses on real estate in the past, or the vicissitudes 

of the real-estate markets in the future.... And some of the deals 

1. 

'Review of the News," The New American, Sept. ll y 1989, p. 15.


appear to be sham transactions, in which failing thrifts were sold to 

failing thrifts, which are failing all over again.... 

Although the thrifts proved to be in far worse shape than the Bank 

Board estimated, Mr. Wall defends his strategy for rescuing them with 

open-ended assistance. "We didn't have the money to liquidate/' he 

says. 

When Congress passed FIRREA the previous year to "safeguard 

and stabilize America's financial system/ 7 the staggering 

sum of $300 billion dollars was authorized to be taken from taxes 

and inflation over the following thirty years to do the job. Now, 

Federal Reserve Chairman Alan Greenspan was saying that 

true long-term cost would stand at $500 billion, an amount even 

greater than the default of loans to all 

the 

the Third-World countries 

combined. The figure was still too low. A non-biased private study 

released by Veribank, Inc. showed that, when all the hidden costs 

are included, the bill presented to the American people will be 

about $532 billion. The problems that President Bush promised 

would ''never happen again" were happening again. 

BOOKKEEPING SLEIGHT OF HAND 

Long before this point, the real estate market had begun to 

contract, and many mortgages exceeded the actual price for which 

the property could be sold. Furthermore, market interest rates had 

risen far above the rates that were locked into most of the S&L 

loans, and that decreased the value of those mortgages. The true 

value of a $50,000 mortgage that is paying 7% interest is only half of 

a $50,000 mortgage that is 

earning 14%. So the protectors of the 

public devised a scheme whereby the S&Ls were allowed to value 

their assets according to the original loan value rather than their 

true market value. That helped, but much more was still needed. 

The next step was to create bookkeeping assets out of thin air. 

This was accomplished by authorizing the S&Ls to place a monetary 

value on community "good will"! With the mere stroke of a 

pen, the referees created $2.5 billion in such assets, and the players 

continued the game. 

1. "Audit Report by FDIC Shows Wall's Estimates for Thrift Bailouts in 1988 Were 

Wildly Low/' by Charles McCoy and Todd Mason, The Wall Street Journal, Sept. 14, 

1990, p. A-l 2. 

2. "S&L Industry Rebuilds As Bailout Reaches Pinal Phase," Veribank News Release, 

Veribank, Inc. (Wakefield, Massachusetts), January 12, 1994, p. 2. 


Then the FSLIC began to issue "certificates of net worth/' which 

vvere basically promises to bail out the ailing S&Ls should they 

need The government had already promised it- 

to do that but, by 

printing 

it on pieces of paper and calling them "certificates of net 

worth/' the S&Ls were allowed to count them as assets on their 

books. Such promises are assets but, since the thrifts would be 

obligated to pay back any money it received in a bailout, those 

pay-back obligations should also have been put on the books as 

liabilities. The net position would not change. The only way they 

could count the certificates as assets without adding the offsetting 

liabilities would be for the bailout promises to be outright gifts with 

no obligation to ever repay. That may be the eventual result, but it 

is not the way the plan was set up. In any event, the thrifts were 

told they could count these pieces of paper as capital, the same as if 

the owners had put up their own cash. And the game continued. 

The moment of truth arrives when the S&Ls have to liquidate 

some of their holdings, such as in the sale of their mortgages or 

foreclosed homes to other S&Ls, commercial banks, or private 

parries. That is when the inflated bookkeeping value is converted 

into the true market value, and the difference has to be entered into 

the ledger as a loss. 

But not in the never-never land of socialism 

where government is the great protector. Dennis Turner explains: 

The FSUC permits the S&L which sold the mortgage to take the 

loss over a 40-year period. Most companies selling an asset at a loss 

must take the loss immediately: only S&Ls can engage in this patent 

fraud. Two failing S&Ls could conceivably sell their lowest-yielding 

mortgages to one another, and both wouJd raise their net worth! This 

dishonest accounting in the banking system is approved by the higfiest 

regulatory authorities. 

1 

U.S. News & World Report continues the commentary: 

Today, scores of savings-and-loan associations, kept alive mainly 

by accounting gimrrucks, continue to post big losses.. . . Only a fraction 

of the industry's aggregate net worth comprises hard assets such as 

mortgage notes. Intangible assets, which include bookkeeping entries 

such as good will, make up nearly all of the industry's estimated net 

Worth of 37.6 billion dollars. 

2 

P J? e .nnis Turner ' 

When Your Bank Fails (Princeton, New Jersey: Amwell 

f ub «shing,Inc. / 1983) /P .141. 

Tt's Touch And Go for Troubled S&Ls/' by Patricia M. Scherschel, U.S. News & 

world Report, March 4, 1985, p. 92.


ACCOUNTING GIMMICKS ARE NOT FRAUD 

We must keep in mind that a well managed institution would 

never assume these kinds of risks or resort to fraudulent 

accounting if it wanted to stay in business for the long haul. But 

with Washington setting guidelines and standing by to make up 

losses, a manager would be fired if he didn't take advantage of the 

opportunity. After all, Congress specifically said it was OK when it 

passed the laws. These were loopholes deliberately put there to be 

used. Dr. Edward Kane explains: 

Deception itself doesn't constitute illegal fraud when it's 

authorized by an accounting system such as the Generally Accepted 

Accounting Principles (GAAP) system which allows institutions to 

forego recording assets at their true worth, maintaining them instead 

at their inflated value. The regulatory accounting principles system in 

1982 added even new options to overstate capital.... Intense 

speculation, such as we observed in these firms, is not necessarily bad 

management at all. In most of these cases, it was clever management. 

There were clever gambles that exploited, not depositors or savers, but 

taxpayers. 

The press has greatly exaggerated the role of illegal fraud in 

these matters with much time spent excoriating the likes of Donald 

Dixon at Vernon S&L and Charles Keating at Lincoln Savings. 

True, these flops cost the taxpayer well over $3 billion dollars, but 

all the illegal fraud put together amounts to only about one-half of 

one per cent of the total losses so far. 

Focusing on that minuscule 

component serves only to distract from the fact that the real 

problem is government regulation itself. 

JUNK BONDS ARE NOT JUNK 

Another part of the distraction has been to make it appear that 

the thrifts got into trouble because they were heavily invested in 

"junk bonds/' 

Wait a minute! What are junk bonds, anyway? This may come 

as a surprise, but those held by the S&Ls were anything but junk. In 

fact, in terms of risk-return ratios, most of them were superiorgrade 

investments to bonds from the Fortune-500 companies- 

1. "FIRREA: Financial Malpractice/' by Edward J. 

Kane, Durell Journal of Money 

and Banking, May, 1990, p. 5. 

2. "Banking on Government/' by Jane H. Ingraham, The New American, August 24, 

1992, p. 24. 

of older companies—but the small-company sector generally pro- 

more jobs, has greater profit margins, and pays more 

dividends than the so-called "investment-grade" companies. From 

rvides 


So-called junk bonds are merely those that are offered by smaller 

orn panies which are not large enough to be counted among the 

ation's giants. The large reinvestors, such as managers of mutual 

funds and retirement funds, prefer to stay with well-known names 

like General Motors and IBM. They need to invest truly huge 

blocks of money every day, and the smaller companies just don't 

have enough to offer to satisfy their needs. Consequently, many 

stocks and bonds from smaller companies are not traded in the 

New York Stock Exchange. They are traded in smaller exchanges or 

directly between brokers in what is called "over the counter." 

Because they do not have the advantage of being traded in 

larger markets, they have to pay a higher interest rate to attract 

investors, and for that reason, they are commonly called high-yield 

bonds. 

Bonds offered by these companies are derided by some brokers 

as not being "investment grade," yet, many of them are excellent 

performers. In fact, 

the 

they have become an important part of the 

American economy because they are the backbone of new industry. 

The most successful companies of the future will be found among 

their ranks. During the last decade, while the Fortune-500 companies 

were shrinking and eliminating 3.6 million jobs, this segment 

of new industry has been growing and has created 18 million new 

jobs. 

Not all new companies are good investments—the same is true 

1981 to 1991, the average return on ten-year Treasury bills was 10.4 

per cent; the Dow Jones Industrial Average was 12.9 per cent; and 

the average return on so-called junk bonds was 14.1 per cent. 

Because of this higher yield, they attracted more than $180 billion 

from savvy investors, some of whom were S&Ls- It was basically a 

new market which was orchestrated by an upstart, Michael Milken, 

a t the California-based Drexel Burnham Lambert brokerage house. 

CAPITAL GROWTH WITHOUT BANK LOANS OR 

JNFLATION 

One of the major concerns at Jekyll Island in 1910 was the trend 

to obtain business-growth capital from sources other than bank 

loans. Here, seventy years later, the same trend was developing

. 


" 

again in a slightly different form. Capital, especially for small 

companies, was now corning from bonds which Drexel had found a 

way to mass market. In fact, Drexel was even able to use those 

bonds to engineer corporate takeovers, an activity that previously 

had been reserved for the mega-investment houses. By 1986, Drexel 

had become the most profitable investment bank in the country. 

Here was $180 billion that no longer was being channeled 

through Wall Street. Here was $180 billion that was coming from 

people's savings instead of being created out of nothing by the 

banks. In other words, here was growth built upon real investment, 

not inflation. Certain people were not happy about it. 

Glenn Yago, Director of the Economic Research Bureau and 

Associate Professor of Management at the State University of New 

York at Stony Brook, explains the problem: 

It was not until high yield securities were applied to restructuring 

through deconglomeration and takeovers that hostilities against the 

junk bond market broke out.... The high yield market grew at the 

expense of bank debt, and high yield companies grew at the expense 

of the hegemony of many established firms. As Peter Passell noted in 

The New York Times, the impact was first felt on Wall Street, "where 

sharp elbows and a working knowledge of computer spreadsheets 

suddenly counted more than a nose for dry sherry or membership in 

Skull and Bones." 1 

The first line of attack on this new market of high-yield bonds 

was to call them "junk." The word itself was powerful. The 

financial media picked it up and many investors were frightened 

away. 

The next step was for compliant politicians to pass a law 

requiring S&Ls to get rid of their "junk/' supposedly to protect the 

public. That this was a hoax is evident by the fact that only 5% ever 

held any of these bonds, and their holdings represented only 1.2% 

of the total S&Ls assets. Furthermore, the bonds were performing 

satisfactorily and were a source of much needed revenue. Nevertheless, 

The Financial Institutions Reform and Recovery Act, which 

was discussed previously, was passed in 1989. It forced S&Ls to 

liquidate at once their "junk" bond holdings. That caused their 


rices to plummet, and the thrifts were even further weakened as 

jL>y took a loss on the sale. Jane Ingraham comments: 

Overnight, profitable S&Ls were turned into government-owned 

basket cases in the hands of the Resolution Trust Corporation (RTC). 

t add to the disaster, the RTC itself, which became the country's 

largest owner of junk bonds ... flooded the market again with $1.6 

billion of its holdings at the market's bottom in 1990.. . 

So it was government itself that crashed the junk bond market, not 

Michael Milken, although the jailed Milken and other former officials 

of Drexel Burnham Lambert have just agreed to a $1.3 billion 

settlement of the hundreds of lawsuits brought against them by 

government regulators, aggrieved investors, and others demanding 

"justice." 1 

Incidentally, 

these bonds have since recovered and, had the 

S&Ls been allowed to keep them, they would be in better financial 

condition today. And so would be the RTC. 

With the California upstarts out of the way, it was a simple 

matter to buy up the detested bonds at bargain prices and to bring 

control of the new market back to Wall Street. The New York firm 

of Salomon Brothers, for example, one of Drexel's most severe 

critics during the 1980s, is now a leading trader in the market 

Drexel created. 

REAL PROBLEM IS GOVERNMENT REGULATION 

So the real problem within the savings-and-loan industry is 

government regulation which has insulated it from the free market 

and encouraged it to embark upon unsound business practices. As 

the Wall Street Journal stated on March 10, 1992: 

If 

you're going to wreck a business the size of the U.S. Thrift 

industry, you need a lot more power than Michael Milken ever had. 

You need the power of national political authority, the kind of power 

possessed only by regulators and Congress. Whatever "hold" Milken 

or junk bonds may have had on the S&Ls, it was nothing compared 

with the interventions of Congress. 

At the time this book went to press, the number of S&Ls that 

operated during the 1980s had dropped to less than half. As 

failures, mergers, and conversion into banks continue, the number 

w iU decline further. Those that remain fall into two groups: those 

1. Glenn Yago, Junk Bonds: How High Yield Securities Restructured Corporate America 

(New York: Oxford University Press, 1991), p. 5. 

1- 

'"Banking on Government/' pp. 24, 25. 

- 

Quoted in "Banking on Government," p. 26.


that have been taken over by the RTC and those that have not Most 

of those that remain under private control—and that is a relative 

term in view of the regulations they endure—are slowly returning 

to a healthy state as a result of improved profitability, asset quality, 

and capitalization. The RTC-run organizations, on the other hand, 

continue to hemorrhage due to failure by Congress to provide 

funding to close them down and pay them off. Losses from this 

group are adding $6 billion per year to the ultimate cost of bailout. 

President Clinton was asking Congress for an additional $45 billion 

and hinting that this should be the last bailout—but no promises. 

The game continues. 

CONGRESS IS PARALYZED, WITH GOOD REASON 

Congress seems disinterested and paralyzed with inaction. One 

would normally expect dozens of politicians to be calling for a 

large-scale investigation of the ongoing disaster, but there is hardly 

a peep. The reason becomes obvious when one realizes that 

savings-and-loan associations, banks, and other federally regulated 

institutions are heavy contributors to the election campaigns of 

those who write the regulatory laws. A thorough, public investigation 

would undoubtedly turn up some cozy relationships that the 

legislators would just as soon keep confidential. 

The second reason is that any honest inquiry would soon reveal 

the shocking truth that Congress itself is the primary cause of the 

problem. By following the socialist path and presuming to protect 

or benefit their constituency, they have suspended and violated the 

natural laws that drive a free-market economy. In so doing, they 

created a Frankenstein monster they could not control The more 

they tried to tame the thing, the more destructive it became. As 

economist Hans Sennholz has observed: 

The real cause of the disaster is the very financial structure that 

was fashioned by legislators and guided by regulators; they together 

created a cartel that, like all other monopolistic concoctions, is playing 

mischief with its victims. 

A CARTEL WITHIN A CARTEL 

Sennholz has chosen exactly the right word: cartel. The savingsand-loan 

industry, is really a cartel within a cartel. It could not 

1. "The Great Banking Scandal," by Hans F. Sennholz, The Freeman, Nov., 1990/ 

p. 405. 

function 

without Congress standing by to push unlimited amounts 

of money into it. And Congress could not do that without the 

banking cartel called the Federal Reserve System standing by as the 

"lender of last resort" to create money out of nothing for Congress 

to borrow. This comfortable arrangement between political scientists 

and monetary scientists permits Congress to vote for any 

scheme it wants, regardless of the cost. If politicians tried to raise 

that money through taxes, they would be thrown out of office. But 

being able to "borrow" it from the Federal Reserve System upon 

demand, allows them to collect it through the hidden mechanism of 

inflation, and not one voter in a hundred will complain. 

The thrifts have become the illegitimate half-breed children of 

the Creature. And that is why the savings-and-loan story is 

included in this study. 

[f America is to survive as a free nation, her citizens must 

become far more politically educated than they are at present. As a 

people, we must learn not to reach for every political carrot 

dangled in front of us. As desirable as it may be for everyone to 

afford a home, we must understand that government programs 

pretending to make that possible actually wreak havoc with our 

system and bring about just the opposite of what they promise. 

After 60 years of subsidizing and regulating the housing industry, 

how many young people today can afford a home? Tinkering with 

the laws of supply and demand, plus the hidden tax called inflation 

to pay for the tinkering, has driven prices beyond the reach of 

many and has wiped out the down payments of others. Without 

such costs, common people would have much more money and 

purchasing power than they do today, and homes would be well 

within their reach. 

SUMMARY 

Our present-day problems within the savings-and-loan industry 

can be traced back to the Great Depression of the 1930s. 

Americans were becoming impressed by the theories of socialism 

and soon embraced the concept that it was proper for government 

D provide benefits for its citizens and to protect them against 

economic hardship. 

Under the Hoover and Roosevelt administrations, new government 

agencies were established which purported to protect depos- 

in the S&Ls and to subsidize home mortgages for the middle 

lts


class. 

These measures distorted the laws of supply and demand 

and, from that point forward, the housing industry was moved out 

of the free market and into the political arena. 

Once the pattern of government intervention had been established, 

there began a long, unbroken series of federal rules and 

regulations that were the source of windfall profits for managers, 

appraiser, brokers, developers, and builders. They also weakened 

the industry by encouraging unsound business practices and 

high-risk investments. 

When these ventures failed, and when the value of real estate 

began to drop, many S&Ls became insolvent. The federal insurance 

fund was soon depleted, and the government was confronted with 

its own promise to bail out these companies but not having any 

money to do so. 

The response of the regulators was to create accounting gimmicks 

whereby insolvent thrifts could be made to appear solvent 

and, thus, continue in business. This postponed the inevitable and 

made matters considerably worse. The failed S&Ls continued to 

lose billions of dollars each month and added greatly to the 

ultimate cost of bailout, all of which would eventually have to be 

paid by the common man out of taxes and inflation. The ultimate 

cost is estimated at over one trillion dollars. 

Congress appears to be unable to act and is 

strangely silent. 

This is understandable. Many representatives and senators are the 

beneficiaries of generous donations from the S&Ls. But perhaps the 

main reason is that Congress, itself, is the main culprit in this crime. 

In either case, the politicians would like to talk about something 

else. 

In the larger view, the S&L industry is a cartel within a cartel. 

The fiasco could never have happened without the cartel called the 

Federal Reserve System standing by to create the vast amounts of 

bailout money pledged by Congress. 

Chapter Five 

NEARER TO THE 

HEART'S DESIRE 

The 1944 meeting in Bretton Woods, New Hampshire, 

at which the world's most prominent socialists 

established the International Monetary Fund 

and the World Bank as mechanisms far eliminating 

gold from world finance; the hidden agenda 

behind the IMF/World Bank revealed as the 

building of world socialism; tlie role of the Federal 

Reserve in bringing that about. 

As we have seen, the game called Bailout has been played over 

and over again in the rescue of large corporations, domestic banks, 

and savings-and-loan institutions. The pretense has been that these 

measures were necessary to protect the public. The result, however, 

has been just the opposite. The public has been exploited as billions 

of dollars have been expropriated through taxes and inflation. The 

money has been used to make up losses that should have been paid 

by the failing banks and corporations as the penalty for mismanagement 

and fraud. 

While this was happening in our home-town stadium, the same 

game was being played in the international arena. There are two 

primary differences. One is that the amount of money at stake in 

the international game is much larger. Through a complex tangle of 

bank loans, subsidies, and grants, the Federal Reserve is becoming 

the "lender of last resort" for virtually the entire planet. The other 

difference is that, instead of claiming to be Protectors of the Public, 

the players have emblazoned across the backs of their uniforms: 

Saviors of the World. 

BRETTON WOODS: AN ATTACK ON GOLD 

fhe game began at an international meeting of financiers, 

Politicians, and theoreticians held in July of 1944 at the Mount 

Washington Hotel in Bretton Woods, New Hampshire. Officially, it


was called the United Nations Monetary and Financial Conference, 

but is generally referred to today as simply the Bretton Woods 

Conference. Two international agencies were created at that meeting: 

the International Monetary Fund and its sister organisation, 

the International Bank for Reconstruction and Development— 

commonly called the World Bank. 

The announced purposes of these organizations were admirable. 

The World Bank was to make loans to war-torn and underdeveloped 

nations so they could build stronger economies. The 

International Monetary Fund (IMF) was to promote monetary 

cooperation between nations by maintaining fixed exchange rates 

between their currencies. But the method by which these goals 

were to be achieved was less admirable. It was to terminate the use 

of gold as the basis of international currency exchange and replace 

it with a politically manipulated paper standard. In other words, it 

was to allow governments to escape the discipline of gold so they 

could create money out of nothing without paying the penalty of 

having their currencies drop in value on world markets. 

Prior to this conference, currencies were exchanged in terms of 

their gold value, and the arrangement was called the "goldexchange 

standard." This is not the same as a "gold-standard" in 

which a currency is backed by gold. It was merely that the 

exchange ratios of the various currencies—most of which were not 

backed by gold—were determined by how much gold they could 

buy in the open market. Their values, therefore, were set by supply 

and demand. Politicians and bankers hated the arrangement, 

because it was beyond their ability to manipulate. In the past, it had 

served as a remarkably efficient mechanism but it was a strict 

disciplinarian. As John Kenneth Galbraith observed: 

The Bretton Woods arrangements sought to recapture the 

advantages of the gold standard—currencies that were exchangeable 

at stable and predictable rates into gold and thus at stable and 

predictable rates into each other. And this it sought to accomplish 

while minimizing the pain imposed by the gold standard on countries 

that were buying too much, selling too little and thus losing gold." 

The method by which this was to be accomplished was exactly 

the method devised on Jekyll Island to allow American banks to 

1. John Kenneth Galbraith, Money: Whence It Came, Where It Went (Boston: 

Houghton Mifflin, 1975), pp. 258, 259. 

NEARER TO THE HEART'S DESIRE 87 

cresXe money out of nothing without paying the penalty of having 

their 

currencies devalued by other banks. It was the establishment 

of a world central bank which would create a common fiat money 

for all nations and then require them to inflate together at the same 

rate. There was to be a kind of international insurance fund which 

vvould rush that fiat money to any nation that temporarily needed 

it to face down a "run" on its currency. It wasn't born with all these 

features fully developed, just as the Federal Reserve wasn't fully 

developed when it was born. That, nevertheless, was the plan, and 

it was launched with all the structures in place. 

The theoreticians who drafted this plan were the well-known 

Fabian Socialist from England, John Maynard Keynes, 1 and the 

Assistant Secretary of the U.S. Treasury, Harry Dexter White. 

THE FABIAN SOCIETY 

The Fabians were an elite group of intellectuals who formed a 

semi-secret society for the purpose of bringing socialism to the 

world. Whereas Communists wanted to establish socialism quickly 

through violence and revolution, the Fabians preferred to do it 

slowly through propaganda and legislation. The word socialism 

was not to be used. Instead, they would speak of benefits for the 

people such as welfare, medical care, 

higher wages, and better 

working conditions. In this way, they planned to accomplish their 

objective without bloodshed and even without serious opposition. 

They scorned the Communists, not because they disliked their 

goals, but because they disagreed with their methods. To emphasize 

the importance of gradualism, they adopted the turtle as the 

symbol of their movement. The three most prominent leaders in the 

early days were Sidney and Beatrice Webb and George Bernard 

Shaw. A stained-glass window in the Beatrice Webb House in 

Surrey, England is especially enlightening. Across the top appears 

the last line from Omar Khayyam: 

Dear love, couldst thou and I with fate conspire 

To grasp this sorry scheme of things entire, 

Would we not shatter it to bits, and then 

Remould it nearer to the heart's desire! 

Keynes often is portrayed as having been merely a liberal. But, for his Lifelong 

voivement with Fabians and their work, see Rose Martin, Fabian Freeway; High 

^"w to Socialism in the U.S.A. (Boston: Western [stands, 1966).


•" 


Beneath the line Remould it nearer to the heart's desire, the mural 

depicts Shaw and Webb striking the earth with hammers. Across 

the bottom, the masses kneel in worship of a stack of books 

advocating the theories of socialism. Thumbing his nose at the 

docile masses is H.G. Wells who, after quitting the Fabians, 

denounced them as "the new machiavellians." The most revealing 

component, however, is the Fabian crest which appears Between 

Shaw and Webb. It is a wolf in sheep's clothing! 

COMMUNIST MOLES 

Harry Dexter White was America's chief technical expert and 

the dominant force at the conference. He eventually became the 

first Executive Director for the United States at the IMF. An 

interesting footnote to this story is that White was simultaneously a 

member of the Council on Foreign Relations (CFR) and a member 

of a Communist espionage ring in Washington while he served as 

Assistant Secretary of the Treasury. And even more interesting is 

that the White House was informed of that fact when President 

Truman appointed him to his post. The FBI had transmitted to the 

White House detailed proof of White's activities on at least two 

separate occasions. 

Serving as the technical secretary at the Bretton 

Woods conference was Virginius Frank Coe, a member of the same 

espionage ring to which White belonged. Coe later became the first 

Secretary of the IMF. 

Thus, completely hidden from public view, there was a complex 

drama taking place in which the intellectual guiding lights at 

the Bretton Woods conference were Fabian Socialists and Communists. 

Although they were in disagreement over method, they were 

in perfect harmony on goal: international socialism. 

There were undoubtedly other reasons for Communists to be 

enthusiastic about the IMF and the World Bank, despite the fact 

1. See Zygmund Dobbs, The Great Deceit: Social Pseudo-Sciences (West SayviNe, 

New York: Veritas Foundation, 1964), opposite p. 1. Also Rose L. Martin, Fabian 

Freeway: High Road to Socialism in the U.S.A. (Boston: Western Islands, 1966), pp. 30, 

31. 

2. See: David Rees, Harry Dexter White: A Study in Paradox (New York: Coward, 

McCann & Geoghegan, 1973); Whittaker Chambers, Witness (New York: Random 

House, 1952); Allen Weinstein, Perjury: The Hiss-Chambers Case (New York: Vintage 

Books, 1978); James Burnham, TJie Web of Subversion: Underground Networks in the 

US. Government (New York: The John Day Co., 1954); Elizabeth Bentley, Out of 

Bondage (New York: Devin-Adair, 1951) 

that the Soviet Union elected at the time not to become a member. 

The goal of the organizations was to create a world currency, a 

world central bank, and a mechanism to control the economies of 

all 

nations. In order for these things to happen, the United States 

would of necessity have to surrender its dominant position. In fact, 

it would have to be reduced to just one part of the collective whole. 

FXhat fit in quite nicely with the Soviet plan. Furthermore, the World 

Bank was seen as a vehicle for moving capital from the United 

States and other industrialized nations to the underdeveloped 

1 

nations, the very ones over which Marxists have always had the 

greatest control. They looked forward to the day when we would 

pay their bills. It has all come to pass. 

IMF STRUCTURE AND FUNDING 

The International Monetary Fund appears to be a part of the 

United Nations, much as the Federal Reserve System appears to be 

a part of the United States government, but it is entirely independent. 

It is funded on a quota basis by its member nations, 

almost two hundred in number. The greatest share of capital, 

however, comes from the more highly industrialized nations such 

as Great Britain, Japan, France, and Germany, The United States 

contributes the most, at about twenty per cent of the total. In 

reality, that twenty per cent represents about twice as much as the 

number indicates, because most of the other nations contribute 

worthless currencies which no one wants. The world prefers 

dollars. 

One of the routine operations at the IMF is to exchange 

worthless currencies for dollars so the weaker countries can pay 

their international bills. This is supposed to cover temporary 

"cash-flow" problems. It is a kind of international FDIC which 

rushes money to a country that has gone bankrupt so it can avoid 

devaluing its currency. The transactions are seldom paid back. 

Although escape from the gold-exchange standard was the 

lor >g-range goal of the IMF, the only way to convince nations to 

Participate at the outset was to use gold itself as a backing for its 

own money supply—at least as a temporary expedient. As Keynes 

explained it: 

I felt that the leading central banks would never voluntarily 

relinquish the then existing forms of the gold standard; and I did not 

desire a catastrophe sufficiently violent to shake them off


involuntarily. The only practical hope lay, therefore, in a gradual 

evolution in the forms of a managed world currency, taking the 

existing gold standard as a starting point. 

It was illegal for American citizens to own gold at that time, but 

everyone else in the world could exchange their paper dollars for 

gold at a fixed price of $35 per ounce. That made it 

international currency because, unlike any other at 

the de facto 

the time, its 

value was guaranteed. So, at the outset, the IMF adopted the dollar 

as its own international monetary unit. 

PAPER GOLD 

But the Fabian turtle was crawling inexorably toward its 

destination. In 1970, the IMF created a new monetary unit called 

the SDR, or Special Drawing Right. The media optimistically 

described it as "paper gold," but it was pure bookkeeping wizardry 

with no relationship to gold or anything else of tangible value. 

SDRs are based on "credits" which are provided by the member 

nations. These credits are not money. They are merely promises 

that the governments will get the money by taxing their own 

citizens should the need arise. The IMF considers these to be 

"assets" which then become the "reserves" from which loans are 

made to other governments. As we shall see in chapter ten, this is 

almost identical to the bookkeeping sleight-of-hand that is used to 

create money out of nothing at the Federal Reserve System. 

Dennis Turner cuts through the garbage: 

SDRs are turned into loans to Third-World nations by the creation 

of checking accounts in the commercial or central banks of the member 

nations in the name of the debtor governments. These bank accounts 

are created out of thin air. The IMF creates dollars, francs, pounds, or 

other hard currencies and gives them to a Third-World dictator, with 

inflation 

resulting in the country where the currency originated.,.. 

Inflation is caused in the industrialized nations while wealth is 

transferred from the eeneral public to the debtor country. And the 

debtor doesn't repay. 

When the IMF was created, it was the vision of Fabian Socialist 

John Maynard Keynes that there be a world central bank issuing a 

1. John Maynard Keynes, The Collected Writings of, Vol V (1930 rpt. New York: 

Macmillan, 1971), p. xx. 

2. Dennis Turner, When Your Bank Fails (Princeton, New Jersey: Amwell 

Publishing, 1983), p. 32. 


Seive currency called the "bancor" to free all governments from 

the discipline of gold. With the creation of SDRs, the IMF had 

begun to fulfill that dream. 

finally 

GOLD IS FINALLY ABANDONED 

But there was still 

nrimary 

an obstacle. As long as the dollar was the 

currency used by the IMF and as long as it was redeemable 

in gold at $35 per ounce, the amount of international money that 

could be created would be limited. If the IMF were to function as a 

true world central bank with unlimited issue, the dollar had to be 

broken away from its gold backing as a first step toward replacing 

it completely with a bancor, an SDR or something else equally free 

from restraint. 

On August 15, 1971, President Nixon signed an executive order 

declaring that the United States would no longer redeem its paper 

dollars for gold. So ended the first phase of the IMF's metamorphosis. 

It was not yet a true central bank, because it could not create its 

own world currency. It had to depend on the central banks of its 

member nations to provide cash and so-called credits; but since 

these banks, themselves, could create as much money as they 

wished, from now on, there would be no limit. 

The original purpose had been to maintain fixed rates of 

exchange between currencies; but the IMF has presided over more 

than two hundred currency devaluations. In private industry, a 

failure of that magnitude might be cause for going out of business, 

but not in the world of politics. The greater the failure, the greater 

the pressure to expand the program. So, when the dollar broke loose 

from gold and there was no longer a ready standard for measuring 

currency values, the IMF merely changed its goal and continued to 

expand its operation. The new goal was to "overcome trade 

deficits." 

TRADE DEFICITS 

The topic of trade deficits is a favorite among politicians, 

economists, and talk-show hosts. Everyone agrees they are bad, but 

tt^re is much disagreement over what causes them. Let's have a try 

at itȦ 

trade deficit is a condition that exists when a country imports 

a greater value of goods than it exports. In other words, it spends 

aore than it earns in international trade. This is similar to the 

^tuation of an individual who spends more than he earns. In both

— 

92 THE CREATURE FROM JEKYLL ISLAND NEARER TO THE HEART'S DESIRE 93 

cases, the process cannot be sustained unless: (1) earnings are 

increased; (2) money is taken out of savings; (3) assets are sold; (4) 

money is counterfeited; or (5) money is borrowed. Unless one of 

these occurs, the individual or the country has no choice but to 

decrease spending. 

Increasing one's earnings is the best solution. In fact, it is the 

only solution for the long haul. All else is temporary at best. An 

individual can increase his income by working harder or smarter or 

longer. A country does it the same way. But it cannot happen 

unless private industry is allowed to flourish in a system of 

free-enterprise. The problem with this option is that few politicians 

respect the dynamic power of the free-enterprise system. Their 

world is built upon political programs in which the laws of the free 

market are manipulated to achieve politically popular goals. They 

may desire the option of increasing the nation's income by increasing 

its productivity, but their political agenda prevents that from 

happening. 

The second option is to obtain extra money out of savings. But 

there are virtually no governments in the world today that have 

any savings. Their debts and liabilities exceed assets by a large 

margin. Likewise, most of their industries and their citizens are in a 

similar position. Their savings already have been consumed by 

government. 

The third option, the selling of assets, also is not available for 

most countries. By assets, we mean tangible items other than 

merchandise which is normally for sale. Although these, too, are 

assets in the broad meaning, in accounting methodology, they are 

classified as inventory. The only government asset that is 

readily 

marketable is gold, and few countries today have a stockpile from 

which to draw. Even in those cases, what little they have is already 

1. It is the author's opinion that it's time to get the politicians wearing Uncle-Sam 

suits off our backs. Which is easier said than done, because Americans still like their 

protectionist subsidies: tariffs to protect the business man, minimum wages and 

compulsory unionism to protect the worker, ethnic quotas in hiring to protect the 

underdog, cradle-to-the-grave insurance programs, unemployment benefits, disability 

compensation, extreme environmental and safety measures—regardless of 

cost. Free enterprise can and will produce all of these benefits in order to compete 

for buyers and employees alike. But, as long as these measures are compulsory arid 

chosen on the basis of political popularity without regard to economic consequences, 

American industry will never be able to recover. And then none of the 

illusory benefits will remain. 

wed to another government or a bank. As for private assets, 

rions can, for a while, sell these to foreign buyers and offset their 

ative trade balances. That is what has been happening in the 

United States for many years as office buildings, stocks, factories, 

nd entire companies have been sold to foreign investors. But the 

fact remains that the nation is still spending more than it earns, and 

that process cannot continue indefinitely. Foreign ownership and 

control over industry and commerce also create sociological and 

political problems. Underdeveloped countries do not have to 

worry about any of that, however, because they have few private 

assets to sell. 

THE COUNTERFEIT OPTION 

The counterfeit option is available only if a country happens to 

be in the unique position of having its currency accepted as the 

medium of international trade, as has been the case for the United 

States. In that event, it is possible to create money out of nothing, 

and other nations have no choice but to accept it. 

Thus, for years, 

the United States has been able to spend more money than it earned 

in trade by having the Federal Reserve create whatever it needed. 

When the dollar was separated entirely from gold in 1971, it 

ceased being the official IMF world currency and finally had to 

compete with other currencies — primarily the mark and the yen 

on the basis of its relative merit. From that point forward, its value 

increasingly became discounted. Nevertheless, it was still the 

preferred medium of exchange. Also, the U.S. was one of the safest 

places in the world to invest one's money. But, to do so, one first 

had to convert his native currency into dollars. These facts gave the 

U.S. dollar greater value on international markets than it otherwise 

would have merited. So, in spite of the fact that the Federal Reserve 

was creating huge amounts of money during this time, the demand 

for it by foreigners was seemingly limitless. The result is that 

America has continued to finance its trade deficit with fiat money 

-ounterfeit, if you will—a feat which no other nation in the world 

could hope to accomplish. 

We have been told that our nation's trade deficit is a terrible 

^g/ and that it would be better to "weaken the dollar" to bring it 

art end. Weakening the dollar is a euphemism for increasing 

lation. In truth, America is not hurt by a trade deficit at all. 

' We are the benefactors while our trading partners are the 

In


victims. We get the cars and TV sets while they get the funny 

money. We get the hardware. They get the paperware. 

There is a dark side to the exchange, however. As long as the 

dollar remains in high esteem as a trade currency, America can 

continue to spend more than it earns. But when the day arrives—as 

it certainly must—when the dollar tumbles and foreigners no 

longer want it, the free ride will be over. When that happens, 

hundreds of billions of dollars that are now resting in foreign 

countries will quickly come back to our shores as people everywhere 

in the world attempt to convert them into yet more real 

estate, factories, and tangible products, and to do so as quickly as 

possible before they become even more worthless. As this flood of 

dollars bids up prices, we will finally experience the inflation that 

should have been caused in years past but which was postponed 

because foreigners were kind enough to take the dollars out of our 

economy in exchange for their products. 

The chickens will come home to roost. But, when they do, it will 

not be because of the trade deficit. It will be because we were able 

to finance the trade deficit with fiat money created by the Federal 

Reserve. If it were not for that, the trade deficit could not have 

happened. 

Back to the main topic, which is the five methods by which a 

trade deficit can be paid. Through the process of elimination, the 

fourth option of borrowing is where the action is today for most of 

the world, and that is where the IMF positioned itself in 1970. Its 

new mission was to provide loans so countries can continue to 

spend more than they earn, but to do so in the name of "overcoming 

trade deficits." 

IMF LOANS: DOOMED BUT SWEET 

These loans do not go into private enterprises where they have 

a chance of being turned for a profit. They go into state-owned and 

state-operated industries which are constipated by bureaucracy 

and poisoned by corruption. Doomed to economic failure from the 

start, they consume the loans with no possibility of repayment 

Even the interest quickly becomes too much to handle. Which 

means the IMF must fall back to the "reserves," back to the 

"assets," back to the "credits," and eventually back to the taxpayers 

to bail them out 

world 


Whereas the International Monetary Fund is 

evolving into a 

central bank which eventually will issue a world currency 

based on nothing, its sister organization, the World Bank, has 

become its lending agency. Acting as Savior of the World, it seeks to 

aid the underdeveloped nations, to feed the hungry, and to bring a 

better life to all mankind. In pursuit of these humanitarian goals, it 

provides loans to governments at favorable terms, usually at rates 

below market, for terms as long as fifty years, and often with no 

payments due until after ten years. 

Funding for these loans comes from member states in the form 

of a small amount of cash, plus promises to deliver about ten-times 

more if the Bank gets into trouble. The promises, described as 

"callable capital," constitute a kind of FDIC insurance program but 

with no pretense at maintaining a reserve fund. (In that sense it is 

more honest than the real FDIC which does maintain the pretense 

but, in reality, is based on nothing more than a similar promise.) 

Based upon the small amount of seed money plus the far 

greater amount of "credits" and "promises" from governments of 

the industrialized countries, the World Bank is able to go into the 

commercial loan markets and borrow larger sums at extremely low 

interest rates. After all, the loans are backed by the most powerful 

governments in the world which have promised to force their 

taxpayers to make the payments if the Bank should get into trouble. 

It then takes these funds and relends them to the underdeveloped 

countries at slightly higher rates, making a profit on the arbitrage. 

The unseen aspect of this operation is that the money it 

processes is money which, otherwise, would have been available 

for investment in the private sector or as loans to consumers. It 

siphons off much-needed development capital for private industry, 

prevents new jobs from being created, causes interest rates to rise, 

and retards the economy at large. 

THE HIDDEN AGENDA: WORLD SOCIALISM 

Although most of the policy statements of the World Bank deal 

with economic issues, a close monitoring of its activities reveal a 

preoccupation with social and political issues. This should not be 

surprising considering that the Bank was perceived by its founders 

as an instrument for social and political change. The change which 

il Was designed to bring about was the building of world socialism, 

^d that is exactly what it is accomplishing today.


This hidden agenda becomes crystal clear in the nature of what 

the Bank calls Sectoral Loans and Structural-Adjustment Loans. In 

the first category, only part of the money is to be used for the costs 

of specific projects while the rest goes to support policy changes in 

the economic sector. In the second group, all of the money is for 

policy changes and none of it is for projects. In recent years, almost 

half of the loans to underdeveloped countries have been in that 

category. What are the policy changes that are the object of these 

loans? They add up to one thing: the building ofworld socialism. 

As the Fabians had planned it, the word socialism is not to be 

used. Instead, the loans are issued for government hydro-electric 

projects, government oil refineries, government lumber mills, government 

mining companies, and government steel plants. It is 

delivered from the hands of politicians and bureaucrats into the 

hands of other politicians and bureaucrats. When the money comes 

from government, goes to government, and is administered by 

government, the result will be the expansion of government. 

Here is an example. One of the policy changes often required by 

the World Bank as a condition of granting a loan is that the 

recipient country must hold down its 

wages. The assumption is 

that the government has the power—and rightfully should have the 

power—to set wages! In other words, one of the conditions of its 

loan is that the state must be omnipotent. 

Paul Roberts holds the William E. Simon Chair of Political 

Economy at the Center for Strategic and International Studies in 

Washington. Writing in Business Week, he says: 

The entire "development process 7 ' 

has been guided by the belief 

that reliance on private enterprise and equity investment is 

incompatible with economic and social progress. In place of such 

proven avenues of success, development planning substituted loans 

and foreign aid so that governments of the LDCs [Less Developed 

Countries] could control economic activity in keeping with plans 

drawn up by experts. 

Consequently, economic life in the LDCs was politicized from the 

start. By endowing governments with extensive control over their 

economies, the U.S. set up conditions exactly opposite to those 

required for economic growth. 

Ken Ewert explains further that the conditions imposed by the 

fund are seldom free-market oriented. He says: 

The Fund concentrates on "macro-policies/' such as fiscal and 

monetary policies or exchange rates, and pays little attention to 

fundamental issues like private property rights and freedom of 

enterprise. Implicit ... is the belief that with proper "macromanagement" 

any economic system is viable.... 

Even more important, it has allowed governments the world over 

to expropriate the wealth of their citizens more efficiently (through the 

hidden tax of inflation) while at the same time aggrandizing their own 

r?ower. There is little doubt that the IMF is an influence for world-wide 

socialism. 

An important feature of the Structural-Adjustment Loans is that 

the money need not be applied to any specific development project. 

It can be spent for anything the recipient wishes. That includes 

interest payments on overdue bank loans. Thus, the World Bank 

becomes yet one more conduit from the pockets of taxpayers to the 

assets of commercial banks which have made risky loans to 

Third-World countries. 

AUSTERITY MEASURES AND SCAPEGOATS 

Not every measure advocated by the IMF and World Bank is 

socialistic. Some of them even appear to be in support of the private 

sector, such as the reduction of government subsidies and welfare. 

They may include tax increases to reduce budget deficits. These 

policy changes are often described in the press as "austerity 

measures/ 7 

and they are seen as hard-nosed business decisions to 

salvage the failing economies of underdeveloped countries. But, as 

the wolf (in sheep's clothing) said to Little Red-Riding-Hood, "All 

the better to fool you with, my dear." These austerity measures are 

mostly rhetoric. The borrowing nations usually ignore the conditions 

with impunity, and the World Bank keeps the money coming 

anyway. It's all part of the game. 

Nevertheless, the "structural-adjustment" conditions provide a 

scapegoat for local 

politicians who can now place the blame for 

their nation's misery on big, bad "capitalists" from America and the 

*MF. People who have been taught that it is government's role to 

provide for their welfare, their health care, their food and housing, 

1. "How 'Experts' Caused the Third World Debt Crisis/' by Paul Craig Roberts, 

Business Week, November 2, 1987. 

b "The International Monetary Fund/' by Ken S. Ewert, The Freeman, April, 1989, 

PP* 157, 158.


their jobs and retirement—such people will not be happy when 

they hear that these "rights" are being threatened. So they demonstrate 

in the streets in protest, they riot in the commercial sections 

of town so they can steal goods from stores, and they throng to the 

banner of leftist politicians who promise to restore or increase their 

benefits. As described by Insight magazine: 

National strikes, riots, political upheavals and social unrest in 

Argentina, Bolivia, Brazil, Ecuador, Egypt, Haiti, Liberia, Peru, Sudan 

and elsewhere have at various times been attributed to IMF austerity 

programs.... 

Some came to the fund with domestic trouble already brewing 

and seized on the fund as a convenient scapegoat. 

Quite true. An honest reading of the record shows that the IMF, 

far from being a force for austerity in these countries, has been an 

engine of socialist waste and a fountain of abundance for the 

corrupt leaders who rule. 

FINANCING CORRUPTION AND DESPOTISM 

Nowhere is this pattern more blatant than in Africa. Julius 

Nyerere, the dictator of Tanzania, is notorious for his "villagization" 

program in which the army has driven the peasants from 

their land, burned their huts, and loaded them like cattle into trucks 

for relocation into government villages- The purpose is to eliminate 

opposition by bringing everyone into compounds where they can 

be watched and controlled. Meanwhile the economy staggers, 

farms have gone to weed, and hunger is commonplace. Yet, 

Tanzania has received more aid per capita from the World Bank 

than any other nation. 

In Uganda, government security forces have engaged in mass 

detentions, torture, and killing of prisoners. The same is true under 

the terrorist government in Zimbabwe. Yet, both regimes continue 

to be the recipients of millions of dollars in World Bank funding. 

Zimbabwe (formerly Rhodesia) is a classic case. After its 

independence, the leftist government nationalized (confiscated) 

many of the farms previously owned by white settlers. The most 

desirable of these lands became occupied by the government's 

senior ruling-party officials, and the rest were turned into state-run 

collectives. They were such miserable failures that the workers on 

1 . "IMF 

Hands Out Prescription for Sour Economic Medicine/' Insight, February 9, 

1987, p. 14. 

êse farmlands were, themselves, soon begging for food. Not 

daunted by these failures, the socialist politicians announced in 

1 991 that they were going to nationalize half of the remaining farms 

W And eil. they barred the courts from inquiring into how much 

^mpensation would be paid to their owners. 

The IMF was represented in Zimbabwe at the time by Michel 

Camdessus, the Governor of the central Bank of France, and a 

former finance minister in Francois Mitterrand's Socialist govern- 

After being informed of Zimbabwe's plan to confiscate 

ment 

additional land and to resettle people to work on those lands, 

Camdessus agreed to a loan valued at 42 billion rands with full 

knowledge that much of it would be used for the resettlement 

project. 

Perhaps the worst violations of human rights have occurred in 

Ethiopia under the Marxist regime of Mengistu Haile Mariam. The 

famine of 1984-85, which threatened the lives of millions of people, 

was the result of government nationalization and disruption of 

agriculture. Massive resettlement programs have torn hundreds of 

thousands of people from their privately owned land in the north 

and deported them to concentration-camp "villages" in the south, 

complete with guard towers. A report by a French voluntary 

medical-assistance group, Doctors without Borders, reveals that the 

forced resettlement program may have killed as many people as 

the famine itself. 1 

describes their experience: 

Dr. Rony Brauman, director of the organization, 

Armed militiamen burst into our compounds, seized our 

equipment and menaced our volunteers. Some of our employees were 

beaten, and our trucks, medicines and food stores confiscated. We left 

Ethiopia branded as enemies of the revolution. The regime spoke the 

truth. The atrocities committed in the name of Mengistu's master plan 

did make us enemies of the revolution. 

FINANCING FAMINE AND GENOCIDE 

In the 1980s, the world was saddened by photographs of 

starving children in Ethiopia, but what the West did not realize was 

that this was a planned famine. It was modelled after Stalin's 

} "Ethiopia Bars Relief Team/' by Blaine Harden, Washington Post, December 3, 

*9 85,p.A-21. 

7" "Famine Aid: Were we Duped?" by Dr. Rony Brauman, Reader's Digest, October 

l98 6,p.71.

. 


starvation program in the Ukraine in the 1930s and Mao's starvation 

of the peasants in the '40s. Its purpose was to starve the 

population into total submission to the government, for it is the 

government which decides who will eat and who will not. Yet, 

right up to the time Mengistu was overthrown, the World Bank 

continued to send him hundreds of millions of dollars, with much 

of it going specifically to the Ministry of Agriculture, the very 

agency in charge of the resettlement program. 

In the late 1970s the same story unfolded in Communist 

Vietnam. There were resettlement programs, forced collectivization, 

concentration camps, atrocities, and tens of thousands of 

dissidents escaping to the sea only to drown in overcrowded, leaky 

boats. Throughout it all, the regime was generously funded by the 

World Bank. 

Laos has jailed thousands of political prisoners; Syria has 

massacred 20,000 members of its 

opposition; Indonesia has uprooted 

several 

million people from their homelands in Java; the 

Sandinistas in Nicaragua murdered their opposition and terrorized 

the nation into submission; Poland, while a puppet state of the 

Soviet Union, brutally suppressed its trade-union movement; 

China massacred its dissident students and imprisoned its religious 

leaders; and the former Soviets slaughtered civilians in Afghanistan 

while conducting a relentless espionage war against the entire 

free world. Yet, these regimes have been the recipient of literally 

billions of dollars from the World Bank. 

How can the Bank's managers continue in conscience to fund 

such genocidal regimes? Part of the answer is that they are not 

permitted to have a conscience. David Dunn, head of the Bank's 

Ethiopia Desk explained: "Political distinctions are not something 

our charter allows us to take into account." The greater part of the 

answer, however, is that all socialist regimes have the potential for 

genocide, and the Bank is committed to socialism. The brutalities of 

these countries are all in a days work for serious socialists who 

view them as merely unfortunate necessities for the building of 

their Utopia. Lenin said you cannot make an omelet without 

1 James Bovard, The World Bank vs. The World's Poor, Cato Policy Analysis (Washington, 

D.C.: Cato Institute, 1987), pp. 4-6, 

2. "Harnessing World Bank to the West," insight, February 9, 1987, p. 8. 

cracking a few eggs. George Bernard Shaw, one of the early leaders 

of the Fabian Socialist movement, expressed it this way: 

Under Socialism, you would not be allowed to be poor. You would 

be forcibly fed, clothed, lodged, taught, and employed whether you 

liked it or not. If it were discovered that you had not character and 

industry enough to be worth all this trouble, you might possibly be 

executed in a kindly manner; but whilst you were permitted to live, 

you would have to live well. 

REASON TO ABOLISH THE FEDERAL RESERVE 

The top echelon at the World Bank are brothers under the skin 

to the socialist dictators with whom they do daily business. Under 

the right circumstances, they could easily switch roles. What we 

have seen is merely a preview of what can be expected for the 

entire world if 

the envisioned New World Order becomes operational. 

The IMF/World Bank is the protege of the Federal Reserve. It 

would not exist without the flow of American dollars and the 

benevolence of American leadership. The Fed has become an 

accomplice in the support of totalitarian regimes throughout the 

world. As stated at the beginning of this study, that is one of the 

reasons it should be abolished: It is an instrument of totalitarianism. 

GETTING RICH FIGHTING POVERTY 

While the top leaders and theoreticians at the IMF and World 

Bank dream of world socialism, the middle managers and political 

rulers have more immediate goals in mind. The bureaucracy enjoys 

a plush life 

administering the process, and the politicians on the 

receiving end obtain wealth and power. Ideology is not their 

concern. Socialism, capitalism, fascism, it makes no difference to 

them as long as the money flows. 

Graham Hancock has been an astute observer of the international-aid 

"industry" and has attended their plush conferences. He 

knows many of the leading players personally. In his book, Lords of 

Poverty, he speaks of the IMF's Structural-Adjustment loans: 

Corrupt Ministers of Finance and dictatorial Presidents from Asia, 

Africa, and Latin America are tripping over their own expensive 

footwear in their unseemly haste to "get adjusted." For such people, 

money has probably never been easier to obtain than it is today; with 

e0rge Bernard shaw ' 

The intelligent Woman's Guide to Socialism and Capitalism 

(19; riQ*?« UV28 

; rpt New Brunswick, New Jersey: Transaction Books, 1984), p. 470.


no complicated projects to administer and no messy accounts to keep, 

the venal, the cruel and the ugly are laughing literally all the way to 

the bank. For them structural adjustment is like a dream come true. No 

sacrifices are demanded of them personally. All they have to 

do—amazing but true—is screw the poor, and they've already had 

plenty of practice at that. 

In India, the World Bank funded the construction of a dam that 

displaced two million people, flooded 360 square miles, and wiped 

out 81,000 acres of forest cover. In Brazil, it spent a billion dollars to 

"develop" a part of the Amazon basin and to fund a series of 

hydroelectric projects. It resulted in the deforestation of an area half 

the size of Great Britain and has caused great human suffering 

because of resettlement. In Kenya, the Bura irrigation scheme 

caused such desolation that a fifth of the native population 

abandoned the land. The cost was $50,000 per family served. In 

Indonesia, the transmigration program mentioned previously has 

devastated tropical forests—at the same time that the World Bank 

is funding reforestation projects. The cost of resettling one family is 

$7,000, which is about ten-times the Indonesian per-capita income. 

Livestock projects in Botswana led to the destruction of grazing 

land and the death of thousands of migratory animals. This 

resulted in the inability of the natives to obtain food by hunting, 

forcing them into dependence on the government for survival. 

While Nigeria and Argentina are drowning in debt, billions from 

the World Bank have gone into building lavish new capital cities to 

house government agencies and the ruling elite. In Zaire, Mexico, 

and the Philippines, political leaders became billionaires while 

receiving World Bank loans on behalf of their nations. In the 

Central African Republic, IMF and World Bank loans were used to 

stage a coronation for its emperor. 

The record of corruption and waste is endless. But the real 

eye-opener is in the failure of socialist ventures, those magnificent 

projects which were to bring prosperity to the underdeveloped 

countries. Here are just a few examples. 

CONVERTING MONEY INTO FAILURE 

Before receiving loans from the World Bank, Tanzania was not 

wealthy, but it fed its own people, and it had economic growth- 

1. Graham Hancock, Lords of Poverty: The Power, Prestige, and Corruption of the 

International Aid Business (New York: Atlantic Monthly Press, 1989), pp. 59,60. 

the World Bank. The country is hopelessly in debt with no way to 

Âfter receiving more than 3 billion dollars in loans, it nationalized 

the nation's farms and industries and converted every business into 

a 

government agency. It built a truck assembly plant, a tire factory, 

electronic factories, highways, ports, railways, and dams. Tanzania's 

industrial production and agricultural output fell by almost 

one-third. Food was the main export in 1966. Under socialism, food 

had to be imported — paid for by foreign aid and more loans from 

repay- 

Argentina once had one of the highest standards of living in 

Latin America. But then it became the recipient of massive loans 

from the World Bank as well as commercial banks in the United 

States- Since the money was given to politicians, it was used to 

build the only system politicians know how to build: socialism. By 

1982, the Gross National Product was in a nose dive, manufacturing 

had fallen to less than half of capacity, thousands of privately 

owned companies had been forced into bankruptcy, unemployment 

was soaring, and so was welfare. By 1989, inflation was 

running at an average of 5,000% and, in the summer of that year, 

topped at 1,000,000%! Banks were offering interest rates of 600% 

per month in hopes of keeping deposits from being moved out of 

the country. People were rioting in the streets for food, and the 

government was blaming greedy shop owners for raising prices. 

The nation was hopelessly in debt with no way to repay. 

Brazil is run by the military, and the state controls the economy. 

Government-owned companies consume 65% of all industrial 

investment, which means that the private sector is Limited to 35% 

and is shrinking. The government used loans from U.S. banks to 

create an oil company, Petroleo Brasileiro S. A., which became Latin 

America's largest corporation. Despite huge oil deposits and 

record-high oil prices, the company operated at a loss and was not 

even able to produce enough gasoline for its own citizens. By 1990, 

Nation was running at 5,000%. Since 1960, its prices had risen to 

164,000 times their original level. A new crime was invented called 

hedging against inflation/' and people were arrested for charging 

the free-market price for their goods and for using dollars or gold 

as money. Led by Communist organizers, mobs roamed the streets 

shouting '"We're hungry. Steal what you will! 

7 ' 

The nation was 

hopelessly in debt with no way to repay.



The experience in Mexico was a carbon copy of that in Brazil, 

except that the amount of money was larger. When the world's 

fourth largest oil reserves were discovered, Mexican politicians 

reached for the brass ring. With billions borrowed from U.S. banks, 

they launched Petroleos Mexicanos (PEMEX) and soon became the 

world's fifth largest oil producer. They also built chemical plants 

and railroads, and launched many other industrial projects. These 

were run as welfare agencies instead of businesses: too many 

people on the payroll, too many managers, excessive salaries, too 

many holidays, and unrealistic benefits. The ventures floundered 

and lost money. Private businesses failed by the thousands, and 

unemployment rose. The government increased the minimum 

wage causing more businesses to fail and more unemployment 

That led to more welfare and unemployment benefits. To pay for 

that, the government borrowed even more and began creating its 

own fiat money. Inflation destroyed what was left of the economy. 

Price controls were next, along with rent and food subsidies, 

and doubling the minimum wage. By 1982, Mexicans were trading 

their pesos for dollars and sending their savings out of the country, 

as the peso became all but worthless in commerce. In 1981, the 

average wage for Mexican workers was 31% of the average wage 

for Americans. By 1989, it had fallen to 10%. Mexico, once one of 

the major food exporters in the world, was now required to import 

millions of dollars worth of food grains. This required still more 

money and more loans. All this occurred while oil prices were high 

and production was booming. A few years later, when oil prices 

fell, the failures and shortfalls became even more dramatic. 

In 1995, Mexico's bank loans were once again on the brink of 

default, and, once again, U.S. taxpayers were thrown into the 

breech by Congress to cover more than $30 billion at risk. Although 

this loan was eventually repaid, the money to do so was extracted 

from the Mexican people through another round of massive 

inflation, which plunged their standard of living even lower. The 

nation is now hopelessly mired in socialism. The Communist Party, 

promising "reform" and still more socialism, is attracting a large 

following and could become a potent political force. 

1 - The same American b anks that were making the loans were soliciting this flight 

capital and ended up getting deposits of the same money they had lent. It was nice 

business both ways. 

Thus, the saga continues. After pouring billions of dollars into 

underdeveloped countries around the globe, no development has 

taken place. In fact, we have seen just the opposite. Most countries 

are worse off than before the Saviors of the World got to them. 

SUMMARY 

The IMF and the World Bank, were created at a meeting of 

global financiers and politicians held at Bretton Woods, New 

Hampshire, in 1944. Their announced goals were to facilitate 

international trade and to stabilize the exchange rates of national 

currencies. The unannounced goals were quite different. They were 

the elimination of the gold-exchange standard as the basis of 

currency valuation and the establishment of world socialism. 

The method by which gold was to be eliminated in international 

trade was to replace it with a world currency which the IMF, 

acting as a world central bank, would create out of nothing. The 

method by which world socialism was to be established was to use 

the World Bank to transfer money-—disguised as loans—to the 

governments of the underdeveloped countries and to do so in such 

a way as to insure the demise of free enterprise. The money was to 

be delivered from the hands of politicians and bureaucrats into the 

hands of other politicians and bureaucrats. When the money comes 

from government, goes to government, and is administered by 

government, the result will be the expansion of government. 

The theoreticians who dominated the conference at Bretton 

Woods were the well-known Fabian Socialist from England, John 

Maynard Keynes, and the Assistant Secretary of the U.S. Treasury, 

Harry Dexter White. White became the first Executive Director for 

the United States at the IMF. 

The Fabians were an elite group of intellectuals who agreed 

with Communists as to the goal of socialism but disagreed over 

tactics. Whereas Communists advocated revolution by force and 

violence, Fabians advocated gradualism and the transformation of 

society through legislation. 

It was learned in later years that Harry Dexter White was a 

member of a Communist espionage ring. Thus, hidden from view, 

there was a complex drama taking place in which the two intellectual 

founders of the Bretton-Woods accords were a Fabian Socialist 

*nd a Communist, working together to bring about their mutual 

goal: world socialism.


Capital for the IMF and the World Bank comes from the 

industrialized nations, with the United States putting up the most. 

Funds consist partly of hard currencies—such as the dollar, yen, 

mark and franc—but these are augmented by many times that 

amount in the form of "credits." These are merely promises by the 

member governments to get the money from their taxpayers if the 

Bank gets into trouble with its loans. 

While the IMF is gradually evolving into a central bank for the 

world, the World Bank is serving as its lending arm. As such, it has 

become the engine for transferring wealth from the industrialized 

nations to the underdeveloped countries. While this has lowered 

the economic level of the donating countries, it has not raised the 

level of the recipients. The money has simply disappeared down 

the drain of political corruption and waste. 

HEMOUILD tT [NEARER | TO THE | HEARTS' JDES1RE 

Chapter Six 

BUILDING THE NEW 

WORLD ORDER 

The Game-Called-Bailout reexamined and shown 

to 

be far more than merely a means of getting 

taxpayers to foot the cost of bad loans; the final 

play revealed as the merger of all nations into 

world government; the unfolding of that strategy 

as applied to Panama, Mexico, Brazil, Argentina, 

China, Eastern Europe, and Russia. 

Let us return now to the game called bailout. Everything in the 

previous chapter has been merely background information to 

understand the game as it is played in the international arena. 

Here, finally, are the rules: 

This is an accurate rendering of the stained-glass window in the Beatrice 

Webb House in Surrey, England, headquarters of the Fabian Society. It 

depicts Sidney Webb and George Bernard Shaw striking the earth with 

hammers to "REMOULD IT NEARER TO THE HEARTS DESIRE." Note 

the wolf in sheep's clothing in the Fabian crest above the globe. 

1. Commercial banks in the industrialized nations, backed by their 

respective central banks, create money out of nothing and lend 

it to the governments of underdeveloped nations. They know 

that these are risky loans, so they charge an interest rate that is 

high enough to compensate. It is more than what they expect to 

receive in the long run. 

2. When the underdeveloped nations cannot pay the interest on 

their loans, the IMF and World Bank enter the game as both 

players and referees. Using additional money created out of 

nothing by the central banks of their member nations, they 

advance "development" loans to the governments which now 

have enough to pay the interest on the original loans with 

enough left over for their own political purposes. 

3. The recipient country quickly exhausts the new supply of money, 

and the play returns to point number two. This time, however, 

the new loans are guaranteed by the World Bank and the central 

banks of the industrialized nations. Now that the risk of default 

is removed, the commercial banks agree to reduce the interest to

108 THE CREATURE FROM JEKYLL ISLAND BUILDING THE NEW WORLD ORDER 109 

the point anticipated at the beginning. The debtor governments 

resume payments. 

4. The final play is — well, in this version of the game there appears 

to be no final play, because the plan is to keep the game going 

forever. To make that possible, certain things must happen that 

are very final, indeed. They include the conversion of the IMF 

into a world central bank as Keynes had planned, which then 

issues an international fiat money. Once that "Bank of Issue" is 

in place, the IMF can collect unlimited resources from the 

citizens of the world through the hidden tax called inflation. The 

money stream then can be sustained indefinitely—with or 

without the approval of the separate nations—because they will 

no longer have money of their own. 

Since this game results in a hemorrhage of wealth from the 

industrialized nations, their economies are doomed to be brought 

down further and further, a process that has been going on since 

Bretton Woods. The result will be a severe lowering of their living 

standards and their demise as independent nations. The hidden 

reality behind so-called development loans is that America and 

other industrialized nations are being subverted by that process. 

That is not an accident; it is the essence of the plan. A strong nation is 

not likely to surrender its sovereignty. Americans would not agree 

to turn over their monetary system, their military, or their courts to 

a world body made up of governments which have been despotic 

to their own people, especially since most of those regimes have 

already revealed anti-American hostility. But if Americans can be 

brought to the point where they are suffering from a collapse of 

their economy and from a breakdown in civil order, things will be 

different. When they stand in bread lines and face anarchy in their 

streets, they will be more willing to give up sovereignty in return 

for "assistance" from the World Bank and the UN "peacekeeping" 

forces. This will become even more acceptable if a structured 

demise of Communism can be arranged ahead of time to make it 

appear that the world's major political systems have converged 

into the common denominator of "social democracy." 

THE FINAL PLAY 

The underdeveloped nations, on the other hand, are not being 

raised up. What is happening to them is that their political leaders 

are becoming addicted to the IMF cash flow and will be unable to 

break the habit. These countries are being conquered by money 

no longer be truly independent 

instead of arms. Soon they will 

nations- They are becoming mere components in the system of 

world socialism planned by Harry Dexter White and John Maynard 

Keynes. Their leaders are being groomed to become potentates in a 

new, high-tech feudalism, paying homage to their Lords in New 

York. And they are eager to do it in return for privilege and power 

within the "New World Order." That is the final play. 

The essence of socialism is redistribution of the wealth. The 

goal is equality, and that means taking from the rich and giving to 

the poor. At least that's the theory. Unfortunately, the poor are 

never benefited by this maneuver. They either do not get the 

money in the first place—too much is siphoned off by the bureaucracies 

which administer the programs—or, if they do get any of it, 

they don't know what to do with it. They merely spend it until it is 

gone, and then no one has any money— except, of course, those 

who administer the government programs. Nevertheless, politicians 

know that promises to redistribute the wealth are popular 

among two groups: the voters who naively believe it will help the 

poor, and the socialist managers who see it as job security. 

Supported by these two voting blocs, election to office is assured. 

One of the early American advocates of socialism on a global 

scale—including the draining of wealth away from the "rich" 

United States—was John F. Kennedy. He undoubtedly learned the 

concept while attending the Fabian London School of Economics in 

1935-36 just prior to his father's appointment as Ambassador to 

England. When JFK became President, his political views continued 

to carry the imprint of that training. In September of 1963, he 

addressed the finance ministers and central-bank governors from 

102 nations at the annual meeting of the IMF/World Bank. He 

explained the concept of world socialism in glowing terms: 

. . 

Twenty years ago, when the architects of these institutions met to 

design an international banking structure, the economic life of the 

world was polarized in overwhelming, and even alarming, measure 

on the United States..,. Sixty per cent of the gold reserves of the world 

were here in the United States.... There was a need for redistribution 

of the financial resources of the world. . And there was an equal need 

to organize a flow of capital to the impoverished countries of the 

! 

- 

Martin, p. 25.


world. All this has come about. It did not come about by chance but by 

conscious and deliberate and responsible planning. 

CFR SETS STRATEGY 

The brain trust for implementing the Fabian plan in America is 

called the Council on Foreign Relations (CFR). We shall look at it 

closely in future chapters, but it is important to know at this point 

that almost all 

of America's leadership has come from this small 

group. That includes our presidents and their advisers, cabinet 

members, ambassadors, board members of the Federal Reserve 

System, directors of the largest banks and investment houses, 

presidents of universities, and heads of metropolitan newspapers, 

news services, and TV networks. It is not an exaggeration to 

describe this group as the hidden government of the United States. 

CFR members have never been shy about calling for the 

weakening of America as a necessary step toward the greater good 

of building world government. One of the CFR founders was John 

Foster Dulles, who later was appointed Secretary-of-State by CFR 

member Dwight Eisenhower. In 1939, Dulles said: 

Some dilution or leveling off of the sovereignty system as it 

prevails in the world today must take place ... to the immediate 

disadvantage of those nations which now possess the preponderance 

of power.. . . The establishment of a common money . . . would deprive 

our government of exclusive control over a national money.... The 

United States must be prepared to make sacrifices afterward in setting 

up a world politico-economic order which would level off inequalities 

of economic opportunity with respect to nations. 

CFR member Zbigniew Brzezinski was the National Security 

Adviser to CFR member Jimmy Carter. In 1970, Brzezinski wrote: 

... some international cooperation has already been achieved, but 

further progress will require greater American sacrifices. More 

intensive efforts to shape a new world monetary structure will have to 

be undertaken, with some consequent risk to the present relatively 

favorable American position. 

1. "Text of Kennedy Speech to World Monetary Parley/' New York Times, 

October 1, 1963, p. 16. 

2. For an in-depth analysis of the CFR, including a comprehensive list of members, 

see James Perloff, Shadows of Power (Appleton, Wisconsin: Western Islands, 1988). 

3. "Dulles Outlines World Peace Plan/' New York Times, October 28, 1939. 

4. Zbigniew Brzezinski, Between Two Ages: America's Role in the Technetronic Era 

(Westport, Connecticut: Greenwood Press, 1970), p. 300. 

At the Spring, 1983, Economic Summit in Williamsburg, Virginia, 

President Ronald Reagan declared: 

Nation al economies need monetary coordination mechanisms, 

and that is why an integrated world economy needs a common 

But, no national currency will do—only a world 

monetary standard... . 

currency will work. 

The CFR strategy for convergence of the world's monetary 

systems was spelled out by Harvard Professor Richard N. Cooper, 

a CFR member who had been the Under Secretary of State 

Economic Affairs in the Carter Administration: 

I 

suggest a radical alternative scheme for the next century: the 

creation of a common currency for all of the industrial democracies, with a 

common monetary policy and a joint Bank of Issue to determine that monetary 

policy. . . . How can independent states accomplish that? They need to 

turn over the determination of monetary policy to a supranational 

body. [Emphasis in original] . . 

It is highly doubtful whether the American public, to take just one 

example, could ever accept that countries with oppressive autocratic 

regimes should vote on the monetary policy that would affect 

monetary conditions in the United States.... For such a bold step to 

work at all, it presupposes a certain convergence of political values.. . 

Phrases such as, monetary coordination mechanisms, modern world 

economic order, convergence of political values, or new world order are 

not very specific. To the average person, they sound pleasant and 

harmless. Yet, to the insiders of the club, they are code phrases 

which have a specific meaning: the terrnination of national sovereignty 

and the creation of world government. CFR member, 

Richard Gardner—another adviser to President Carter—explains 

the meaning of these phrases and also calls for the Fabian strategy 

of deception and gradualism: 

In short, the "house of world order" will have to be built from the 

bottom up.... An end run around national sovereignty, eroding it 

piece by piece, will accomplish much more than the old-fashioned 

frontal assault 

As for the programmed decline of the American economy, CFR 

Member Samuel Huntington argues that, if higher education is 

1 "A Monetary System for the Future,"by Richard N. Cooper, Foreign Affairs, Fall, 

^Hpp- 166,177, 184. 

"The Hard Road to World Order," by Richard Gardner, Foreign 

J- 

Affairs, April, 

19 ?4, p. 558. 

for


considered to be desirable for the general population, "a program is 

then necessary to lower the job expectations of those who receive a 

college education." CFR member Paul Volcker, former Chairman 

of the Federal Reserve, says: "The standard of living of the average 

American has to decline. ... I don't think you can escape that." 

By 1993, Volcker had become the U.S. Chairman of the Trilateral 

Commission. The TLC was created by David Rockefeller to 

coordinate the building of The New World Order in accordance 

with the Gardner strategy: "An end run around national sovereignty, 

eroding it piece by piece." The objective is to draw the 

United States, 

Mexico, Canada, Japan, and Western Europe into 

political and economic union. Under slogans such as free trade and 

environmental protection, each nation is to surrender its sovereignty 

"piece by piece" until a full-blown regional government 

emerges from the process. The new government will control each 

nation's working conditions, wages, and taxes. Once that has 

happened, it will be a relatively simple step to merge the regionals 

into global government. That is the reality behind the so-called 

trade treaties within the European Union (EU), the North American 

Free Trade Agreement (NAFTA), the Asia-Pacific Economic Cooperation 

agreement (APEC), and the General Agreement on Tariffs 

and Trade (GATT). They have little to do with trade. In the 

Trilateral Commission's annual report for 1993, Volcker explains: 

Interdependence Is driving our countries toward convergence in 

areas once considered fully within the domestic purview. Some of 

these areas involve government regulatory policy, such as 

environmental standards, the fair treatment of workers, and taxation.^ 

In 1992, the Trilateral Commission released a report coauthored 

by Toyoo Gyohten, Chairman of the Board of the Bank of 

Tokyo and formerly Japan's Minister of Finance for International 

Affairs. Gyohten had been a Fulbright Scholar who was trained at 

Princeton and taught at Harvard Business School. He also had been 

in charge of the Japan Desk of the International Monetary Fund. In 

short, he represents the Japanese monetary interests within The 

f^jew World Order. In this report, Gyohten explains that the real 

importance of "trade" agreements is not trade but the building of 

global government: 

Regional trade arrangements should not be regarded as ends in 

themselves, but as supplements to global liberalization,... Regional 

arrangements provide models or building blocks for increased or 

strengthened globalism.... Western Europe [the EU] represents 

regionalism in its truest form.... The steps toward deepening 

[increasing the number of agreements] are dramatic and designed to 

be irreversible.... A common currency.... central bank.... court and 

parliament—will have expanded powers.... After the Maastricht 

summit [the Dutch town where the meeting was held], an Economist 

editorial pronounced the verdict: "Call it what you will: by any other 

name it is federal government."... In sum, the regional integration 

process in Europe can be seen as akin to an exercise in 

nation-b uilding. 

Applying this same perspective to the NAFTA treaty, former 

Secretary-of-State, Henry Kissinger (CFR), said it "is not a conventional 

trade agreement but the architecture of a new international 

system.... the vital first step for a new kind of community of 

nations/' The newspaper article that contained this statement was 

appropriately entitled: "With NAFTA, U.S. Finally Creates a New 

World Order." 

David Rockefeller (CFR) was even more emphatic. 

He said that it would be "criminal" not to pass the treaty because: 

"Everything is in place—after 500 years—to build a true 'new 

world' in the Western Hemisphere." 3 

By early 1994, the drift toward the New World Order had 

become a rush. On April 15, the government of Morocco placed a 

full-page ad in the New York Times celebrating the creation of the 

World Trade Organization which was formed by the signing of the 

General Agreement on Tariffs and Trade (GATT) which took place 

in the Moroccan city of Marrakech. While Americans were still 

êing told that GATT was merely a "trade" agreement, the 

*nternationalists were celebrating a much larger concept. The ad 

spelled it out in unmistakable terms: 

1 Michael Crozier, Samuel P. Huntington, and Joji Watanuki, The Crisis ofDemocracy 

(New York: New York University Press, 1975), pp. 183-84. 

2. "Volcker Asserts U.S. Must Trim Living Standard/' New York Times, October 18, 

1979, p. 1. 

3. Washington 1993: The Annual Meeting of the Trilateral Commission, Trialogue 46 

(New York: Trilateral Commission, 1993), p. 77. 

Toyoo Gyohten and Charles E. Morrison, Regionalism in A Converging World 

Ne V°rk: Trilateral 

)v Commission, 1992), pp. 4, 7-9, 1 1. 

L 

NAFTA 

'lWith 

- 

U -S- Finally Creates a New World Order/' by Henry Kissinger, 

Ângeles Times, July 18, 1993, pp. M-2, 6. 

• A 

Hemisphere in the Balance," by David Rockefeller, Wall Street journal, 

**** 1,1993, p. A-10.


1944, Bretton Woods: The IMF and the World Bank 

1945, San Francisco: The United Nations 

1994, Marrakech: The World Trade Organization 

History knows where it is going.... The World Trade Organization, 

the third pillar of the New World Order, along with the United 

Nations and the International Monetary Fund. 

A RARE GUMPSE INTO THE INNER WORKINGS 

So much for the final play. Let us return, now, to the game called 

bailout as it is actually played today on the international scene. Let 

us begin with a glimpse into the inner workings of the Presidential 

Cabinet James Watt was the Secretary of the Interior in the Reagan 

Administration. In his memoirs, he described an incident at a 

Cabinet meeting in the spring of 1982. The first items on the agenda 

were reports by Treasury Secretary Donald Regan and Budget 

Director David Stockman concerning problems the less-developed 

countries were having with their bank loans. Watt said: 

Secretary Regan was explaining the inability 

of those destitute 

countries to pay even the Interest on the loans that individual banks 

such as Bank of America, Chase Manhattan and Citibank had made. 

The President was being told what actions the United States "must" 

take to salvage the situation. 

After the Regan and Stockman briefings,, there were several 

minutes of discussion before I asked, "Does anyone believe that these 

less developed countries will ever be able to pay back the principal on 

these loans?" When no one spoke up, I asked, "If the loans are never 

going to be repaid, why should we again bail out the countries and 

arrange payment for their interest?" 

The answer came from several voices at once, "If we don't arrange 

for their interest payments, the loans will go into default, and it could 

put our American banks in jeopardy." Would the customers lose their 

money? No, came the answer, but the stockholders might lose 

dividends. 

In amazement, I leaned back in my large, leather chair, only two 

seats from the President of the United States. I realized that nothing in 

the world could keep these high government officials from scrambUng 

to protect and bail out a few very large and sorely troubled American 

banks. 

1 New York Times, April 15, 1994, p. A9. 

2. James G. Watt, The Courage of A Conservative (New York: Simon and Schuster, 

1985), pp. 124-25. 

PANAMA 

Carter 

of its 

First 

The first major score in the game had been made under the 

Administration when Panama fell in arrears on the payment 

loans. A consortium of banks including Chase Manhattan, 

National of Chicago, and Citibank brought pressure to bear on 

Washington to give the Canal to the Panamanian government so it 

could use the revenue to pay interest on its loans. Although there 

was massive opposition to this move among the American people, 

the Senate yielded to insider pressure and passed the give-away 

treaty. The Panamanian government inherited $120 million in 

annual revenue, and the interest payments to the banks were 

restored. As Congressman Philip Crane observed: 

At the time of the Torrijos-backed coup in 1968, Panama's total 

official overseas debt stood at a manageable and, by world standards, 

modest $167 million. Under Torrijos, indebtedness has skyrocketed 

nearly one thousand percent to a massive $1.5 billion. Debt-service ratio 

now consumes an estimated 39 percent of the entire Panamanian 

budget... What it appears we really have here is not just aid to a 

tinhorn dictator in the form of new subsidies and canal revenues the 

treaties would give to the Torrijos regime, but a bailout of a number of 

banks which should have known better than to invest in Panama and, 

in any event, should not escape responsibility for having done so. 

The Panama bailout was a unique play. In no other country did 

we have an income-producing property to give away, so from that 

point forward the bailout would have to be done with mere money. 

To pave the way for that, Congress passed the Monetary Control 

Act of 1980 which authorized the Federal Reserve to "monetize 

foreign debt." That is banker language meaning that the Fed was 

now authorized to create money out of nothing for the purpose of 

lending to foreign governments. It classifies those loans as "assets" 

and then uses them as collateral for the creation of even more 

money here in the United States. That was truly a revolutionary 

expansion of the Fed's power to inflate. Until then, it was permitted 

to rnake money only for the American government Now, it was able 

to do it for any government. Since then it has been functioning as a 

central bank for the entire world. 

w 8), pp. 64, 68. 

%n--^P M. Crane, Surrender in Panama (Ottawa, Illinois: Caroline House Books,


MEXICO 

By 1982, almost every Third-World government was running 

behind in payments. Mexico led the way by announcing it could 

not send any more money that year on its $85 billion debt. Federal 

Reserve Governor Henry Wallich rushed to Switzerland to negotiate 

an IMF loan of $4.5 billion through the Bank of International 

Settlements. The central banks of Europe and Japan provided $1.85 

billion (about 40%); the rest came from the Federal Reserve. 

Commercial banks postponed payments on the principal for two 

years; but, with the infusion of new loans, payment on the interest 

was resumed. That did not solve the problem. Within a few years, 

Mexico was in arrears again and, in 1985, the banks agreed to 

postpone $29 billion in payments and rolled over another $20 

billion, which means they issued new loans to pay off the old. 

In that same year, Secretary of the Treasury James Baker 

announced the government's plan to solve the world's debt crisis. It 

was a formal statement encouraging banks to continue lending to 

Third-World governments provided they promised to enact economic 

reforms favoring a free market. It was more of a philosophy 

than a plan, because there was no hope that it would be implemented 

by any of the socialist governments receiving the loans. 

Behind the announcement was the implication that the federal 

government acting through the Federal Reserve System, could be 

counted on to assist if the loans went sour. Baker called for 

funneling $29 billion over three years primarily to Latin American 

countries, of which Mexico was a prime recipient. 

CURRENCY SWAP 

Shortly after the Mexican government had loaned $55 million to 

Fidel Castro, it announced to the banks: "We will pay only what we 

have, and no more." Whereupon Paul Volcker, head of the Federal 

Reserve, rushed to meet with Mexico's finance minister, Jesus Silva 

Herzog, and offered to put the American taxpayer into the breach. 

A $600 million short-term loan was extended to get Mexico past its 

election date of July 4. It was called a "currency swap" because 

Mexico exchanged an equal number of pesos which it promised to 

redeem in U.S. dollars. Pesos, of course, were worthless in international 

markets—which is the reason Mexico wanted the dollars. 

The importance of this loan was not its size nor even the 

question of repayment. It was the manner in which it was made- 

First it was made by the Federal Reserve directly, acting as a central 

bank for Mexico, not the U.S.; and secondly, it was done almost in 

total secrecy. William Greider gives the details: 

The currency swaps had another advantage: they could be done 

secretly. Volcker discreetly informed both the Administration and the 

key congressional chairmen, and none objected. But the public 

reporting of currency swaps was required only every quarter, so the 

emergency loan from the Fed would not be disclosed for three or four 

months...- By that time, Volcker hoped, Mexico would be arranging 

more substantial new financing from the IMF.. . . The foreign assistance 

was done as discreetly as possible to avoid setting off a panic, but also 

to avoid domestic political controversy.... Bailing out Mexico, it 

seemed, was too grave to be controversial. 

DEBT SWAP 

The currency swap did not solve the problem. So, in March of 

1988, the players and referees agreed to introduce a new maneuver 

in the game: an accounting trick called a "debt swap." A debt swap 

is similar to a currency swap in that the United States exchanges 

something of real value in return for something that is worthless. 

But instead of currencies, they exchange government bonds. The 

transaction is complicated by the time-value of those bonds. 

Currencies are valued by their immediate worth, what they will buy 

today, but bonds are valued by their future worth, what they will 

buy in the future. After that differential factor is calculated, the 

process is essentially the same. Here is how it worked. 

Mexico, using U.S. dollars, purchased $492 million worth of 

American Treasury Bonds that pay no interest but which will pay 

$3.67 billion when they mature in twenty years. (Technically, these 

are called zero-coupon bonds.) Then Mexico issued its own bonds 

with the U.S. securities tied to them as collateral. This meant that 

the future value of Mexico's bonds, previously considered worthless, 

were now guaranteed by the United States government. The 

banks eagerly swapped their old loans for these new Mexican 

bonds at a ratio of about 1.4 to 1. In other words, they accepted $100 

million in bonds in return for canceling $140 million in old debt, 

^hat reduced their interest income, but they were happy to do it, 

because they had swapped worthless loans for fully-guaranteed 

bonds. 

Greide t, pp. 485-6.


This maneuver was hailed in the press as true monetary magic. 

It would save the Mexican government more than $200 million in 

annual interest charges; it would restore cash flow to the banks; 

and—miracle of miracles—it would cost nothing to American 

taxpayers. The reasoning was that the Treasury bonds were sold at 

normal market rates. The Mexican government paid as much for 

them as anyone else. That part was true, but what the commentators 

failed to notice was where Mexico got the American dollars 

with which to buy the bonds. They came through the IMF in the 

form of "foreign-currency exchange reserves." In other words, they 

were subsidies from the industrialized nations, primarily the 

United States. So, the U.S. Treasury put up the lion's share of the 

money to buy its own bonds. It went a half-billion dollars deeper in 

debt and agreed to pay $3.7 billion more in future payments so the 

Mexican government could continue paying interest to the banks. 

That is called bailout, and it does fall on the American taxpayer. 

IMF BECOMES FINAL GUARANTOR 

The following year, Secretary of State, James Baker (CFR), and 

Treasury Secretary, Nicholas Brady (CFR), flew to Mexico to work 

out a new debt agreement that would begin to phase in the IMF as 

final guarantor. The IMF gave Mexico a new loan of $3.5 billion 

(later increased to $7.5 billion), the World Bank gave another $1.5 

billion, and the banks reduced their previous loan values by about 

a third. The private banks were quite willing to extend new loans 

and reschedule the old. Why not? Interest payments would now be 

guaranteed by the taxpayers of the United States and Japan. 

That did not permanently solve the problem, either, because the 

Mexican economy was suffering from massive inflation caused by 

interna] debt, which was in addition to the external debt owed to the 

banks. The phrases "internal debt" and "domestic borrowing" are 

code for the fact that government has inflated its money supply by 

selling bonds. The interest it must pay to entice people to purchase 

those bonds can be staggering and, in fact, interest on Mexico's 

domestic borrowing was draining three times as much from the 

economy as the foreign debt service had been siphoning off. 

1 "U.S. Bond Issue Will Aid Mexico in Paying Debts/' by Tom Redburn, Los 

Angeles Times, December 30, 1987. 

2. "With Foreign IOUs Massaged, Interest Turns to Internal Debt," Insight, October 

2, 1989, p. 34. 

BUILDING THE NEW WORLD ORDER 119 

Notwithstanding this reality, Citicorp chairman, John S. Reed 

(CFR)/ whose bank is one of Mexico's largest lenders, said they 

vvere prepared to lend even more now. Why? Did it have anything 

to do with the fact that the Federal Reserve and the IMF would 

guarantee payments? Not so. "Because we believe the Mexican 

economy is doing well/' he said. 

At the end of 1994, the game was still going, and the play was 

the same. On December 21, the Mexican government announced 

could no longer pay the fixed exchange rate between the 

that it 

peso and the dollar and that the peso would now have to float in 

the free market to find its true value. The next day it plummeted 39 

per cent and the Mexican stock market tumbled. Once again, 

Mexico could not pay the interest on its loans. On January 11, 

President Clinton (CFR) urged Congress to approve U.S. guarantees 

for new loans up to $40 billion. Secretary of the Treasury 

• 

Robert Rubin (CFR) explained: "It is the judgment of all, including 

Chairman Alan Greenspan [CFR], that the probability of the debts 

being paid [by Mexico] is exceedingly high." But, while Congress 

debated the issue, the loan clock was ticking. Payment of $17 billion 

in Mexican bonds was due within 60 days, and $4 billion of that 

was due on the first of February! Who was going to pay the banks? 

This matter could not wait. On January 31, acting independently 

of Congress, President Clinton announced a bailout 

package of over $50 billion in loan guarantees to Mexico; $20 billion 

from the U.S. Exchange Stabilization Fund, $17.8 billion from the 

IMF, $10 billion from the Bank of International Settlements, and 

$3 billion from commercial banks. 

BRAZIL 

Brazil became a major player in 1982 when it announced that it 

too was unable to make payments on its debt. In response, the U.S. 

Treasury made a direct loan of $1.23 billion to keep those checks 

going to the banks while negotiations were under way for a more 

Permanent solution through the IMF. Twenty days later, it gave 

bother $1.5 billion; the Bank of International Settlements advanced 

$!-2 billion. The following month, the IMF provided $5.5 billion; 

Western banks extended $10 billion in trade credits; old loans were 

^scheduled; and $4.4 billion in new loans were made by a Morgan 

Jkd., p. 35.


^ 

BUILDING 

THE NEW WORLD ORDER 121 

Bank syndication. The "temporary" loans from the U.S. Treasury 

months later, Argentina announced it could not make any more 

were extended with no repayment date established. Ron Chernovv 

payments until the fall of 1983. The banks immediately began 

Argentinian politicians a little extra spending money. Seven 

''/^°tt\er 

2 

Plan to Mop Up the Mess/' Insight, April 10, 1989, p. 31. 

Uther mechanisms which involve culture, education, political sovereignty, and 

Jitary 

1. Chernow, p. 644. power are embodied in agencies of the United Nations. 

comments: 

negotiations for rollovers, guarantees, and new IMF loans. 

The plan set a fateful precedent of "curing" the debt Argentina then signed an agreement with 

crisis 

350 creditor 

by 

banks to 

heaping on more debt. In this charade, bankers would lend more to 

stretch out payments on nearly a fourth of its $13.4 billion debt, and 

Brazil with one hand, then take it back with the other. This preserved 

the banks agreed to lend an extra $4.2 billion to cover interest 

the fictitious book value of loans on bank balance sheers. Approaching 

payments and political incentives. The IMF gave $1.7 billion. The 

the rescue as a grand new syndication, the bankers piled on high 

United States government gave an additional $500 million directly. 

interest rates and rescheduling fees. 

By 1983, Third-World governments owed $300 billion to banks 

Argentina then paid $850 million in overdue interest charges to the 

banks. 

and $400 billion to the industrialized governments. Twenty-five 

By 1988, Argentina had again stopped payment on its loans and 

nations were already behind in their payments. Brazil was in 

was falling hopelessly behind as bankers and politicians went into 

default a second time and asked for rescheduling, as did Rumania, 

a huddle to call the next bailout play. Somehow, the payments had 

Cuba, and Zambia. The IMF stepped in and made additional 

to be passed on one more time to the taxpayers—which they were 

in the 

billions of dollars available to the delinquent countries. The 

form of new loans, rollovers, 

Department 

of Agriculture, through its Commodity Credit Corporation, 

and guarantees. As summarized 

by Larry A. Sjaastad at the University of Chicago: 

paid $431 million to American banks to cover payments on loans 

There isn't a U.S. bank that would not sell its entire Latin 

from Brazil, Morocco, Peru, and Rumania. At the conclusion of 

American portfolio for 40 cents on the dollar were it not for the 

possibility that skillful political 

these agreements, the April 20, 1983, Wall Street Journal editorialized 

that "the international debt And that 

lobbying might turn up a sucker 

willing to pay 50 or 60 or even 90 cents on the dollar. 

crisis ... is, for all practical 

sucker 

is the U.S. Taxpayer. 

purposes, over." 

Not quite. By 1987, Brazil was again in default on its monstrous 

As mentioned previously, this history can become repetitious 

$121 billion debt, this time for one and 

and 

a-half years. In spite of the 

boring. It would be counterproductive to cover the same 

sordid 

torrent of money that had passed through its hands, it was now so 

story as it has unfolded in each country. Suffice it to say that 

the identical 

broke, it couldn't even buy gasoline for its police cars. In 1989, as a 

game has been played with teams from Bolivia, Peru, 

Venezuela, 

new round of bailout was being organized, President Bush(CFR) 

Costa Rica, Morocco, the Philippines, the Dominican 

Republic, and 

announced that the only real solution to the Third-World debt 

almost every other less-developed country in the 

world. 

problem was debt forgiveness. 

Perhaps, through repetition, we are running this history into THE NEED FOR CONVERGENCE 

the ground, but here are just a few more examples before moving 

This sets the stage for understanding the next phase of the game 

along. 

vhich is unfolding as these words are being written. It is the 

j^lusion of China 

ARGENTINA 

and the former Soviet bloc into the Grand 

Design for 

By 1982, Argentina was unable to make a $2.3 billion payment 

global government. As with all the other countries in the 

'°rld, the primary mechanism 

that was due in July and August. The banks extended their loans 

being used to accomplish this 

goal— a t least in the field 

while the IMF prepared a new of 

infusion in the amount economics—is 

of $2.15 

the IMF/ World Bank. 2 

he process is: (1) the transfer of money from 

billion. This restored the interest payments and gave the 

the industrialized


nations—which drags them down economically to a suitable 

common denominator—and (2) the acquisition of effective control 

over the political leaders of the recipient countries as they become 

dependent upon the money stream. The thing that is new and 

which sets this stage apart from previous developments is that the 

an acceptable 

apparent crumbling of Communism has created 

rationale for the industrialized nations to now allow their lifeblood 

to flow into the veins of their former enemies. It also creates the 

appearance of global, political "convergence/' a condition which 

CFR theoretician, Richard Cooper, said was necessary before 

Americans would accept having their own destinies determined by 

governments other than their own. 

CHINA 

Red China joined the IMF/World Bank in 1980 and immediately 

began to receive billions of dollars in loans, although it was 

well known that she was devoting a huge portion of her resources 

to military development. By 1987, China was the IMF's second 

largest borrower, next to India, and the transfusions have grown at 

a steady pace ever since. 

The Bank has asserted that loans will encourage economic 

reforms in favor of the private sector. Yet, none of the money has 

gone to the private sector. All of it is funneled into the government 

bureaucracy which, in turn, wages war against the free market. In 

1989, after small businesses and farms in the private sector had 

begun to flourish and surpass the performance of similar government 

enterprises, Red China's leaders clamped down on them with 

harsh controls and increased taxes. Vice Premier Yao Yilin 

announced that there was too much needless construction, too 

many private loans, and too much spending on "luxuries" such as 

cars and banquets. To stop these excesses, he said, it would be 

necessary to increase government controls over wages, prices, and 

business activities. 

Then there is the question of why China needs the money in the 

first place. Is it to develop her industry or natural resources? Is it to 

fight 

poverty and improve the living standard of her citizens? 

James Bovard answers: 

The Bank's defense of its China Policy is especially puzzling 

because China itself is going on a foreign investment binge. The World 

Bank gives China money at zero interest, and then China buys 

property in Hong Kong, the United States, Australia, and elsewhere. 

An economist with Citibank estimated that China's "direct investment 

in property, manufacturing and services [in Hong Kong alone] topped 

$6 billion." In 1984, China had a net outflow of capital of $1 billion. 

Moreover, China has its own foreign aid program, which has given 

more than $6 billion in recent decades, largely to leftist governments. 1 

THE GREAT DECEPTION 

It is the author's contention that the much heralded demise of 

Communism in the Soviet bloc is a mixture of fact and fantasy. It is 

fact at the bottom level of Communist society where the people, in 

truth, rejected it long ago. The only reason they appeared to 

embrace it for so many years was that they had no choice. As long 

as the Soviets held control of the weapons and the means of 

communication, the people had to accept their fate. 

But at the tip of the pyramid of state power, it is a different 

story. The top Communist leaders have never been as hostile to 

their counterparts in the West as the rhetoric suggests. They are 

quite friendly to the world's leading financiers and have worked 

closely with them when it suits their purposes. As we shall see in 

the following section, the Bolshevik revolution actually was 

financed by wealthy financiers in London and New York. Lenin 

and Trotsky were on the closest of terms with these moneyed 

interests^-both before and after the Revolution. Those hidden 

liaisons have continued to 

this day and occasionally pop to the 

surface when we discover a David Rockefeller holding confidential 

meetings with a Mikhail Gorbachev in the absence of government 

sponsorship or diplomatic purpose. 

It is not unreasonable to imagine a scenario in which the leaders 

of the Communist bloc come to realize they cannot hold themselves 

in power much longer. There comes a point where even physical 

force is not enough, especially when the loyalties of those who hold 

the weapons also begin to falter. With economic gangrene creeping 

U P the legs of their socialist systems, they realize they must obtain 

outside financial assistance or perish. 

In such a scenario, quiet agreements can be worked out to the 

ûtual advantage of all negotiators. The plan could be as simple as 

^statue-of-liberty play in a college football game: the appearance of 

01ng one thing as a cover for accomplishing something else. While 

f Bovard, pp. 18^19.


Americans are prepared to accept such deception on a football 

field, they cannot believe that world financiers and politicians are 

capable of it. The concept is rejected out of hand as a "conspiracy 

theory." 

Nevertheless, in this scenario, we theorize it 

is agreed among 

the negotiators that the Soviet Bloc needs financial support. It 

agreed that the Western nations have the capacity to provide it. 

is 

It is 

agreed that the best way to move money from the industrialized 

nations into the Soviet bloc is through international agencies such 

as the IMF/World Bank. It is agreed this cannot happen until 

hostility between world systems is replaced by political convergence. 

It is agreed that future conflict is wasteful and dangerous to 

all 

parties- Therefore, it is finally agreed that the Soviet bloc must 

abandon its posture of global aggression while the Western nations 

continue to move toward socialism, necessary steps for the longrange 

goal of merger into a world government. But, in doing so, it 

must be insured that the existing Communist leaders retain control 

over their respective states. 

COMMUNISTS BECOME SOCIAL DEMOCRATS 

To that end, they change their public identities to "Social 

Democrats." They speak out against the brutal 

excesses of their 

predecessors and they offer greater freedom of expression in the 

media. A few dispensable individuals among their ranks are 

publicly purged as examples of the demise of the old order. States 

that once were held captive by the Soviet Union are allowed to 

break away and then return on a voluntary basis. If any leaders of 

the newly emancipated states prefer true independence instead of 

alignment with Russia, they are replaced. 

No other changes are required. Socialism remains the economic 

system of choice and, although lip service may be given to 

free-market concepts, the economy and all 

means of production 

remain under state control. The old Communists are now Social 

Democrats and, without exception, they become the leaders in the 

new system. 

The West rejoices, and the money starts to move. As an extra 

bonus, the former Bolsheviks are now hailed by the world as great 

statesmen who put an end to the Cold War, brought freedom to 

their people, and helped to forge a New World Order. 

When did Communism depart? We are not quite sure. All we 

know is that one day we opened our newspapers and it was 

accomplished. Social Democrats were everywhere. No one could 

find any Communists. Russian leaders spoke as long-time enemies 

of the old regime. Peristroika was here. Communism was dead. It 

was not killed by an enemy. It voted itself out of existence. It 

committed suicide! 

Does it not seem strange that Communism fell without a 

struggle? Is it not curious that the system which was born out of 

class conflict and revolution and which maintained itself by force 

and violence for almost a century just went away on its own? 

Communism was not overthrown by people rising up with clubs 

and pitchforks to throw off their yoke of tyranny. There was no 

revolution or counterrevolution, no long period of fragmentation, 

no bloody surges between opposing forces. Poof! It just happened. 

True, there was blood in the streets in those areas where opposing 

groups vied for power, but that was after Communism had 

departed, not before. Such an event had never occurred in history. 

Until then, it had been contrary to the way governments act; 

contrary to the very nature of power which never surrenders 

without a life-and-death struggle. This, indeed, is 

a great curiosity—which 

should cause people to think. 

Our premise is that the so-called demise of Communism is a 

Great Deception—not awfully different from many of the others 

that are the focus of this volume. We see it 

as having been stage 

managed for the purposes outlined previously: the transition to 

world government. In our view, tlmt scenario is 

the only one that 

makes sense in terms of today's geopolitical realities and the only 

one consistent with the lessons of history. 

We realize, of course, that such a view runs contrary to popular 

opinion and conventional wisdom. For many, it is shocking just to 

hear it spelled out. It would not be possible to convince anyone of 

Jts truth without extensive evidence. Certainly, such evidence 

abounds, but it is not within the scope of this study. So, now that 

w e have stated it, we shall leave it behind merely as a clarification 

°f the author's point of view so the reader can step around it if he 

"* 

Wishes.


EASTERN EUROPE 

full 70% of the $3.8 billion owed to the United States. Taxpayers 

American aid to Eastern European governments, while they 

picked up the bill. 

were still puppet states of the Soviet Union, has been justified by 

The same story has been unfolding in all the former Soviet-bloc 

the same theory advanced on behalf of China: it would improve 

countries. In 1980, for example, just before Hungary was brought 

their economies, show their people a better way of life, and wean 

into the IMF/World Bank, her annual per-capita GNP was $4,180. 

them from Communism. Advocates of that theory now point to the 

This was a problem, because the policy of the World Bank was to 

demise of Communism as evidence of the soundness of their plan. 

make development loans only to countries that had per-capita 

The truth, however, is that the money did not improve the economy GNPs of less than $2,650. Not to worry. In 1981, the Hungarian 

government simply revised its statistics 

and did not show the people a better way of life. In fact, it did 

downward from 

not 

$4,180 to 

$2,10Q. 1 

That was a drop of 50% in 

help the people in any way. 

one year, 

It went directly to their governments 

surely one of the 

sharpest depressions in world history. Everyone 

and was 

knew it 

used for government priorities. It strengthened the 

was 

ruling 

a lie, 

but no one raised an eyebrow. It was all part of the 

parties and enabled them 

game. By 

to solidify their control. 

1989, 

the Bush Administration had granted "most favored nation" 

It is well known that one of the reasons Poland's economy 

trade 

was 

status to the Hungarian government and established 

weak is that much of her productive output was shipped 

on its behalf a 

to the 

special $25 million development fund. 

Soviet Union at concessionary prices, primarily to support the 

military. Polish-built tanks fought in the Vietnam war; 20% of the RUSSIA 

Soviet merchant marine was built in Poland; 70% of Poland's 

American banks had always been willing to make loans to the 

computer and locomotive production and 80% of her communications 

equipment was shipped to the Soviets; American grain Cuban Missile Crisis, the Vietnam War, the Soviet invasion of 

Soviet Union, except for short periods of expediency during the 

purchased by Poland with money borrowed from American banks 

Afghanistan, and other minor business interruptions. In 1985, after 

was sent to Cuba. Poland was merely a middle man, a conduit to 

the public had lost interest in Afghanistan, banks of the "free 

Russia and her satellites. The banks were really funding Russia. 

world" reopened their loan windows to the Soviets. A $400 million 

It was in 1982 that Poland first defaulted on bank loans which 

package was put together by a consortium of First National of 

had been guaranteed by the U.S. government through the Commodity 

Credit Corporation. Under the terms of the guarantee, 

London subsidiary of the Royal Bank of Canada. The loan was 

Chicago, Morgan Guaranty, Bankers Trust, and Irving Trust—plus 

a 

offered 

taxpayers would make payments on any bank loan that went into 

at unusually low interest rates "to buy American and 

Canadian 

default. That was what the banks were counting on when they 

grain." 

Public 

made those loans, but to classify them as "in default" would 

indignation is easily disarmed when the announced 

purpose of 

require the banks to remove them from their books as assets. That 

a loan to a totalitarian government is to purchase 

commodities 

was unacceptable, because it would make their balance sheets look 

from the country where the loan originates—especially 

if the 

as bad as they really were. So the Treasury agreed to bend the rules 

commodity is grain for the assumed purpose of making 

bread or feeding 

and make livestock. 

payments without requiring the loans to be 

Who could 

in default. 

possibly object to having the 

money come right back to 

That was eventually stopped by an irate Congress, but not until the 

our own farmers and merchants in the 

Jorm of profits? And 

Reagan 

who 

Administration had stalled long enough to pay $400 

could fault a project that provided food 

for the hungry? 

million directly to the banks on behalf of Poland. 

The deception is subtly appealing. It 

In November, 1988, the World Bank made its first loan to 

is true that the money will 

e used— in part at 

Poland in the amount of $17.9 million. Three years later, in a 

least—to buy grain or other locally produced 

dramatic demonstration of what the President had meant when he 

advocated "debt forgiveness," the Bush Administration canceled a gust 30° rl Bank Courts Eastern Europe/' 

Q 

by Jerry Lewis, Wall Street Journal Au-


commodities. But the borrowing nations are like a homeowner who 

increases the mortgage on his house "to enlarge his living room." 

He probably wilJ make the addition, but he borrows twice as much 

as he needs so he can also buy a new car. Since the government 

allows a tax deduction on mortgage interest, in effect he now gets a 

tax deduction for the interest paid on his car as well. Likewise, the 

borrowing nations usually borrow more than they need for the 

announced purchase, but they receive all the money at favorable 

rates. 

Yet, this is not the most serious fault in the transaction. In the 

case of Russia, the grain was no small item on her list 

of needs. 

After repeated failures of her socialist agriculture, she was not able 

to feed her population. Hungry people are dangerous to a government. 

Russia needed grain to head off internal revolt far more than 

the homeowner needed to increase the size of his living room. In 

other words, Russia had to have the grain, with or without the loan, 

Without it, she would have had to curtail spending Somewhere else 

to obtain the money, most likely in her military. By giving her the 

money "to buy grain," we actually allowed her to spend more 

money on armaments. 

But even that is not the primary flaw in making loans to Russia. 

The bottom line is that most of those loans will never be repaid* As 

we have seen, the name of the game is bailout, and it is as certain as 

the setting sun that, somewhere down the line, Russia will not be 

able to make her payments, and the taxpayers of the industrialized 

nations will be put through the IMF wringer one more time to 

squeeze out the transferred purchasing power- 

BUSINESS VENTURES IN RUSSIA INSURED BY U.S. 

In 1990, the U.S. Export-Import Bank announced it would begin 

making direct loans to Russia. Meanwhile, the U.S. Overseas 

Private Investment Corporation was providing free "insurance" to 

private companies that were willing to invest in the ex-Soviet state. 

In other words, it was now doing for industrial corporations what it 

had been doing all along for banks: guaranteeing that, if their 

investments turned sour, the government—make that taxpayers-— 

would compensate them for their losses. The limit on that insurance 

had been $100 million, a generous figure, indeed. But, to 

encourage an even greater flow of private capital into Russia, the 

r 

BUILDING THE NEW WORLD ORDER 129 

gush Administration authorized unlimited protection for "sound 

American corporate investments." 

these truly were sound investments, they would not need 

If 

foreign-aid subsidies or government guarantees. What is really 

happening in this play is a triple score: 

1. 

International lending agencies provide the Social Democrats with 

money to purchase goods and services from American firms. No 

one really expects them to repay. It is merely a clever method of 

redistributing wealth from those who have it to those who 

don't—without those who have it catching on. 

2. American firms do not need money to participate. Since their 

ventures are guaranteed, banks are anxious to loan whatever 

amount of money is required. Efficiency or competitiveness are 

not important factors. Contracts are awarded on the basis of 

political influence. Profits are generous and without risk. 

3. When the Social Democrats eventually default in their contracts 

to the American firms or when the joint venture loses money 

because of socialist mismanagement, the federal government 

provides funds to cover corporate profits and repayment of 

bank loans. 

There you have it: The Social Democrats get the goodies; the 

corporations get the profits, and the banks get the interest on 

money created out of nothing. You know what the taxpayers get! 

By 1992, the wearisome pattern was clearly visible. Writing in 

the New York Times, columnist Leslie H. Gelb gave the numbers: 

The ex-Soviet states 

are now meeting only 30 percent of their 

interest payments (and almost no principal) on debts to the West of 

$70 billion.... Various forms of Western aid to the ex-Soviet states 

totaled about $50 billion in the last 20 months, and the money has 

virtually disappeared without a trace or a dent on the economic 

picture. 

The interesting thing about this report is 

that Leslie Gelb has 

been a member of the CFR since 1973. Why would a CFR 

spokesman blow the whistle on one of their most important 

Maneuvers toward The New World Order? The answer is that he is 

doing just the opposite. Actually he is making a plea for more loans 

*- "The Russian Sinkhole/' by Leslie H. Gelb, New York Times, March 30, 1992, p.


BUILDING THE NEW WORLD ORDER 

exception. 

The industrialized nations of the world are being bled to near 

The international version of the game called Bailout is similar to 

death in a global transfer of their wealth to the less developed 

domestic version in that the overall objective is to have the 

countries. Is it being done according to plan? Or is it an accident? It 

taxpayers cover the defaulted loans so that interest payments can 

is not being done to them by their enemies. It is being done by then 

continue going to the banks. The differences are: (1) instead of 

awn leaders. The process is well coordinated across national lines 

justifying this as protecting the American public, the pretense is 

and perfectly dovetails with the actions of other leaders who are ât it is to save the world from poverty; and (2) the main money 

doing the same thing to their respective countries. Furthermore; 

Pipeline goes from the Federal Reserve through the IMF/ World 

these leaders regularly meet together to better coordinate their K ank. Otherwise, the rules are basically the same. 

131 

and more outright aid on the basis that the need is so great! He 

activities. Could anything that complex be accomplished by accident? 

Or would some kind of a plan be required? 

advocates the prioritizing of funding with first attention to aiding 

Russia's nuclear-power facilities, agriculture, and industrial capacity. 

At the end of his article, he writes: "The stakes could not be 

and it is to aid the less developed countries. But, after forty years 

A spokesman from the IMF would answer, yes, there is a plan, 

higher. All the more reason for substantial, practical and immediate 

and hundreds of billions of dollars, they have totally failed to 

aid—not for grand illusions." 

accomplish that goal. Would intelligent people believe that pursuing 

the same plan will produce different results in the future? Then 

Congress hears and obeys. In spite of the fact that all the 

preceding billions have "disappeared without a trace or a dent/' 

why do they follow a plan that cannot work? The answer is they are 

the transfusion continues. In 1993 the World Bank advanced 

not following that plan. They are following a different one: one 

another half-billion-dollar loan to Russia; before leaving office, 

which has been very successful from their point of view. Otherwise, 

we must conclude that the leaders of the industrialized 

President Bush arranged for another $2 billion loan through the 

Export-Import Bank; and Congress authorized hitting the voters 

nations are, to a man, just plain stupid. We do not believe it. 

with another $Z5 billion in foreign aid earmarked specifically for 

There is little room to escape the conclusion that these men and 

Russia. In July, at the Tokyo summit meeting of the Group-ofwomen 

are following a higher loyalty than the self interest of their 

Seven industrialized nations, another $24 billion was promised, 

respective countries. In their hearts they may honestly believe that, 

half of which will come from the IMF. As this book goes to print, 

in the long run, the world will be better for it, including their fellow 

there is no end in sight. 

THE CONSPIRACY THEORY 

countrymen. But, for the present, their goals and their methods are 

not shared by those who have placed them in office. Under those 

A moment's reflection on the events described in this section 

circumstances, they must conceal their plan from public view. If 

leads us to a crossroads of conscience. We must choose between 

their fellow citizens really knew what they were doing, they would 

two paths. Either we conclude that Americans have lost control 

be thrown out of office and, in some cases, might even be shot as 

over their government, or we reject this information as a mere 

traitors. Add all that together and it spells CONSPIRACY. 

distortion of history. In the first case, we become advocates of the 

The only other explanation is that it's all accidental: no plan, no 

conspiratorial view of history. In the latter, we endorse the accidental 

cooperation, no goal, just the blind forces of history following the 

view. It is a difficult choice. 

path of least resistance. For some it will be easier and more 

The reason it is difficult is that we have been conditioned to 

comfortable to accept that model. But the evidence speaks loudly 

laugh at conspiracy theories, and few people will risk public 

against it. What is the evidence? Not just the previous chapters, but 

ridicule by advocating them. On the other hand, to endorse the 

accidental view is absurd. Almost all of history is an unbroken trail 

of one conspiracy after another. Conspiracies are the norm, not the 

everything that follows in this book. By contrast, the evidence for 

the accidental theory of history is — a blank page. 

SUMMARY


There is another dimension to the game, however, that involves 

more than mere profits and scam. It is the conscious and deliberate 

evolution of the IMF/World Bank into a world central bank with 

the power to issue a world fiat currency. And that is an important 

step in an even larger plan to build a true world government within 

the framework of the United Nations. 

Economically strong nations are not candidates for surrendering 

their sovereignty to a world government. Therefore, through 

"loans" that will never be paid back, the IMF/World Bank directs 

the massive transfer of wealth from the industrialized nations to 

the less developed nations. This ongoing process eventually drains 

their economies to the point where they also will be in need of 

assistance. No longer capable of independent action, they will 

accept the loss of sovereignty in return for international aid. 

The less developed countries, on the other hand, are being 

brought into The New World Order along an entirely 

different 

route. Many of these countries are ruled by petty tyrants who care 

little for their people except how to extract more taxes from them 

without causing a revolt. Loans from the IMF/World Bank are 

used primarily to perpetuate themselves and their ruling parties in 

power—and that is exactly what the IMF/ World Bank intends. 

Rhetoric about helping the poor notwithstanding, the true goal of 

the transfer of wealth disguised as loans is to get control over the 

leaders of the less developed countries. After these despots get 

used to the taste of such an unlimited supply of sweet cash, they 

will never be able to break the habit. They will be content—already 

are content—to become little gold-plated cogs in the giant machinery 

of world government. Ideology means nothing to them: capitalist, 

communist, socialist, fascist what does it matter so long as the 

money keeps coming. The IMF/World Bank literally is buying these 

countries and using our money to do it. 

The recent inclusion of Red China and the former Soviet bloc on 

the list of IMF /World Bank recipient countries signals the final 

phase of the game. Now that Latin America and Africa have been 

"purchased" into the New World Order, this is the final frontier- In 

a relatively short time span, China, Russia, and the Eastern 

European countries have now become the biggest borrowers an& 

already, they are in arrears on their payments. This is where the 

action will lie in the months ahead. 

Section II 

A CRASH COURSE 

ON MONEY 

The eight chapters contained in this and the 

following section deal with material that is 

organized by topic, not chronology. Several of 

them will jump ahead of events that are not 

covered until later. Furthermore, the scope is such 

that the reader may wonder what, if any, is the 

connection with the Federal Reserve System. 

Please be patient. The importance will eventually 

become clear. It is the author's intent to cover 

concepts and principles before looking at events. 

Without this background, the history of the 

Federal Reserve is boring. With it, the story 

emerges as an exciting drama which profoundly 

affects our lives today. So let us begin this 

adventure with a few discoveries about the 

nature of money itself.

Chapter Seven 

THE BARBARIC METAL 

The history and evolution of money; the emergence 

of gold as the universal money supply; the 

attempts by governments to cheat their subjects 

by clipping or debasing gold coins; the reality that 

any quantity of gold will suffice for a monetary 

system and that "more money" does not require 

more gold. 

There is a great mystique surrounding the nature of money. It is 

generally regarded as beyond the understanding of mere mortals. 

Questions of the origin of money or the mechanism of its creation 

are seldom matters of public debate. We accept them as facts of life 

which are beyond our sphere of control. Thus, in a nation which is 

founded on the principle of government by the people, and which 

assumes a high level of understanding among the electorate, the 

people themselves have blocked out one of the most important 

factors affecting, not only their government, but their personal lives 

as well. 

This attitude is not accidental, nor was it always so. There was a 

titue in the fairly recent past when the humble voter—even without 

formal education—was well informed on money matters and 

vitally concerned about their political implementation. In fact, as 

we shall see in a later chapter, major elections were won or lost 

depending on how candidates stood on the issue of a central bank. 

It has been in the interest of the money mandarins, however, to 

convince the public that, now, these issues are too complicated for 

n ovices. Through the use of technical jargon and by hiding simple 

reality inside a maze of bewildering procedures, they have caused 

ar * understanding of the nature 

of money to fade from the public 

consciousness. 

^HAT IS MONEY? 

The first step in this maneuver was to scramble the definition of 

m °ney itself. For example, the July 20, 1975 issue of the New York

136 THE CREATURE FROM JEKYLL ISLAND THE BARBARIC METAL 137 

Times, in an article entitled "Money Supply: A Growing Muddle/' 

begins with the question: "What is money nowadays?" The Wall 

Street Journal of August 29, 1975, comments: "The men and women 

involved in this arcane exercise [of watching the money supply] ... 

aren't exactly sure what the money supply consists of." And, in its 

September 24, 1971 issue, the same paper said: "A pro-International 

Monetary Fund Seminar of eminent economists couldn't agree on 

what money is or how banks create it." 

Even the government cannot define money. Some years ago, a 

Mr. A.F. Davis mailed a ten-dollar Federal Reserve Note to the 

Treasury Department. In his letter of transmittal, he called attention 

to the inscription on the bill which said that it was redeemable in 

"lawful money," and then requested that such money be sent to 

him. In reply, the Treasury merely sent two five-dollar bills from a 

different printing series bearing a similar promise to pay. Mr. Davis 

responded: 

Dear Sir: 

Receipt is hereby acknowledged of two $5.00 United States notes, 

which we interpret from your letter are to be considered as lawful 

money. Are we to infer from this that the Federal Reserve notes are not 

lawful money? 

I am enclosing one of the $5.00 notes which you sent to me. I note 

that it states on the face, "The United States of America will pay to the 

bearer on demand five dollars." I am hereby demanding five dollars. 

One week later, Mr. Davis received the following reply from 

Acting Treasurer, M.E. Slindee: 

Dear Mr. Davis: 

Receipt is acknowledged of your letter of December 23rd, 

transmitting one $5. United States Note with a demand for payment of 

five dollars. You are advised that the term "lawful money" has not 

been defined in federal legislation.... The term "lawful currency" no 

longer has such special significance. The $5. United States Note 

received with your letter of December 23rd is returned herewith. 

The phrases "...will pay to the bearer on demand" and "— is 

redeemable in lawful money" were deleted from our currency 

altogether in 1964. 

1. As quoted by C.V. Myers, Money and Energy: Weathering the Storm (Darien, 

Connecticut: Soundview Books, 1980), pp. 161, 163. Also by Lawrence S. Ritter, ed v 

Money and Economic Activity (Boston: Houghton Mifflin, 1967), p. 33. 

Is money really so mysterious that it cannot be defined? Is it the 

coin and currency we have in our pockets? Is it numbers in a 

checking account or electronic impulses in a computer? Does it 

include the balance in a savings account or the available credit on a 

charge card? Does it include the value of stocks and bonds, houses, 

land, or personal possessions? Or is money nothing more than 

purchasing power? 

The main function of the Federal Reserve is to regulate the 

supply of money. Yet, if no one is able to define what money is, 

how can we have an opinion about how the System is performing? 

The answer, of course, is that we cannot, and that is exactly the way 

the cartel wants it. 

The reason the 

Federal Reserve appears to be a complicated 

subject is because most discussions start somewhere in the middle. 

By the time we get into it, definitions have been scrambled and 

basic concepts have been assumed. Under such conditions, intellectual 

chaos is inevitable. If we start at the beginning, however, and 

deal with each concept in sequence from the general to the specific, 

and if we agree on definitions as we go, we shall find to our 

amazement that the issues are really quite simple. Furthermore, the 

process is not only painless, it is—believe it or not—intensely 

interesting. 

The purpose of this and the next three chapters, therefore, is to 

provide what could be called a crash course on money. It will not be 

complicated. In fact, you already know much of what follows. All 

we shall attempt to do is tie it all together so that it will have 

continuity and relativity to our subject. When you are through with 

these next few pages, you will understand money. That's a promise. 

So, lefs get started with the basics. What is money? 

A WORKING DEFINITION 

The dictionary is of little help. If economists cannot agree on 

w hat money is, it is partly due to the fact that there are so many 

fehnitions available that it 

is difficult to insist that any of them is 

the obvious choice. For the purpose of our analysis, however, it will 

e necessary to establish one definition so we can at least know 

vhat is meant when the word is used within this text To that end, 

e shall introduce our own definition which has been assembled 

°*H bits and dabs taken from numerous sources. The structure is 

esi gned, not to reflect what we think money ought to be or to


support the view of any particular school of economics, but simply 

to reduce the concept to its most fundamental essence and to reflect 

the reality of today's world. It is not necessary to agree or disagree 

with this definition. It is introduced solely for the purpose of 

providing an understanding of the word as it is used within these 

pages. This, then, shall be our working definition: 

Money is anything which is accepted as a medium of exchange 

and it may be classified into the following forms: 

1. Commodity money 

Z Receipt money 

3. Fiat money 

4. Fractional money 

Understanding the difference between these forms of money is 

practically all 

we need to know to fully comprehend the Federal 

Reserve System and to come to a judgment regarding its value to 

our economy and to our nation. Let us, therefore, examine each of 

them in some detail. 

BARTER (PRE-MONEY) 

Before there was any kind of money, however, there was barter, 

and it is important first to understand the link between the two. 

Barter is defined as that which is directly exchanged for something 

of like value. Mr. Jones swaps his restored Model-T Ford for a 

Steinway grand piano. 

This exchange is not monetary in nature 

because both items are valued for themselves rather than held as a 

medium of exchange to be used later for something else. Note, 

however, that both items have intrinsic value or they would not be 

accepted by the other parties. 

Labor also may be exchanged as 

barter when it, too, is perceived to have intrinsic value to the 

person for whom the labor is performed. The concept of intrinsic 

value is the key to an understanding of the various forms of money 

that evolved from the process of barter. 

COMMODITY MONEY 

In the natural evolution of every society, 

barter than all 

others. This was because they had certain characteristics 

which made them useful or attractive to almost everyone. 

Eventually, they were traded, not for themselves, but because they 

represented a storehouse of value which could be exchanged at a 

latex time for something else. At that point, they ceased being 

barter and became true money. They were, according to our 

working definition, a medium of exchange. And, since that medium 

Was a commodity of intrinsic value, it may be described as 

commodity money. 

Among primitive people, the most usual item to become 

commodity money was some form of food, either produce or 

livestock. Lingering testimony to this fact is our word pecuniary, 

which means pertaining to money. It is derived from the word 

pecunia, which is the Latin word for cow. 

But, as society progressed beyond the level of bare existence, 

items other than food came into general demand. Ornaments were 

occasionally prized when the food supply was ample, and there is 

evidence of some societies using colored sea shells and unusual 

stones for this purpose. But these never seriously challenged the 

use of cattle, or sheep, or corn, or wheat, because these staples 

possessed greater intrinsic value for themselves even if they were 

not used as money. 

METALS AS MONEY 

Eventually, when man learned how to refine crude ores and to 

craft them into tools or weapons, the metals themselves became of 

âlue. This was the dawning of the Bronze Age in which iron, 

copper, tin, and bronze were traded between craftsmen and 

merchants along trade routes and at major sea ports. 

The value of metal ingots was originally determined by weight. 

ten, as it became customary for the merchants who cast them to 

arnp the uniform weights on the top, they eventually were valued 

imply by counting their number. Although they were too large to 

**)' m 

% 

a pouch, they were still small enough to be transported 

there always have 

and, in this form, they became, in effect, primitive but 

been one or two items which became more commonly used ^nctional tf1 

coins. 

The primary reason metals became widely 

1. Strictly speaking, each party holds the value of what he is receiving to be more 

used as commodity 

money 

than what he is giving. Otherwise he would not make the trade. In the mind of th e 

is that they meet all of the requirements for convenient 

traders, therefore, the items have unequal value. That opinion is shared equally by 

lading. In addition to being of intrinsic value for uses other than 

them both. The shorter explanation, however, is less unwieldy. . 10 *ey, they are not perishable, which is more than one can say for

140 THE CREATURE FROM JEKYLL ISLAND w 

THE 

BARBARIC METAL 141 

cows; by melting and reforming they can be divided into smaller 

units and conveniently used for purchases of minor items, which is 

not possible with diamonds, for example; and, because they are not 

in great abundance, small quantities carry high value, which means 

they are more portable than such items as timber, for example. 

Perhaps the most important monetary attribute of metals, 

however, is their ability to be precisely measured. It is important to 

keep in mind that, in its fundamental form and function, money is 

both a storehouse and a measure of value. It is the reference by 

which all other things in the economy can be compared. It is 

essential, therefore, that the monetary unit itself be both measurable 

and constant. The ability to precisely assay metals in both 

purity and weight makes them ideally suited for this function. 

Experts may haggle over the precise quality of a gemstone, but an 

ingot of metal is either 99% pure or it isn't, and it either weighs 100 

ounces or it doesn't. One's opinion has little to do with it. It is not 

without reason, therefore, that, on every continent and throughout 

history, man has chosen metals as the ideal storehouse and 

measure of value. 

THE SUPREMACY OF GOLD 

There is one metal, of course, that has been selected by 

centuries of trial and error above all others. Even today, in a world 

where money can no longer be defined, the common man instinctively 

knows that gold will do just fine until something better 

comes along. We shall leave it to the sociologists to debate why gold 

has been chosen as the universal money. For our purposes, it 

only important to know that it has been. But we should not 

overlook the possibility that it was an excellent choice. As for 

quantity, there seems to be just the right amount to keep its value 

high enough for useful coinage. It is less plentiful than silver 

—which, incidentally, has run a close second in the monetary 

contest—and more abundant than platinum. Either could have 

served the purpose quite well, but gold has provided what appears 

to be the perfect compromise. Furthermore, it is a commodity in 

great demand for purposes other than money. It is sought for both 

industry and ornament, thus assuring its intrinsic value under all 

conditions. And, of course, its 

measured. 

purity and weight can be precisely 

is 

THE MISLEADING THEORY OF QUANTITY 

It often is argued that gold is inappropriate as money because it 

js too limited in supply to satisfy the needs of modern commerce. 

On the surface, that may sound logical—after all, we do need a lot 

of money out there to keep the wheels of the economy turning 

but, upon examination, this turns out to be one of the most childish 

ideas imaginable. 

First of all, it is estimated that approximately 45% of all the gold 

mined throughout the world since the discovery of America is now 

in government or banking stockpiles. There undoubtedly is at 

least an additional 30% in jewelry, ornaments, and private hoards. 

Any commodity which exists to the extent of 75% of its total world 

production since Columbus discovered America can hardly be 

described as in short supply. 

The deeper reality, however, is that the supply is not even 

important. Remember that the primary function of money is 

measure the value of the items for which it is exchanged. In this 

sense, it serves as a yardstick or ruler of value. It really makes no 

difference if we measure the length of our rug in inches, feet, yards, 

or meters. We could even manage it quite well in miles if we used 

decimals and expressed the result in millimiles. We could even use 

multiple rulers, but no matter what measurement we use, the 

reality of what we are measuring does not change. Our rug does 

not become larger just because we have increased the quantity of 

measurement units by painting additional markers onto our rulers. 

If the supply of gold in relation to the supply of available goods 

!S so small that a one-ounce coin would be too valuable for minor 

transactions, people simply would use half-ounce coins or tenthounce 

coins. The amount of gold in the world does not affect its 

ability to serve as money, it 

used to measure any given transaction. 

only affects the quantity that will be 

Let us illustrate the point by imagining that we are playing a 

game of Monopoly. Each person has been given a starting supply 

£* play money with which to transact business. It doesn't take long 

before we all begin to feel the shortage of cash. If we just had more 

oney, we could really wheel and deal. Let us suppose further that 

^nieone discovers another game-box of Monopoly sitting in the 

(Oli 

*^n Groseclose, Money and Man: A survey of Monetary Experience, 4th ed. 

^Wahoma: University of Oklahoma Press, 1976), p. 259. 

to


THE BARBARIC METAL 

effectiveness, 

planned increase 

of its 

in 

gold-unit. 

the money 

There is 

supply, for 

no need whatever for a* 1 )' 

the supply to rise to offset % 

prOCesS does not end there ' 

however. When the miners see 

that fK 

are no better off than before in spite of the extra work, and 

pecia y when they see the teilors making a greats profit for no 

143 

any condition, or to follow any artificial criteria. More money does not 

supply more capital, is not more productive, does not permit 

"economic growth." 

GOLD GUARANTEES PRICE STABILITY 

The Federal Reserve claims that one of its primary objectives is 

better off? There is no corresponding increase in the quantity 

f 

to stabilize prices. In this, of course, it has failed miserably. The 

property, so everyone would bid up the prices of existing pieces 

irony, however, is that maintaining stable prices is the easiest thing 

until they became twice as expensive. In other words, the law of 

in the world. All we have to do is stop tinkering with the money 

supply and demand would rapidly seek exactly the same equilibrium 

as existed with the more limited money supply. When the 

ically stable under a commodity money system, and this is particu- 

supply and let the free market do its job. Prices become automat- 

quantity of money expands without a corresponding increase in 

larly true under a gold standard. 

goods, the effect is a reduction in the purchasing power of each 

Economists like to illustrate the workings of the marketplace by 

monetary unit. In other words, nothing really changes except that 

the quoted price of everything goes up. But that is merely the quoted 

creating hypothetical micro and macro economies in which everything 

is reduced to only a few factors and a few people. In that 

price, the price as expressed in terms of the monetary unit. In truth, 

spirit, therefore, let us create a hypothetical economy consisting of 

the real price, in terms of its relationship to all other prices, remains 

only two classes of people: gold miners and tailors. Let us suppose 

the same. It's merely that the relative value of the money supply 

that the law of supply and demand has settled on the value of one 

ounce of gold to be equal to a fine, custom-tailored suit of clothes. 

That means that the labor, tools, materials, and talent required to 

mine and refine one ounce of gold are equally traded for the labor, 

tools, and talent required to weave and tailor the suit. Up until 

tow, the number of ounces of gold produced each year have been 

over the sudden increase in wealth. By New Year's day, however, 

roughly equal to the number of fine suits made each year, so prices 

prices would have doubled for everything, and the net result on 

have 

the 

remained stable. The price of a suit is one ounce of gold, and 

the 

world's standard of living would be exactly 

value 

zero. 

of one ounce of gold is equal to one finely-tailored suit. 

The reason so many people fall for the appealing argument that 

Let us now suppose that the miners, in their quest for a better 

dard of living, work extra hours and produce more gold this 

year ftan previously—or that they discover a new lode of gold 

reflect on the consequences of the total supply increasing, the 

jjtocii greatly increases the available supply with little extra effort. 

Now things are no longer in balance. There are more ounces of gold 

ân there are suits. The result of this expansion of the money 

"pply over and above the supply of available goods is the same as 

our game of Monopoly. The quoted prices of the suits go up 

^^se the relative value of the gold has gone down. 

closet and proposes that the currency from that be added to the 

game under progress. By general agreement, the little bills are 

distributed equally among all players. What would happen? 

The money supply has now been doubled. We all have twice as 

much money as we did a moment before. But would we be any 

has gone down. This, of course, is the classic mechanism of 

inflation. Prices do not go up. The value of the money goes down. 

If Santa Claus were to visit everyone on Earth next Christmas 

and leave in our stockings an amount of money exactly equal to the 

amount we already had, there is no doubt that many would rejoice 

the economy needs a larger money supply is that they zero in only 

on the need to increase their supply. If they paused for a moment to 

nonsense of the proposal becomes immediately apparent. 

Murray Rothbard, professor of economics at the University of 

Nevada at Las Vegas, says: 

We come to the startling truth that it doesn't matter what the sttppty 

of money is. Any supply will do as well as any other supply. The fre€ 

market will simply adjust by changing the purchasing power, ot 

1 . Those who rushed to market first, however, would benefit temporarily from the 

old prices. Under inflation, those who save are punished. 

ôlorrHi a R°thbard What Has 

' Government 

n. 

Done to Our Money? 

ôo: 

(Larkspur 

Pine Tree Press, 

V 

1964), ' 

p. 13.


period of time. For example, in 1913, the year the Federal Reserve 

increase in labor, some of them decide to put down their picks and 

1. See Galbraith, p. 250. 

turn to the trade of tailoring. In other words, they are responding to 

the law of supply and demand in labor. When this happens, the 

annual production of gold goes down while the production of suits 

vvas enacted into law, the average annual wage in America was 

$633. The exchange value of gold that year was $20.67. That means 

that the average worker earned the equivalent of 30.6 ounces of 

gold per year. 

In 1990, the average annual wage had risen to $20,468. That is a 

politicians and money mechanics, will always maintain a stable whopping increase of 3,233 per cent, an average rise of 42 per cent 

price structure which is automatically regulated by the underlying 

each year for 77 years. But the exchange value of gold in 1990 had 

also risen. It was at $386.90 per ounce. The average worker, 

therefore, was earning the equivalent of 52.9 ounces of gold per 

the amount of human effort required to provide the goods and 

year- That is an increase of only 73 per cent, a rise of less than 1 per 

services for which it is freely exchanged. 

cent per year over that same period. It is obvious that the dramatic 

increase in the size of the paycheck was meaningless to the average 

CIGARETTES AS MONEY 

American. The reality has been a small but steady increase in 

A perfect example of how commodities tend to self-regulate 

purchasing power (about 1 per cent per year) that has resulted from 

their value occurred in Germany at the end of World War II. The 

the gradual improvement in technology. This and only this has 

German mark had become useless, and barter was common. But 

improved the standard of living and brought down real prices—as 

one item of exchange, namely cigarettes, actually became a commodity 

money, and they served quite well. Some cigarettes were 

revealed by the relative value of gold. 

In areas where personal service is the primary factor and where 

smuggled into the country, but most of them were brought in by 

technology is less important, the stability of gold as a measure of 

U.S. servicemen. In either case, the quantity was limited and the 

value is even more striking. At the Savoy Hotel in London, one 

demand was high. A single cigarette was considered small change. 

gold sovereign will still buy dinner for three, exactly as it did in 

A package of twenty and a carton of two hundred served as larger 

1913. And, in ancient Rome, the cost of a finely made toga, belt, and 

units of currency. If the exchange rate began to fall too low—in 

pair of sandals was one ounce of gold. That is almost exactly the 

other words, if the quantity of cigarettes tended to expand at a rate same cost today, two-thousand years later, for a hand-crafted suit, 

faster than the expansion of other goods—the holders of the 

belt, and a pair of dress shoes. There are no central banks or other 

currency, more than likely, would smoke some of it rather than human institutions which could even come close to providing that 

spend it. The supply would diminish and the value would return to 

kind of price stability. And, yet, it is totally automatic under a gold 

its previous equilibrium. That is not theory, it actually happened. 

standard. 

With gold as the monetary base, we would expect that 

In any event, before leaving the subject of gold, we should 

improvements in manufacturing technology would gradually 

^knowledge that there is nothing mystical about it. It is merely a 

reduce the cost of production, causing, not stability, but a downward 

ornrnodity which, because it has intrinsic value and possesses 

movement of all prices. That downward pressure, however, is 

ertatn qualities, has become accepted throughout history as a 

partially offset by an increase in the cost of the more sophisticated êdium of exchange. Hitler waged a campaign against gold as a 

tools that are required. Furthermore, similar technological effiriencies 

are being applied in the field of mining, so everything tends to 

gely financed their war machine with it. Lenin claimed that gold 

OQi of the Jewish bankers. But the Nazis traded heavily in gold and 

balance out. History has shown that changes in this natural 

is used only to keep the workers in bondage and that, after the 

equilibrium are minimal and occur only gradually over a long ôlution, it would be used to cover the floors of public lavatories. 

goes up, and an equilibrium is reached once again in which suits 

and gold are traded as before. The free market, if unfettered by 

factor of human effort. The human effort required to extract one 

ounce of gold from the earth will always be approximately equal to 

L 

e Soviet Union under Communism became one of the world's 

^gest producers and users of gold. Economist John Maynard


Keynes once dismissed gold as a "barbaric metal." Many followers 

of Keynes today are heavily invested in gold. It is entirely possible 

of course, that something other than gold would be better as the 

basis for money. It's just that in over two thousand years, no one 

has been able to find it. 

NATURAL LAW NO. 1 

The amazing stability of gold as a measure of value is simply 

the result of human nature reacting to the forces of supply and 

demand. The process, therefore, may be stated as a natural law of 

human behavior: 

LESSON: When gold (or silver) is used as money and when 

the forces of supply and demand are not thwarted by 

government intervention, the amount of new metal added to the 

money supply will always be closely proportional to the 

expanding services and goods which can be purchased with it 

Long-term stability of prices is the dependable result of these 

forces. This process is automatic and impartial. Any attempt by 

politicians to intervene will destroy the benefit for all. 

Therefore, 

LAW: Long-term price stability is possible only when the 

money supply is based upon the gold (or silver) supply without 

government interference. 

As the concept of money was slowly developing in the mind of 

ancient man, it became obvious that one of the advantages of using 

gold or silver as the medium of exchange was that, because of their 

rarity as compared to copper or iron, great value could be 

represented by small size. Tiny ingots could be carried in a pouch 

or fastened to a belt for ease of transportation. And, of course, they 

could be more readily hidden for safekeeping. Goldsmiths then 

began to fashion them into round discs and to put their stamps on 

them to attest to purity and weight. In this way, the world's first 

coins began to make their appearance. 

It is believed that the first precious metal coins were minted by 

the Lydians in Asia Minor (now Northwest Turkey), in about 600 

B.C. The Chinese used gold cubes as early as 2100 B.C. But it wasn't 

until the kings stepped into the picture that true coinage became a 

reality. It was only when the state certified the tiny discs that they 

became widely accepted, and it is to the Greeks more than anyone 

that we owe this development. Groseclose describes the result: 

These light, shining discs, adorned with curious new emblems and 

a variety of vigorous, striking images, made a deep impression on 

both Greek and barbarian. And to the more practical minded, the 

abundance of uniform pieces of metal, each of a standard weight, 

certified by the authority of the state, meant a release from the 

cumbersomeness of barter and new and dazzling opportunities in 

every direction. . . 

All classes of men succumbed to money, and those who had 

formerly been content to produce only for their needs and the 

necessities of the household, found themselves going to the market 

place with their handicraft, or the fruits of their toil, to exchange them 

for the coins they might obtain. 1 

EXPANDING THE MONEY SUPPLY BY COIN CLIPPING 

From the very beginning, the desire for a larger money supply 

led to practices which were destructive to the economy. Unscrupulous 

merchants began to shave off a tiny portion of each coin they 

handled— a process known as coin clipping—and then having the 

shavings melted down into new coins. Before long, the king's 

treasury began to do the same thing to the coins it received in taxes. 

In this way, the money supply was increased, but the supply of 

gold was not. The result was exactly what we now know always 

happens when the money supply is artificially expanded. There 

was inflation. Whereas one coin previously would buy twelve 

sheep, now it would only be accepted for ten. The total amount of 

gold needed for twelve sheep never really changed. It's 

just that 

everyone knew that one coin no longer contained it. 

As governments became more brazen in their debasement of 

2 currency, even to the extent of diluting the gold or silver 

content, the population adapted quite well by simply "discount- 

,r «" the new coins. That is to say, they accepted them at a realistic 

âlue, which was lower than what the government had intended. 

s was, as always, reflected in a general rise in prices quoted in 

Tms of those coins. Real prices, in terms of labor or other goods or 

ên of gold itself remained unchanged. 

^ 

Governments do not like to be thwarted in their plans to exploit 

I subjects. So a way had to be found to force people to accept 

-se slugs as real money. This led to the first legal-tender laws. By 

°ya! decree, the "coin of the realm," was declared legal for the 

G rosecllose, Money and Man, p. 13.


settlement of all debts. Anyone who refused it at face value was 

subject to fine, imprisonment, or, in some cases, even death. The 

result was that the good coins disappeared from circulation and 

went into private hoards. After all, if the government forces you to 

accept junk at the same rate of exchange as gold, wouldn't you 

keep the gold and spend the junk? That is what happened in 

America in the '60s when the mint began to issue cheap metal 

tokens to replace the silver dimes, quarters, and half-dollars. 

Within a few months, the silver coins were in dresser drawers and 

safe-deposit boxes. The same thing has happened repeatedly 

throughout antiquity. In economics, that is called Gresham's Law: 

"Bad money drives out good/' 

The final move in this game of legal plunder was for the 

government to fix prices so that, even if everyone is using only junk 

as money, they can no longer compensate for the continually 

expanding supply of it. Now the people were caught. They had no 

escape except to become criminals, which most of them, incidentally, 

chose to do. The history of artificially expanding money is the 

history of great dissatisfaction with government, much lawlessness, 

and a massive underground economy. 

GOLD IS THE ENEMY OF THE WELFARE STATE 

In more modern times, rulers of nations have become more 

sophisticated in the methods by which they debase the currency. 

Instead of clipping coins, it is done through the banking system. 

The consequences of that process were summarized in 1966 by Alan 

Greenspan who, a few years later, would became Chairman of the 

Board of Governors of the Federal Reserve. Greenspan wrote: 

The abandonment of the gold standard made it possible for the 

welfare statists to use the banking system as a means to an unlimited 

expansion of credit. . . 

The law of supply and demand is not to be conned. As the supply 

of money (of claims) increases relative to the supply of tangible assets 

in the economy, prices must eventually rise. Thus the earnings saved 

by the productive members of the society lose value in terms of goods. 

When the economy's books are finally balanced, one finds that this 

loss in value represents the goods purchased by the government for 

welfare or other purposes. . 

. 

In the absence of the gold standard, there is no way to protect 

savings from confiscation through inflation. There is no safe store oi 

value. If there were, the government would have to make its holding 

illegal, as was done in the case of gold.... The financial policy of the 

welfare state requires that there be no way for the owners of wealth to 

protect themselves. 

This is the shabby secret of the welfare statists' tirades against 

gold. Deficit spending is simply a scheme for the "hidden" 

confiscation of wealth. Gold stands in the way of this insidious 

process. It stands as a protector of property rights. 

Unfortunately, when Greenspan was appointed as Chairman of 

the Federal Reserve System, he became silent on the issue of gold. 

Once he was seated at the control panel which holds the levers of 

power, he served the statists well as they continued to confiscate 

the people's wealth through the hidden tax of inflation. Even the 

wisest of men can be corrupted by power and wealth. 

REAL COMMODITY MONEY IN HISTORY 

Returning to the topic of debasing the currency in ancient 

times, it must be stated that such practices were by no means 

universal. There are many examples throughout history of regents 

and kingdoms which used great restraint in money creation. 

Ancient Greece, where coinage was first developed, is one of them. 

The drachma became the defacto monetary unit of the civilized 

world because of the dependability of its gold content. Within its 

borders, cities flourished and trade abounded. Even after the fall of 

Athens in the Peloponnesian War, her coinage remained, for 

centuries, as the standard by which all others were measured. 2 

Perhaps the greatest example of a nation with sound money, 

however, was the Byzantine Empire. Building on the sound monetary 

tradition of Greece, the emperor Constantine ordered the 

creation of a new gold piece called the solidus and a silver piece 

called the miliarense. The gold weight of the solidus soon became 

ed at 65 grains and was minted at that standard for the next 

eight-hundred years. Its quality was so dependable that it was 

freely accepted, under the name bezant, from China to Brittany, 

from the Baltic Sea to Ethiopia. 

Byzantine laws regarding money were strict. Before being 

l drrutted to the profession of banking, the candidate had to have 

sponsors who would attest to his character, that he would not file 

Greens 

Idrntla ? P an " ' 

Gold and Economic Freedom/' in Capitalism: The Unknown 

£*h ed. Ayn Rand (New York: Signet Books, 1967), p. 101. 

the Greeks 

ren 

' 

under Solon, had one, brief experience with a debased cur- 

Ut 

PP U 

'* WaS Sh°rt liVed/ and neVer re P eated See Groseclose, Money 

" 

and Man, 

9


9 THE BARBARIC METAL 151 

or chip either the solidi or the miliarensia, and that he would not 

issue false coin. 

hand. 1 

Violation of these rules called for cutting off a 

It is an amazing fact of history that the Byzantine Empire 

flourished as the center of world commerce for eight-hundred 

years without falling into bankruptcy nor, for that matter, even into 

debt. Not once during this period did it devalue its money. 

"Neither the ancient nor the modern world/' says Heinrich Gelzer, 

"can offer a complete parallel to this phenomenon. This prodigious 

stability...secured the bezant as universal currency. On account of its 

full weight, it passed with all the neighboring nations as a valid 

medium of exchange. By her money, Byzantium controlled bom the 

civilized and the barbarian worlds/' 

BAD COMMODITY MONEY IN HISTORY 

The experience of the Romans was quite different. Basically a 

militaristic people, they had little patience for the niceties of 

monetary restraint. Especially in the later Empire, debasement of 

the coinage became a deliberate state policy. Every imaginable 

means for plundering the people was devised. In addition to 

taxation, coins were clipped, reduced, diluted, and plated. Favored 

groups were given franchises for state-endorsed monopolies, the 

origin of our present-day corporation. And, amidst constantly 

rising prices in terms of constantly expanding money, speculation 

and dishonesty became rampant. 

By the year 301 A.D., mutiny was developing in the army/ 

remote regions were displaying disloyalty, the treasury was empty, 

agriculture depressed, and trade almost at a standstill. It was then 

that Diocletian issued his famous price-fixing proclamation as the 

last measure of a desperate emperor. We are struck by the 

similarity to such proclamations in our own time. Most of the chaos 

can be traced directly to government policy. Yet, the politicians 

point the accusing finger at everyone else for their "greed" and 

"disregard for the common good." Diocletian declared: 

1. he livre du prifet ou Vempereur Uon le Sage sur les corporations de Constantino?*' 

French translation from the Geneva text by Jules Nicole, p. 38. Cited by Groseclose, 

Money and Man, p. 52. 

2. Byzantininsche Kulturgeschichte (Tubingen, 1909), p. 78. As quoted by Grosedose, 

Money and Man, p. 54. 

Who is of so hardened a heart and so untouched by a feeling of 

humanity that he can be unaware, nay that he has not noticed, that in 

the sale of wares which are exchanged in the market, or dealt with in 

the daily business of the cities, an exorbitant tendency in prices has 

spread to such an extent that the unbridled desire of plundering is 

held in check neither by abundance nor by seasons of plenty.... 

Inasmuch as there is seen only a mad desire without control, to pay no 

heed to the needs of the many,...it seems good to us, as we look into the 

future, to us who are the fathers of the people, that justice intervene to 

settle matters impartially. 1 

What followed was an incredibly detailed list 

of mandated 

prices for everything from a serving of beer or a bunch of 

watercress to a lawyer's fee and a bar of gold. The result? 

Conditions became even worse, and the royal decree was rescinded 

five years later. 

The Roman Empire never recovered from the crisis. By the 

fourth century, all coins were weighed, and the economy was 

slipping back into barter again. By the seventh century, the weights 

themselves had been so frequently changed that it was no longer 

possible to effect an exchange in money at all. For all practical 

purposes, money became extinct, and the Roman Empire was no 

more. 

RECEIPT MONEY 

When new civilizations rose from the ruins of Rome, they 

reclaimed the lost discovery of money and used it to great 

advantage. The invention was truly a giant step forward for 

mankind, but there were many problems yet to be solved and 

much experimentation lay ahead. The development of paper 

oney was a case in point. When a man accumulated more coins 

than he required for daily purchases, he needed a safe place to store 

an. The goldsmiths, who handled large amounts of precious 

metals in their 

trades, had already built sturdy vaults to protect 

their own inventory, so it was natural for them to offer vault space 

o their customers for a fee. The goldsmith could be trusted to 

guard the coins well because he also would be euardine 6 his own 

wealth. 

When the coins were placed into the vault, the warehouseman 

ould give the owner a written receipt which entitled him to 

As quoted by Groseclose, Money and Man, pp. 43-44.


withdraw at any time. At first, 

the only way the coins could be 

taken from the vault was for the owner to personally present the 

receipt. Eventually, however, it became customary for the owner to 

merely endorse his receipt to a third party who, upon presentation 

could make the withdrawal. These endorsed receipts were the 

forerunners of today's checks. 

The final stage in this development was the custom of issuing, 

not just one receipt for the entire deposit, but a series of smaller 

receipts, adding up to the same total, and each having printed 

across the top: PAY TO THE BEAKER ON DEMAND. As the population 

learned from experience that these paper receipts were truly 

backed by good coin in the goldsmith's warehouse and that the 

coin really would be given out in exchange for the receipts, it 

became increasingly common to use the paper instead of the coin. 

Thus, receipt 

money came into existence. The paper itself was 

useless, but what it represented was quite valuable. As long as the 

coin was held in safe keeping as promised, there was no difference 

in value between the receipt and the coin which backed it. And, as 

we shall see in the next chapter, there were notable examples of the 

honest use of receipt money at the very beginning of the development 

of banking. When the receipt was scrupulously honored, the 

economy moved forward. When it was used as a gimmick for the 

artificial expansion of the money supply, the economy convulsed 

and stagnated. 


This is not a textbook on the history of money, so we cannot 

afford the luxury of lingering among the fascinating details. For our 

purposes, it is sufficient to recognize that human behavior in these 

matters is predictable and, because of that predictability, it is 

possible to formulate another principle that is so universal that it 

too, may be considered a natural law. Drawing from the vast 

experience of this early period, it can be stated as follows: 

metals, the result is price stability, economic prosperity, and 

political tranquility. Therefore, 

LAW: For a nation to enjoy economic prosperity and 

political tranquility, the monetary power of its politicians must 

be limited solely to the maintenance of honest weights and 

measures of precious metals. 

As we shall see in the following chapters, the centuries of 

monetary upheaval that followed that early period contain no 

evidence that this law has been repealed by modern man. 

SUMMARY 

Knowledge of the nature of money is essential to an under- 

rstanding of the Federal Reserve. Contrary to common belief, 

topic is 

the 

neither mysterious nor complicated. For the purposes of 

this study, money is defined as anything which is accepted as a 

medium of exchange. Building on that, we find there are four kinds 

of money: commodity, receipt, fiat, and fractional. Precious metals 

were the First commodity money to appear in history and ever 

since have been proven by actual experience to be the only reliable 

base for an honest monetary system. Gold, as the basis of money, 

can take several forms: bullion, coins, and fully backed paper 

receipts. Man has been plagued throughout history with the false 

theory that the quantity of money is important, specifically that 

more money is better than less. This has led to perpetual manipulation 

and expansion of the money supply through such practices as 

coin clipping, debasement of the coin content, and, in later centuries, 

the issuance of more paper receipts than there was gold to 

back them. In every case, these practices have led to economic and 

political disaster. In those rare instances where man has refrained 

from manipulating the money supply and has allowed it to be 

determined by free-market production of the gold supply, the 

result has been prosperity and tranquility. 

LESSON: Whenever government sets out to manipulate the 

money supply, regardless of the intelligence or good intentions 

of those who attempt to direct the process, the result is inflation/ 

economic chaos, and political upheaval. By contrast, whenever 

government is limited in its monetary power to only the 

maintenance of honest weights and measures of precious

Chapter Eight 

FOOL'S GOLD 

The history of paper money without preciousmetal 

backingforced on the public by government 

decree; the emergence of our present-day 

fractional-reserve 

banking system based on the 

issuance of a greater amount of receipts for gold 

than the bank has in gold to back them up. 

We previously have broken down the concept of money into 

four categories: commodity, receipt, fiat, and fractional. In the last 

chapter we examined commodity and receipt money in some 

detail. In doing so, we also established certain monetary principles 

which apply regardless of their form. We shall now turn to the 

remaining two categories, both of which are represented by paper 

and which are at the root of almost all of modern man's economic 

woes. 

FIAT MONEY 

The American Heritage Dictionary defines fiat money as "paper 

money decreed legal tender, not backed by gold or silver." The two 

characteristics of fiat money, therefore, are (1) it does not represent 

anything of intrinsic value and (2) it is decreed legal tender. Legal 

tender simply means that there is a law requiring everyone to 

accept the currency in commerce. The two always go together 

because, since the money really is worthless, it soon would be 

rejected by the public in favor of a more reliable medium of 

exchange, such as gold or silver coin. Thus, when governments 

issue fiat money, they always declare it to be legal tender under 

pain of fine or imprisonment. The only way a government can 

exchange its worthless paper money for tangible goods and 

services is to give its citizens no choice. 

The first notable use of this practice was recorded by Marco 

Polo during his travels to China in the thirteenth century. The 

famous explorer gives us this account:

156 THE CREATURE FROM JEKYLL ISLAND FOOL'S GOLD 157 

The Emperor's mint then is in this same City of Cambaluc, and the 

way it is wrought is such that you might say he hath the Secret of 

Alchemy in perfection, and you would be right!... 

What they take is a certain fine white bast or skin which lies 

between the wood of the tree and the thick outer bark, and this they 

make into something resembling sheets of paper, but black. When 

these sheets have been prepared they are cut up into pieces of different 

sizes. The smallest of these sizes is worth a half tornesel.... There is 

also a kind worth one Bezant of gold, and others of three Bezants, and 

so up to ten. 

All these pieces of paper are issued with as much solemnity and 

authority as if they were of pure gold or silver; and on every piece, a 

variety of officials, whose duty it is, have to write their names and to 

put their seals. And when all is prepared duly, the chief officer 

deputed by the Kaan smears the Seal entrusted to him with vermilion 

and impresses it on the paper, so that the form of the Seal remains 

stamped upon it in red; the money is then authentic. Any one forging 

it would be punished with death. And the Kaan causes every year to 

be made such a vast quantity of this money, which costs him nothing, 

that it must equal in amount all the treasures in the world! 

With these pieces of paper, made as I have described, he causes all 

payments on his own account to be made, and he makes them to pass 

current universally over all his Kingdoms.... And nobody, however 

important he may think himself, dares to refuse them on pain of death. 

And indeed everybody takes them readily. 

One is tempted to marvel at the Kaan's audacious power and 

the subservience of his subjects who endured such an outrage; but 

our smugness rapidly vanishes when we consider the similarity to 

our own Federal Reserve Notes. They are adorned with signatures 

and seals; counterfeiters are severely punished; the government 

pays its expenses with them; the population is forced to accept 

them; they—and the "invisible" checkbook money into which they 

can be converted—are made in such vast quantity that it must 

equal in amount all 

the treasures of the world. And yet they cost 

nothing to make. In truth, our present monetary system is an 

almost exact replica of that which supported the warlords of seven 

centuries ago. 

1. Original from Henry Thule's edition of Marco Polo's Travels, reprinted in W- 

Vissering, On Chinese Currency: Coin and Paper Money (Leiden: E.J. Brill, 1877), 

reprinted 1968 by Ch'eng-wen Publishing Co., Taiwan, as cited by Anthony Sutton, 

The War on Gold (Seal Beach, California: '76 Press, 1977), pp. 26-28. 

THE COLONIAL EXPERIENCE 

Unfortunately, the present situation is not unique to our 

history. In fact, after China, the next place in the world to adopt the 

use of fiat money was America; specifically, the Massachusetts Bay 

Colony. This event has been described as "not only the origin of 

paper money in America, but also in the British Empire, and almost 

in the Christian world." 

In 1690, Massachusetts launched a military raid against the 

French colony in Quebec. She had done this before and, each time, 

had brought back sufficient plunder to more than pay for the 

expedition. This time, however, the foray was a dismal failure, and 

the men returned empty handed. When the soldiers demanded 

their pay, Massachusetts found its coffers empty. Disgruntled 

soldiers have a way of becoming unruly, so the officials scrambled 

for some way to raise the funds. Additional taxes would have been 

extremely unpopular, so they decided simply to print paper 

money. In order to convince the soldiers and the citizenry to accept 

it, the government made two solemn promises: (1) it would redeem 

the paper for gold or silver coin just as soon as there was sufficient 

tax revenue to do so, and (2) absolutely no additional paper notes 

would ever be issued. Both pledges were promptly broken. Only a 

few months later, it was announced that the original issue was 

insufficient to discharge the government's debt, and a new issue 

almost six times greater was put into circulation. The currency 

wasn't redeemed for nearly forty years, long after those who had 

made the pledge had faded from the scene. 

A CLASSIC PATTERN 

Most of the other colonies were quick to learn the magic of the 

printing press, and the history that followed is a classic example of 

cause and effect: Governments artificially expanded the money 

supply through the issuance of fiat currency. This was followed by 

legal tender laws to force its acceptance. Next came the disappearance 

of gold or silver coins which went, instead, into private hoards 

or to foreign traders who insisted on the real thing for their wares. 

Many of the colonies repudiated their previous money by issuing 

new bills valued at multiples of the old. Then came political 

1- Ernest Ludlow Bogart, Economic History of the American People (New York: 

Longmans, Green and Co., 1930), p. 172.

I. 


discontent and civil 

disobedience. And at the end of each cycle 

there was rampant inflation and economic chaos. 

In 1703, South Carolina declared that its money was "a good 

payment and tender in law" and then added that, should anyone 

refuse to honor it as such, they would be fined an amount equal to 

"double the value of the bills so refused." By 1716, the penalty had 

been increased to "treble the value." 

THE PRINTING PRESS AND INFLATION 

Benjamin Franklin was an ardent proponent of fiat money 

during those years and used his great influence to sell the idea to 

the public. We can get some idea of the ferment of the times by 

noting that, in 1736, writing in his Pennsylvania Gazette, Franklin 

apologized for its irregular publication, and explained that the 

printer was "with the Press, labouring for the publick Good, to 

make Money more plentiful." 2 The printing of money was apparently 

a major, time-consuming operation. 

In 1737, Massachusetts devalued its fiat currency by 66%, 

offering one dollar of new currency for three of the old. The 

promise was made that, after five years, the new money would be 

fully redeemed in silver or gold. The promise was not kept 

By the late 1750s, Connecticut had price inflated by 800%. The 

Carolinas had inflated 900%. Massachusetts 1000%. Rhode Island 

2300%. 4 Naturally, these inflations all had to come to an end and, 

they turned into equally massive deflations and 

when they did, 

depressions. It has been shown that, even in colonial times, the 

classic booms and busts which modern economists are fond of 

blaming on an "unbridled free market" actually were direct 

manifestations of the expansion and contraction of fiat monev^ 

which no longer was governed by the laws of supply and demand. 

1 Statutes at Large of South Carolina, 11. 211,665, as cited by George Bancroft, A 

Plea for the Constitution (Originally published by Harpers in 1886. Reprinted m 

Sewanee, Tennessee: Spencer Judd Publishers, 1982), p. 7. 

2. Leonard W. Labaree, ed., The Papers of Benjamin Franklin (New Haven: Yaie 

University Press, 1960), Vol. 2, p. 159. 

3. Province Laws, II. 826, cited by Bancroft, p. 14. 

4. Ron Paul and Lewis Lehrman, The Case for Gold (Washington, D.C.: Cato Institute, 

1982), p. 22. Also Sutton, The War on Gold, p. 44. 

n 

5 See Donald L. Kemmerer, "Paper Money in New Jersey, 1668-1775, New 

Jersey Historical Society, Proceedings 74 (April 1956): pp. 107-144, as cited by Paul 

and Lehrman, The Casefor Gold, p. 22. 

FOOL'S GOLD 159 

By this time, coins had completely disappeared from the scene. 

Some were in private hoards, but most of them had been exported 

to other countries, leaving the colonies with little choice but to use 

fiat 

money or barter. Merchants from abroad were interested in 

neither of those, however, and international trade ground almost to 

a halt 

A BLESSING IN DISGUISE 

The experiment with fiat money was a calamity to the colonists, 

but it was also a thorn in the side of the Bank of England. The bank 

had used its influence with the Crown to forbid the colonies to mint 

their own coins or to establish local banks. This meant that, if the 

colonists wanted the convenience of paper money, they would be 

forced to use the notes issued by the Bank of England. No one had 

anticipated that the colonial governments would be so inventive as 

to create their own paper money. So, in 1751, Great Britain began to 

pressure the colonies to redeem all of their currency and withdraw 

it from circulation. This they eventually did, and at bargain prices. 

By then, their fiat money was heavily discounted in the market 

place and the governments were able to buy back their own 

currency for pennies on the dollar. 

The decree from the British Parliament, although heavily 

resented by the colonists, turned out to be a blessing in disguise. 

The paper notes of the Bank of England never did become a 

primary medium of exchange. Probably because of their recent bad 

experience with paper money, the colonists merely brought what 

few gold and silver coins they had out of hiding and returned to a 

true commodity-money system. At first, the doomsdayers predicted 

this would spell further ruin for the colonial economy. 

'"There isn't enough money" was the all-too-familiar cry. But there 

was, indeed, quite enough for, as we have already seen, any 

amount is sufficient. 

TOBACCO BECOMES MONEY 

There was, in fact, a period in which other commodities became 

accepted as a secondary medium of exchange. Such items as nails, 

lumber, rice, and whisky filled the monetary void, but tobacco was 

the most common. Here was a commodity which was in great 

demand both within the colonies and for overseas commerce. It 

had intrinsic value; it could not be counterfeited; it could be 

divided into almost any denominational quantity; and its supply


could not be increased except by the exertion of labor. In other 

words, it was regulated by the law of supply and demand, which 

gave it great stability in value. In many ways, it was an ideal 

money. It was officially adopted as such by Virginia in 1642 and a 

few years later by Maryland, but it was used unofficially in all the 

other colonies, as well. So close was the identity of tobacco with 

money that the previous fiat currency of New Jersey, not a tobacco 

growing state, displayed a picture of a tobacco leaf on its 

face. It 

also carried the inscription: "To counterfeit is Death" Tobacco was 

used in early America as a secondary medium of exchange for 

about two-hundred years, until the new Constitution declared that 

money was, henceforth, the sole prerogative of the federal government. 

The primary currency at that juncture, however, was still gold 

and silver coin, or specie, as it is called. And the immediate result of 

returning to a sound monetary unit was a rapid recovery from the 

economic stagnation previously inflicted by the booms and busts of 

fiat money. Trade and production rose dramatically, and this, in 

turn, attracted an inflow of gold and silver coin from around the 

world, filling the void that had been created by years of worthless 

paper. The law of supply and demand was visibly at work. For a 

while, Massachusetts had returned to specie while Rhode Island 

remained on fiat money. The result was that Newport, which had 

been the trade center for the West Indies, lost its trade to Boston 

and became an empty port. 2 After the colonies had returned to 

coin, prices quickly found their natural equilibrium and then stayed 

at that point, even during the Seven Years War and the disruption 

of trade that occurred immediately prior to the Revolution. There 

is no better example of the fact that economic systems in distress 

can and do recover rapidly if government does not interfere with 

the natural healing process. 

WAR BRINGS A RETURN OF FIAT MONEY 

The War for Independence brought all of this to a sudden halt. 

Wars are seldom funded out of the existing treasury, nor are they 

even done so out of increased taxes. If governments were to levy 

1. Galbraith, pp. 48-50. 

2. Paul and Lehrman, pp. 22-23. 

3. 'The Colonial Monetary Standard of Massachusetts/' by Roger W. Weiss, 

Economic History Review, No. 27, November, 1974, p. 589. 

taxes on their citizens fully adequate to finance the conflict, the 

amount would be so great that many of even its most ardent 

supporters would lose enthusiasm. By artificially increasing the 

money supply, however, the real cost is hidden from view. It is still 

paid, of course, but through inflation, a process that few people 

understand. 

The American Revolution was no exception. In order to pay the 

bill 

for independence, both the Confederation and the individual 

states went heavily into the printing business. At the beginning of 

the war in 1775, the total money supply stood at $12 million. 

June of that year, the Continental Congress issued another 

$2 million. Before the notes were even put into circulation, another 

$1 million was authorized. By the end of the year, another 

$3 million. In 1776, another $19 million. $13 million in 1777. 

$64 million in 1778. $125 million in 1779. And still more: the 

Continental Army issued its own "certificates" for the purchase of 

supplies totalling $200 million. A total of $425 million in five years 

on top of a base of $12 million is an increase of over 3500%. And, in 

addition to this massive expansion of the money supply on the part 

of the central government, it must be remembered that the states 

were doing exactly the same thing. It is estimated that, in just five 

years from 1775 to the end of 1779, the total money supply 

expanded by 5000%. By contrast, the amount raised in taxes over 

the five-year period was inconsequential, amounting to only a few 

million dollars. 

AND A MASSIVE INFLATION 

The first exhilarating effect of this flood of new money was the 

flush of apparent prosperity, but that was quickly followed by 

inflation as the self-destruct mechanism began to operate. In 1775, 

paper Continentals were traded for one dollar in gold. In 1777, they 

were exchanged for twenty-five cents. By 1779, just four years from 

their issue, they were worth less than a penny. The phrase "Not 

Worth V 

a Continental'' has its origin in this dismal period. Shoes sold 

for $5,000 a pair. A suit of clothes cost a million. 

It was in that year that George Washington wrote, "A wagon 

oad of money will scarcely purchase a wagon load oP*provisions." 

I Quoted by Albert S. Bolles, The Financial History of the United States (New York: 

D. Appleton, 1896, 4th ed.), Vol. I, p. 13Z 

In



Even Benjamin Franklin began to see the light. In a mood of 

sarcasm, he wrote: 

This Currency, as we manage it, is a wonderful machine. It 

performs its Office when we issue it; it pays and clothes Troops and 

provides Victuals and Ammunition; and when we are obliged to issue 

a Quantity excessive, it pays itself off by Depreciation. 

When speaking of deficit spending, it is common to hear the 

complaint that we are saddling future generations with the bill for 

what we enjoy today. Why not let those in the future help pay for 

what will benefit them also? Don't be deceived. That is a misconception 

encouraged by politicians to calm the public. When money 

is fiat, as the colonists discovered, every government building, 

public work, and cannon of war is paid out of current labor and 

current wealth. These things must be built today with today's labor, 

and the man who performs that labor must also be paid today. It is 

true that interest payments fall partly to future generations, but the 

initial cost is paid by those in the present. It is paid by loss of value 

in the monetary unit and loss of purchasing power for one's wages. 

INFLATION IS A HIDDEN TAX 

Fiat money is the means by which governments obtain instant 

purchasing power without taxation. But where does that purchasing 

power come from? Since fiat money has nothing of tangible 

value to offset it, government's fiat purchasing power can be 

obtained only by subtracting it from somewhere else. It is, in fact, 

"collected" from us all through a decline in our purchasing power. 

It is, therefore, exactly the same as a tax, but one that is hidden from 

view, silent in operation, and little understood by the taxpayer. 

In 1786, Thomas Jefferson provided a clear explanation of this 

process when he wrote: 

Every one, through whose hands a bill passed, lost on that bill 

what it lost in value during the time it was in his hands. This was a real 

tax on him; and in this way the people of the United States actually 

contributed those... millions of dollars during the war, and by a mode 

of taxation the most oppressive of all because the most unequal of all- 

1 Letter to Samuel Cooper, April 22, 1779, quoted by Albert Henry Smyth, ed., The 

Writings of Benjamin Franklin, (New York: Macmillan, 1906), Vol. VII, p. 294. 

2. Thomas Jefferson, Observations on the Article Etats-Unis Prepared for the 

Encyclopedia, June 22, 1786, from Writings (New York: G.P. Putnam's Sons, 1894), 

Vol. IV, p. 165. 

ENTER PRICE CONTROLS AND LEGAL TENDER LAWS 

As prices skyrocketed, the colonies enacted wage and price 

controls, which was like plugging up the whistle on a tea kettle in 

hopes of keeping the steam from escaping. When that failed, there 

followed a series of harsh legal tender laws. One law even invoked 

the specter of treason. It said: "If any person shall hereafter be so 

lost to all virtue and regard for his Country as to refuse to receive 

said bills in payment-he shall be deemed, published, and treated 

as an enemy in this Country and precluded from all trade or 

intercourse with the inhabitants of these colonies." 1 

Rhode Island not only levied a heavy fine for non-acceptance of 

its 

notes but, upon a secmd offense, an individual was stripped of 

citizenship. When a court declared the act unconstitutional, the 

legislature called the judges before it and summarily dismissed the 

offenders from office. 

ENTER ECONOMIC CHAOS AND INSURRECTION 

If the ravages of war were a harsh burden for the colonies to 

bear, the havoc of fiat money was equally so. After the war, 

inflation was followed by deflation as reality returned to the 

market place. Prices fell drastically, which was wonderful for those 

who were buying. But, for the merchants who were selling or the 

farmers who had borrowed heavily to acquire property at inflated 

wartime prices, it was a disaster. The new, lower prices were not 

adequate to sustain their fixed, inflated mortgages, and many 

hard-working families were ruined by foreclosure. Furthermore, 

most people still did not understand the inflation process, and 

there were many who continued to advocate the "paper money 

cure." Several of the states were receptive to the pressure, and their 

printing presses continued to roll. 

Historian Andrew McLaughlin recalls a typical scene in Rhode 

Island at that time as witnessed by a visiting Frenchman: 

A French traveler who passed through Newport about this time 

gives a dismal picture of the place: idle men standing with folded arms 

at the corners of the streets; houses falling to ruins; miserable shops 

offering for sale nothing but a few coarse stuffs;...grass growing in the 

streets; windows stuffed with rags; everywhere announcing misery, 

| David Ramsay, History of the American Revolution (London: Johnson and Stock- 

Jale, 1791), Vol. II, pp. 134-36. 

2 

- Merrill Jensen, The New Nation (New York: Vintage Books, 1950), p. 324.


the triumph of paper money and the influence of bad governmen*. The 

merchants had closed their stores rather than take payment in pape^r; 

farmers from neighboring states did not care to bring their produce. 

Idleness and economic depression also led to outbursts of 

rebellion and insurrection. In 1786, George Washington wrote to 

James Warren: "The wheels of government are clogged anck.. we 

are descending into the vale of confusion and darkness/' Two 

years later, in a letter to Henry Knox, he said: "If ... any person had 

told me that there would have been such formidable rebellion as 

exists, I would have thought him a bedlamite, a fit subject for a 

madhouse." 

Fortunately, there is a happy ending to that part of the story. As 

we shall see in a subsequent chapter, when the state delegates 

assembled to draft the Constitution, the effects of fiat money were 

so fresh in their minds they decided to put an end to it once and for 

all Then, the new republic not only rapidly recovered but went on 

to become the economic envy of the world—for a while, at 

least—until the lesson had been forgotten by following generations. 

But that is getting ahead of our story. For now, we are dealing with 

the topic of fiat money; and the experience of the American 

colonies is 

a classic example of what always happens when men 

succumb to its siren call. 


Let us pause at this point and observe another of those lessons 

derived from centuries of experience. That lesson is so clear and so 

universal and so widely seen throughout history that it may be 

stated as a natural law of human behavior: 

LESSON: Fiat money is paper money without 

precious-metal backing and which people are required by law 

to accept. It allows politicians to increase spending without 

raising taxes. Fiat money is the cause of inflation, and the 

amount which people lose in purchasing power is exactly the 

amount which was taken from them and transferred to their 

government by this process. Inflation, therefore, is a hidden tax. 

1. Andrew C. McLaughlin, The Confederation and the Constitution (New York 

Collier Books, 1962), pp. 107-08. . 

2. Harry Atwood, The Constitution Explained (Merrimac, Massachusetts: Destiny 

Publishers, 1927; 2nd ed. 1962), p. 3. 

3. IM., p.4 


This tax is the most unfair of all because it falls most heavily on 

those who are least able to pay, the small wage earner and those 

on fixed incomes. It also punishes the thrifty by eroding the 

value of their savings. This creates resentment among the 

people, leading always to political unrest and national disunity. 

Therefore, 

LAW: A nation that resorts to the use of fiat money has 

doomed itself to economic hardship and political disunity. 

FRACTIONAL MONEY 

Let us turn, now, to the fourth and final possible form of 

money: a most intriguing concept called fractional money. And, to 

understand how this functions, we must return to Europe and the 

practice of the early goldsmiths who stored the precious metal 

coins of their customers for a fee. 

In addition to the goldsmiths who stored coins, there was 

another class of merchants, called "scriveners/' who loaned coins. 

The goldsmiths reasoned that they, too, could act as scriveners, but 

do so with other people's money. They said it was a pity for all that 

coin to just sit idle in their vaults- Why not lend it out and earn a 

profit which then could be split between themselves and their 

depositors? Put it to work, instead of merely gathering dust. They 

had learned from experience that very few of their depositors ever 

wanted to remove their coins at the same time. In fact, net 

withdrawals seldom exceeded ten or fifteen per cent of their 

stockpile. It seemed perfectly safe to lend up to eighty or even 

eighty-five per cent of their coins. And so the warehousemen began 

to act as loan brokers on behalf of their depositors, and the concept 

of banking, as we know it today^ was born. 

That's the way many history books describe it, but there is more 

involved here than merely putting idle money to work. First of all, 

sharing the interest income with the owners of the deposits was not 

part of the original concept. That only became general practice 

many years later after the depositors became outraged and needed 

to be reassured that these loans were in their interest as well. In the 

beginning, they didn't even know that their coins were being 

loaned out. They naively thought that the goldsmiths were lending 

their own money.


DEPOSITS ARE NOT AVAILABLE FOR LENDING 

In the second place, we need to consider whether the coin in the 

vault was even available for lending—regardless of whether or not 

the depositors received a part of the profit. Let us suppose that we 

are playing a game of poker at the home of Charlie Smith. Each of 

us has given $20 to Charlie who, acting as the banker, has put our 

money into a shoe box and given us, in return, twenty poker chips. 

It is the understanding that, anytime we want to go home, we can 

get back a dollar for each chip we have at that time. Now let us 

suppose that Charlie's brother-in-law, Larry, shows up, not to play 

poker, but to borrow some money. Since six of us are playing and 

each has put in $20, there is a total of $120 in the shoe box, and that 

turns out to be perfect for Larry's needs. You can imagine what 

would happen if Charlie decided to lend out the "idle" money. It is 

not available for lending. 

Neither Charlie nor any of the players have the right to loan 

those dollars, because they are being held in escrow, so to speak, 

pending completion of the contract between Charlie and his guests. 

Those dollars no longer even exist as money. They have been 

replaced—in concept at least—by the poker chips. If any of us are 

so touched by Larry's story that we decide to loan him the money 

ourselves, we would have to do it with other dollars or cash in our 

chips for the dollars in the shoe box. In that case, of course, we 

could no longer stay in the game. VJe cannot spend, loan, or give away 

the deposit and also consider the chips to be worth anything. 

If you are a member of an organization and have given your 

proxy to a friend to vote in your absence at the annual meeting, you 

cannot then show up and cast your own vote in addition to your 

proxy. Likewise, in the beginning of banking, the certificates which 

were circulated as money were, in effect, proxies for the coins. 

Consequently, those coins were not available for lending. Their 

monetary value had been assigned to the certificates. If the certificate 

holders had wanted to lend out their coins, they should have 

retired the certificates first. They were not entitled to hold spendable 

paper money and also authorize their banker to lend that same 

money as coins. One cannot spend, loan, or give away the coins and also 

consider the certificates to be worth anything. 

All of this is just common sense. But there is another dimension 

to the problem which has to do with honesty in business contracts- 

When the bankers used those coins as the basis for loans, they were 

putting themselves in a position of not having enough coin in the 

vault to make good on their contracts when it came time for 

depositors to take their money home. In other words, the new 

contracts were made with the full knowledge that, under certain 

circumstances, they would have to be broken. But the bankers 

never bothered to explain that. The general public was led to 

believe that, if they approved of putting these supposedly idle 

funds to work, they would be helping the economy and earning a 

little profit besides. It was an appealing proposal, and the idea 

caught on like wildfire. 

FRACTIONAL-RESERVE BANKING 

Most borrowers wanted paper money, of course, not bulky 

coins, so, when they received their loans, they usually put the coins 

right back into the vault for safekeeping. They were then given 

receipts for these deposits which, as we have observed, were readily 

accepted in commerce as money. At this point, things began to get 

complicated. The original depositors had been given receipts for all 

of the bank's coins. But the bank now issued loans in the amount of 

eighty-five per cent of its 

deposits, and the borrowers were given 

receipts for that same amount. These were in addition to the original 

receipts. That made 85% more receipts than coins. Thus, the banks 

created 85% more money and placed it into circulation through their 

borrowers. In other words, by issuing phony receipts, they artificially 

expanded the money supply. At this point, the certificates 

were no longer 100% backed by gold. They now had a backing of 

only 54%, 

but they were accepted by the unsuspecting public as 

equal in value to the old receipts. The gold behind all of them, 

however, now represented only a fraction of their face value. Thus, 

the receipts became what may be called fractional money / and the 

process by which they were created is called fractional-reserve 

banking. 

None of this shortfall unfortunately, was ever explained. The 

bankers decided that it would be better not to discuss reality where 

the public could hear. These facts became the arcane secrets of the 

profession. The depositors were never encouraged to question how 

the banks could lend out their money and still have it on hand to 

1. 100 units of gold divided by 185 certificates equals .54


pay back on an instant's notice. Instead, bankers put on great airs of 

respectability, stability, and accountability; dressed and acted serious 

if not stern; erected great edifices resembling government 

buildings and temples, all to bolster the false image of being able to 

honor their contracts to pay on demand. 

It was John Maynard Keynes who observed: 

A "sound" banker, alas! is not one who foresees danger, and 

avoids it, but one who, when he is ruined, is ruined in a conventional 

and orthodox way along with his fellows, so that no one can readily 

blame him. It is necessarily part of the business of a banker to maintain 

appearances, and to confess a conventional respectability, which is 

more than human. Life-long practices of this kind make them the most 

romantic and the least realistic of men. 

CREATING MONEY OUT OF DEBT 

Let us step back for a moment and analyze. In the beginning, 

banks served as warehouses for the safe keeping of their customers' 

coins. When they issued paper receipts for those coins, they 

converted commodity money into receipt money. This was a great 

convenience, but it 

did not alter the money supply. People had a 

choice of using either coin or paper but they could not use both. If 

they used coin, the receipt was never issued. If they used the 

receipt, the coin remained in the vault and did not circulate. 

When the banks abandoned this practice and began to issue 

receipts to borrowers, they became magicians. Some have said they 

created money out of nothing, but that is not quite true. What they 

did was even more amazing. They created money out of debt 

is easier for people to go into debt than to mine 

Obviously, it 

gold. Consequently, money no longer was limited by the natural 

forces of supply and demand. From that point in history forward, it 

was to be limited only by the degree to which bankers have been 

able to push down the gold-reserve fraction of their deposits. 

From this perspective, we can now look back on fractional 

money and recognize that it really is a transitional form between 

receipt money and fiat money. It has some of the characteristics of 

both. As the fraction becomes smaller, the less it resembles receipt 

money and the more closely it comes to fiat money. When the 

fraction finally reaches zero, then it has made the complete 

transition and becomes pure fiat. Furthermore, there is no example 

in history where men, once they had accepted the concept of 

fractional money, didn't reduce the fraction lower and lower until, 

eventually, it became zero. 

No bank can stay in business for very long with a zero reserve. 

The only way to make people accept such a worthless currency is 

by government force. That's what legal-tender laws are all about. 

The transition from fractional-reserve money to fiat money, therefore, 

requires the participation of government through a mechanism 

which is called a central bank. Most of the balance of this book 

will be devoted to a study of that Creature, but, for now, suffice it 

to say that the euphoria of being able to create money without 

human effort is so great that, once such a narcotic is taken, there is 

no politician or banker who can kick the habit. As William Sumner 

observed: "A man mieht as well jump off a precipice intending to 

stop half way down/ 


And so, once again, we come to one of those natural laws that 

emerge from centuries of human experience. It can be stated as 

follows: 

LESSON: Fractional money is paper money which is backed 

by precious metals up to only a portion of the face amount. It is 

a hybrid, being part receipt money and part fiat money. 

Generally, the public is unaware of this fact and believes that 

fractional money can be redeemed in full at any time. When the 

truth is discovered, as periodically happens, there are runs on 

the bank, and only the first few depositors in line can be paid. 

Since fractional money earns just as much interest for the 

bankers as does gold or silver, the temptation is great for them 

to create as much of it as possible. As this happens, the fraction 

which represents the reserve becomes smaller and smaller until, 

eventually, it is reduced to zero. Therefore, 

LAW: Fractional money will always degenerate into fiat 

money. It is but fiat money in transition. 

So much for the overview and generalities. In the next chapter 

We shall see what history has to say on this process. And what a 

history it is! 

1. As quoted by Lever and Huhne, Debt and Danger: The World Financial Crisis 

(New York: The Atlantic Monthly, 1986), p. 42. 

Gmham Swmer 

' 

A 

lî]li 

n4 Hisior y °f American Currency (New York: Holt,


SUMMARY 

Fiat money is paper money without precious-metal backing 

which people are required by law to accept. The first recorded 

appearance of fiat money was in thirteenth century China, but its 

use on a major scale did not occur until colonial America. The 

experience was disastrous, leading to massive inflation, unemployment, 

loss of property, and political unrest. During one period 

when the Bank of England forced the colonies to abandon theh fiat 

money, general prosperity quickly returned. The Revolutionary 

War brought fiat money back to the colonies with a vengeance. The 

economic chaos that resulted led the colonial governments to 

impose price controls and harsh legal tender laws, neither of which 

were effective. 

Fractional money is defined as paper money with preciousmetal 

backing for part, not all, of its stated value. It was introduced 

in Europe when goldsmiths began to issue receipts for gold which 

they did not have, thus only a fraction of their receipts was 

redeemable. Fractional money always degenerates into pure fiat 

money. 

Chapter Nine 

THE SECRET SCIENCE 

The condensed history offractional-reserve banking; 

the unbroken record offraud, booms, busts, 

and economic chaos; the formation of the Bank of 

England, the world's first central bank, which 

became the model for the Federal Reserve System, 

Banks of deposit first appeared in early Greece, concurrent with 

the development of coinage itself. They were known in India at the 

time of Alexander the Great. They also operated in Egypt as part of 

the public granary system. They appeared in Damascus in 1200 and 

in Barcelona in 1401. It was the city-state of Venice, however, which 

is considered the cradle of banking as we know it today. 

THE BANK OF VENICE 

By the year 1361, there already had been sufficient abuse in 

banking that the Venetian Senate passed a law forbidding bankers 

to engage in any other commercial pursuit, thus removing the 

temptation to use their depositors' funds to finance their own 

enterprises. They were also required to open their books for public 

inspection and to keep their stockpile of coins available for viewing 

at all reasonable times. In 1524, a board of bank examiners was 

created and, two years later, all bankers were required to settle 

accounts between themselves in coin rather than by check. 

In spite of these precautions, however, the largest bank at that 

time, the house of Pisano and Tiepolo, had been active in lending 

against its reserves and A in 1584, was forced to close its doors 

because of inability to refund depositors. The government picked 

up the pieces at that point and a state bank was established, the 

Banco della Piazza del Rialto. Having learned from the recent 

experience with bankruptcy, the new bank was not allowed to 

make any loans. There could be no profit from the issuance of 

credit. The bank was required to sustain itself solely from fees for 

coin storage, exchanging currencies, handling the transfer of payments 

between customers, and notary services.


The formula for honest banking had been found. The bank 

prospered and soon became the center of Venetian commerce. Its 

paper receipts were widely accepted far beyond the country's 

borders and, in fact, 

instead of being discounted in exchange for 

gold coin as was the usual practice, they actually carried a premium 

over coins. This was because there were so many kinds of coin in 

circulation and such a wide variance of quality within the same 

type of coin that one had to be an expert to evaluate their worth. 

The bank performed this service automatically when it took the 

coins into its vault. Each was evaluated, and the receipt given for it 

was an accurate reflection of its intrinsic worth. The public, 

therefore, was far more certain of the value of the paper receipts 

than of many of the coins and, consequently, was willing to 

exchange a little bit more for them. 

Unfortunately, with the passage of time and the fading from 

memory of previous banking abuses, the Venetian Senate eventually 

succumbed to the temptation of credit. Strapped for funds and 

not willing to face the voters with a tax increase, the politicians 

decided they would authorize a new bank without restrictions 

against loans, have the bank create the money they needed, and 

then "borrow" it. So, in 1619, the Banco del Giro was formed, which, 

like its bankrupt predecessor, began immediately to create money 

out of nothing for the purpose of lending it to the government. 

Eighteen years later, the Banco della Piazza del Rialto was absorbed 

into the new bank, and history's first tiny flame of sound banking 

sputtered and died. 

Throughout the fifteenth 

and sixteenth centuries, banks had 

been springing up all over Europe. Almost without exception, 

however, they followed the lucrative practice of lending money 

which was not truly available for loan. They created excess 

obligations against their reserves and, as a result, every one of them 

failed. That is 

not to say that their owners and directors did not 

prosper. It merely means that their depositors lost all or a part of 

their assets entrusted for safekeeping. 

THE BANK OF AMSTERDAM 

It wasn't until the Bank of Amsterdam was founded in 1609 that 

we find a second example of sound banking practices, and the 

results were virtually the same as previously experienced by the 

Banco della Piazza del Rialto, The bank only accepted deposits and 

THE SECRET SCIENCE 173 

steadfastly refused to make loans. Its income was derived solely 

All payments in and around Amsterdam soon 

from service fees. 

came to be made in paper currency issued by the bank and, in fact, 

that currency carried a premium over coin itself. The burgomasters 

and the city council were required to take an annual oath swearing 

that the coin reserve of the bank was intact. Galbraith reminds us: 

For a century after its founding it functioned usefully and with 

notably strict rectitude. Deposits were deposits, and initially the metal 

remained in storage for the man who owned it until he transferred it to 

another. None was loaned out. In 1672, when the armies of Louis XIV 

approached Amsterdam, there was grave alarm. Merchants besieged 

the bank, some in the suspicion that their wealth might not be there. 

All who sought their money were paid, and when they found this to be 

so, they did not want payment. As was often to be observed in the 

future, however desperately people want their money from a bank, 

when they are assured they can get it, they no longer want it. 

The principles of honesty and restraint were not to be long 

lived, however. The temptation of easy profit from money creation 

was simply too great. As early as 1657, individuals had been 

permitted to overdraw their accounts which means, of course, that 

the bank created new money out of their debt. In later years 

enormous loans were made to the Dutch East Indies Company. The 

truth finally became known to the public in January of 1790, and 

demands for a return of deposits were steady from that date 

forward. Ten months later, the bank was declared insolvent and 

was taken over by the City of Amsterdam. 

THE BANK OF HAMBURG 

The third and last experience with honest banking occurred in 

Germany with the Bank of Hamburg. For over two centuries it 

faithfully adhered to the principle of safe deposit. So scrupulous 

was its administration that, when Napoleon took possession of the 

bank in 1813, he found 7,506,956 marks in silver held against 

liabilities of 7,489,343. That was 17,613 more than was actually 

needed. Most of the bank's treasure that Napoleon hauled away 

was restored a few years later by the French government in the 

form of securities. It is not clear if the securities were of much value 

but, even if they were, they were not the same as silver. Because of 

foreign invasion, the bank's currency was no longer fully convert- 

1- Galbraith, p. 16.

174 THE CREATURE FROM JEKYLL ISLAND THE SECRET SCIENCE 175 

ible into coin as receipt money. It was now fractional mone>, and 

the self-destruct mechanism had been set in motion. The bank 

lasted another fifty-five years until 1871 when it was ordered to 

liquidate all of its accounts. 

That is the end of the short story of honest banking. From that 

point forward, fractional-reserve banking became the universaJ 

practice. But there were to be many interesting twists and turns in 

its development before it would be ready for something as sophisticated 

as the Federal Reserve System. 

EARLY BANKING IN ENGLAND 

In England, the first paper money was the exchequer order of 

Charles II. It was pure fiat and, although it was decreed legal 

tender, it was not widely used. It was replaced in 1696 by the 

exchequer bill. The bill was redeemable in gold, and the government 

went to great lengths to make sure that there was enough 

actual coin or bullion to make good on the pledge. In other words, 

it was true receipt money, and it became widely accepted as the 

medium of exchange. Furthermore, the bills were considered as 

short-term loans to the government and actually paid interest to the 

holders. 

In 1707, the recently created Bank of England was given the 

responsibility of managing this currency, but the bank found more 

profit in the circulation of its own banknotes, which were in the 

form of fractional money and which provided for the collection of 

interest, not the payment of it. Consequently, the government bills 

gradually passed out of use and were replaced by banknotes 

which, by the middle of the eighteenth century, became England's 

only paper money. 

It must be understood that, at this time, the Bank of England 

was not yet fully developed as a central bank. It had been given a 

monopoly over the issue of banknotes within London and other 

prime geographic areas, but they were not yet decreed as legal 

tender. No one was forced to use them. They were merely private 

fractional receipts for gold coin issued by a private bank which the 

public could accept, reject, or discount at its pleasure. Legal tender 

status was not conferred upon the bank's money until 1833. 

Meanwhile, Parliament had granted charters to numerous other 

banks throughout the empire and, without exception, the issuance 

of fractional money led to their ultimate demise and the ruin of 

their depositors. "Disaster after disaster had to come upon the 

country," says Shaw, because "of the indifference of the state to 

these mere private paper tokens." 1 

The Bank of England, however, 

was favored by the government above all 

time, 

others and, time after 

it was saved from insolvency by Parliament. How it came to 

be that way is an interesting story. 

THE BANK OF ENGLAND 

England was financially exhausted after half a century of war 

against France and numerous civil wars fought largely over 

excessive taxation. By the time of the War of the League of 

Augsberg in 1693, King William was in serious need for new 

revenue. Twenty years previously, King Charles II had flat out 

repudiated a debt of over a million pounds which had been lent to 

him by scores of goldsmiths, with the result that ten-thousand 

depositors lost their savings. This was still fresh in everyone's 

memory, and, needless to say, the government was no longer 

considered a good investment risk. Unable to increase taxes and 

unable to borrow, Parliament became desperate for some other 

way to obtain the money. The objective, says Groseclose, was not to 

bring "the money mechanism under more intelligent control, but to 

provide means outside the onerous sources of taxes and public 

loans for the financial requirements of an impecunious government." 

2 

There were two groups of men who saw a unique opportunity 

arise out of this necessity. The first group consisted of the political 

scientists within the government. The second was comprised of the 

monetary scientists from the emerging business of banking. The 

organizer and spokesman of this group was William Paterson from 

Scotland. 

Paterson had been to America and came back with a 

grandiose scheme to obtain a British charter for a commercial 

company to colonize the Isthmus of Panama, then known as 

Darien. The government was not interested in that, 

so Paterson 

turned his attention to a scheme that did interest it very much, the 

creation of money. 

The two groups came together and formed an alliance. No, that 

is too ~" 

soft a word. The American Heritage Dictionary defines a cabal 

1- W. A. Shaw, Theory and Principles of Central Banking (London & New York; Sir L 

* itman & Sons, Ltd, 1930), pp. 32-32. 

1


as "A conspiratorial group of plotters or intriguers/' There is no 

other word that could so accurately describe this group. With much 

of the same secrecy and mystery that surrounded the meeting on 

Jekyll Island, the Cabal met in Mercer's Chapel in London and 

hammered out a seven-point plan which would serve their mutual 

purposes: 

1. The government would grant a charter to the monetary scientists 

to form a bank; 

2. The bank would be given a monopoly to issue banknotes which 

would circulate as England's paper currency; 

3. The bank would create money out of nothing with only a fraction 

of its total currency backed by coin; 

4. The monetary scientists then would loan the government all the 

money it needed; 

5. The money created for government loans would be backed 

primarily by government I.O.U.s; 

6. Although this money was to be created out of nothing and would 

cost nothing to create, the government would pay "interest" on 

it at the rate of 8%; 

7. Government LO.U.s would also be considered as "reserves" for 

creating additional loan money for private commerce. These 

loans also would earn interest. Thus, the monetary scientists 

would collect double interest on the same nothing. 

The circular which was distributed to attract subscribers to the 

Bank's initial 

stock offering explained: "The Bank hath benefit of 

interest on all the moneys which it, the Bank, creates out of 

nothing/' 

The charter was issued in 1694, and a strange creature 

took its initial breath of life. It was the world's first central bank. 

Rothbard writes: 

1. For an overview of these agreements, see Murray Rothbard, The Mystery of 

Banking (New York: Richardson & Snyder, 1983), p. 180. Also Martin Mayer, The 

Bankers (New York: Weybright & Talley, 1974), pp. 24-25. 

2. Quoted by Carol! Quigley, Tragedy and Hope. A History of the World in Our Time 

(New York: Macmillan, 1966), p. 49. Paterson did not benefit from his own creation- 

He withdrew from the Bank over a policy disagreement within a few months after 

its formation and then returned to Scotland where he succeeded in selling his 

Darien scheme. Frugal Scots thronged to buy stock and to book passage to the 

fever-ridden land. The stock became worthless and almost all the 1200 colonists lost 

their lives. 


In short, since there were not enough private savers willing to 

finance the deficit, Paterson and his group were graciously willing to 

buy government bonds, provided they could do so with 

newly-created out-of-thin-air bank notes carrying a raft of special 

privileges with them. This was a splendid deal for Paterson and 

company, and the government benefited from the flimflam of a 

seemingly legitimate bank's financing their debts.... 

As soon as the 

Bank of England was chartered in 1694, King William himself and 

various members of Parliament rushed to become shareholders of the 

new money factory they had just created. 1 

THE SECRET SCIENCE OF MONEY 

Both groups within the Cabal were handsomely rewarded for 

their efforts. The political scientists had been seeking about 

£500,000 to finance the current war. The Bank promptly gave them 

more than twice what they originally sought. The monetary 

scientists started with a pledged capital investment of £1,200,000. 

Textbooks tell us that this was lent to the government at 8% 

interest, but what is usually omitted is the fact that, at the time the 

loan was made, only £720,000 had been invested, which means the 

Bank "loaned" 66% more than it had on hand. 2 Furthermore, the 

Bauik was given the privilege of creating at least an equal amount of 

money in the form of loans to the public. So, after lending their 

capital to the government, they still had it available to loan out a 

second time. 

An honest loan of their £720,000 at 8% would have yielded 

£57,600 interest. But, with the new secret science, they were able to 

earn 8% on £1,200,000 given to the government plus an estimated 

9% on £720,000 loaned to the public. That adds up to £160,800, 

more than 22% on their investment. The real point, however, is 

that, under these circumstances, it is meaningless to talk about a 

rate of interest. When money is created out of nothing, the true 

interest rate is not 8% or 9% or even 22%. It is infinity. 

In this first official act of the world's first central bank can be 

seen the grand pretense that has characterized all those which have 

followed. The Bank pretended to make a loan but what it really did 

was to manufacture the money for government's use. If the government 

had done this directly, the fiat nature of the currency would 

I Rothbard, Mystery, p. 180. 

I See R.D. Richards, Ph.D., The Early History of Banking in England (New York- 

Augustus M. Kelley, original edition 1929, reprinted 1965), pp. 148-50.

178 

_ P CREATURE FROM JEKYLL ISLAND 

T]rm 

probably would not 

been immediately recognized, and it 

have been accepted at full face value in payment for the expenses of 

war. By creating money through the banking system, however, the 

process became mystifying to the general public. The newly created 

bills and notes were indistinguishable from those previously 

backed by coin, and the public was none the wiser. 

The reality of central banks, therefore—and we must not forget 

that the Federal Reserve System is such a creature—is that, under 

the guise of purchasing government bonds, they act as hidden 

money machines which can be activated any time the politicians 

want. This is 

must depend on taxes or the good credit of their treasury to raise 

money. It is even easier than printing and, because the process is 

a godsend to the political scientists who no longer 

not understood by the public, it is politically safe. 

The monetary scientists, of course, are amply paid for this 

service. To preserve the pretense of banking, it is said they collect 

interest, but this is a misnomer. They didn't lend money, they 

created it. Their compensation, therefore, should be called what it 

is: a professional fee, or commission, or royalty, or kickback, 

depending on your perspective, but not interest. 

FROM INFLATION TO BANK RUNS 

The new money created by the Bank of England splashed 

through the economy like rain in April. The country banks outside 

of the London area were authorized to create money on their own, 

but they had to hold a certain percentage of either coin or Bank of 

England certificates in reserve. Consequently, when these plentiful 

banknotes landed in their hands, they quickly put them into the 

vaults and then issued their own certificates in even greater 

amounts. As a result of this pyramiding effect, prices rose 100% in 

just two years. Then, the inevitable happened: There was a run on 

the bank, and the Bank of England could not produce the coin. 

When banks cannot honor their contracts to deliver coin in 

return for their receipts, they are, in fact, bankrupt. They should be 

allowed to go out of business and liquidate their assets to satisfy 

their creditors just like any other business. This, in fact, is what 

always had happened to banks which loaned out their deposits and 

created fractional money. Had this practice been allowed to continue, 

there is little doubt that people eventually would have 

understood that they simply do not want to do business with those 


kinds of banks. Through the painful but highly effective process of 

trial and error, mankind would have learned to distinguish real 

money from fool's gold. And the world would be a lot better 

because of it today. 

That, of course, was not allowed to happen. The Cabal is a 

partnership, and each of the two groups is committed to protect each 

other, not out of loyalty, but out of mutual self interest. They know 

that, if one falls, so does the other. It is not surprising, therefore 

that, when there was a run on the Bank of England, Parliament 

intervened. In May of 1696, just two years after the Bank was 

formed, a law was passed authorizing it to "suspend payment in 

specie." By force of law, the Bank was now exempted from having 

to honor its contract to return the gold. 

THE PATTERN OF PROTECTION WAS SET 

This was a fateful event in the history of money, because the 

precedent has been followed ever since. In Europe and America 

the banks have always operated with the assumption that their 

partners m government will come to their aid when they get into 

trouble. Politicians may speak about "protecting the public," but 

the underlining reality is that the government needs the fiat money 

produced by the banks. The banks, therefore-at least the bie 

ones- must not be allowed to fait Only a cartel with government 

KS 10n can ^W su


BOOMS AND BUSTS NOW GUARANTEED 

Once the Bank of England had been legally protected from the 

consequences of converting debt into money, the British economy 

was doomed to a nauseating roller-coaster ride of inflation, booms, 

and busts. The natural and immediate result was the granting of 

massive loans for just about any wild scheme imaginable. Why not? 

The money cost nothing to make, and the potential profits could be 

enormous. So the Bank of England, and the country banks which 

pyramided their own money supply on top of the Bank s supply, 

pumped a steady stream of new money into the economy. Great 

stock companies were formed and financed by this money. One 

was for the purpose of draining the Red Sea to recover the gold 

Egyptians when pursuing the Isrealites. 

supposedly lost by the 

£150,000,000 were siphoned into vague and fruitless ventures in 

South America and Mexico. 

The result of this flood of new money—how many times mus 

history repeat it?-was even more inflation. In 1810, the House of 

Commons created a special committee, called the Select Committee 

on the High Price of Gold Bullion, to explore the problem and to 

find a solution. The verdict handed down in the final report was a 

model of clarity. Prices were not going up, it said. The value of the 

currency was going down, and that was due to the fact that it was 

being created at a faster rate than the creation of goods to be 

purchased with it. The solution? The committee recommended that 

She notes of the Bank of England be made fully convertible into 

gold coin, thus putting a brake on the supply of money that could 

be created. 

IN DEFENSE OF THE GOLD STANDARD 

One of the most outspoken proponents of a true gold standard 

was a Jewish London stockbroker by the name of David Ricardc 

Ricardo argued that an ideal currency "should be absolutely 

invariable in value/' 1 

He conceded that precious metals were not 

perfect in this regard because they do shift in purchasing power to 

a small degree. Then he



their banknotes were backed by gold or silver. It was a good try, 

but it ultimately failed because it fell short on three counts: (1) It 

was a political compromise and was not strict enough, allowing the 

banks to still create lending money out of nothing to the extent of 

£14,000,000; in other words, a "fractional" amount thought to be 

safe at the time; (2) The limitation applied only to paper currency 

issued by the Bank. It did not apply to checkbook money, and that 

was then becoming the preferred form of exchange. Consequently, 

the scxalled reform did not even apply to the area where the 

greatest amount of abuse was taking place; and (3) The basic 

concept was allowed to remain unchallenged that man, in his 

infinite political wisdom, can determine what the money supply 

should be more effectively than an unmanaged system of gold or 

silver responding to the law of supply and demand. 

THE ROLLER COASTER CONTINUES 

Within three years of the "reform/' England faced another crisis 

with still more bank failures and more losses to depositors. But 

when the Bank of England tottered on the edge of insolvency, once 

again the government intervened. In 1847, the Bank was exempted 

from the legal reserve requirements of the Peel Act. Such is the 

rock-steady dependability of man-made limits to the money 

supply. 

Groseclose continues the stoiy: 

Ten years later, in 1857, another crisis occurred, due to excessive 

and unwise lending as a result of over-optimism regarding foreign 

trade prospects. The bank found itself in the same position as in 1847, 

and similar measures were taken. On this occasion the bank was 

forced to use the authority to increase its fiduciary [debt-based money] 

issue beyond the limit imposed by the Bank Charter Act.. . 

Again in 1866, the growth of banking without sufficient attention 

to liquidity, and the use of bank credit to support a speculative 

craze...prepared the way for a crash which was finally precipitated by 

the failure of the famous house of Overend, Gurney and Co. The Act of 

1844 was once more suspended... 

In 1890, the Bank of England once again faced crisis, again the 

result of widespread and excessive speculation in foreign securities, 

particularly American and Argentine. This time it was the failure of 

Baring Brothers that precipitated the crash. 

1. Groseclose, Money and Man, pp. 195-96. tUity 

THE MECHANISM SPREADS TO OTHER COUNTRIES 

It is an incredible fact of history that, in spite of the general and 

recurring failures of the Bank of England during these years, the 

central-bank mechanism was so attractive to the political and 

monetary scientists that it became the model for all of Europe. The 

Rank of Prussia became the Reichsbank. Napoleon established the 

Banque de France. A few decades later, the concept became the 

venerated model for the Federal Reserve System. Who cares if the 

scheme is destructive? Here is the perfect tool for obtaining 

unlimited funding for politicians and endless profits for bankers. 

And, best of all, the little people who pay the bills for both groups 

have practically no idea what is being done to them. 

SUMMARY 

The business of banking began in Europe in the fourteenth 

century. Its function was to evaluate, exchange, and safeguard 

people's coins. In the beginning, there were notable examples of 

totally 

honest banks which operated with remarkable efficiency 

considering the vast variety of coinage they handled. They also 

issued paper receipts which were so dependable they freely 

circulated as money and cheated no one in the process. But there 

was a great demand for more money and more loans, and the 

temptation soon caused the bankers to seek easier paths. They 

began lending out pieces of paper that said they were receipts, but 

which in fact were counterfeit. The public could not tell one from 

the other and accepted both of them as money. From that point 

forward, the receipts in circulation exceeded the gold held in 

reserve, and the age of fractional-reserve banking had dawned. 

This led immediately to what would become an almost unbroken 

record from then to the present: a record of inflation, booms and 

busts, suspension of payments, bank failures, repudiation of currencies, 

and recurring spasms of economic chaos. 

The Bank of England was formed in 1694 to institutionalize 

fractional-reserve banking. As the world's first central bank, it 

introduced the concept of a partnership between bankers and 

politicians. The politicians would receive spendable money (created 

out of nothing by the bankers) without having to raise taxes. In 

return, 

the bankers would receive a commission on the transaction—deceptively 

called interest—which would continue in perpetuity. 

Since it all seemed to be wrapped up in the mysterious rituals


of banking, which the common man was not expected to understand, 

there was practically no opposition to the scheme. The 

arrangement proved so profitable to the participants that it soon 

spread to many other countries in Europe and, eventually, to the 

United States. 

Chapter Ten 

THE MANDRAKE 

MECHANISM 

The method by which the Federal Reserve creates 

money out of nothing; the concept of usury as the 

payment of interest on pretended loans; the true 

cause of the hidden tax called inflation; the way in 

which the Fed creates boom-bust cycles. 

In the 1940s, there was a comic strip character called Mandrake 

the Magician. His specialty was creating things out of nothing and, 

when appropriate, to make them disappear back into that same 

void. It is fitting, therefore, that the process to be described in this 

section should be named in his honor. 

In the previous chapters, we examined the technique developed 

by the political and monetary scientists to create money out of nothing 

for the purpose of lending. This is not an entirely accurate 

description because it implies that money is created first and then 

waits for someone to borrow it. On the other hand, textbooks on 

banking often state that money is created out of debt. This also is 

misleading because it implies that debt exists first and then is 

converted into money. In truth, money is not created until the 

instant it is borrowed. It is the act of borrowing which causes it to 

spring into existence. And, incidentally, it is the act of paying off the 

debt that causes it to vanish. There is no short phrase that perfectly 

describes that process. So, until one is invented along the way, we 

shall continue using the phrase "create money out of nothing" and 

occasionally add "for the purpose of lending" where necessary to 

further clarify the meaning. 

B Printed Federal Reserve Notes that sit in the Treasury's vault do not become 

money until they are released into circulation in exchange for checkbook money 

that was created by a bank loan. As long as the bills are in the vault with no 

debt-based money to replace them, they technically are just paper, not money.


So, let us now leave the historical figures of the past and jump 

into their "future/' in other words, into our present, and see just how 

far this money/debt-creation process has been carried—and how it 

works. 

The first fact that needs to be considered is that our money today 

has no gold or silver behind it whatsoever. The fraction is not 54% 

nor 15%. It is 0%. It has travelled the path of all previous fractional 

money in history and already has degenerated into pure fiat money. 

The fact that most of it is in the form of checkbook balances rather 

than paper currency is a mere technicality; and the fact that bankers 

speak about "reserve ratios" is eye wash. The so-called reserves to 

which they refer are, in fact, Treasury bonds and other certificates of 

debt . 

Our money is pure fiat through and through. 

The second fact that needs to be clearly understood is that, in 

spite of the technical jargon and seemingly complicated procedures, 

the actual mechanism by which the Federal Reserve creates money 

is quite simple. They do it exactly the same way the goldsmiths of 

old did except, of course, the goldsmiths were limited by the need to 

hold some precious metal in reserve, whereas the Fed has no such 

restriction. 

THE FEDERAL RESERVE IS CANDID 

The Federal Reserve itself is amazingly frank about this process. 

A booklet published by the Federal Reserve Bank of New York tells 

us: "Currency cannot be redeemed, or exchanged, for Treasury gold 

or any other asset used as backing. The question of just what assets 

'back' Federal Reserve notes has little but bookkeeping significance." 

Elsewhere in the same publication we are told: "Banks are creating 

money based on a borrower's promise to pay (the IOU)... Banks 

create money by 'monetizing' the private debts of businesses and 

individuals." 

In a booklet entitled Modern Money Mechanics, the Federal 

Reserve Bank of Chicago says: 

In the United States neither paper currency nor deposits have 

value as commodities. Intrinsically, a dollar bill is just a piece of paper. 

Deposits are merely book entries. Coins do have some intrinsic value 

as metal, but generally far less than their face amount. 

1. I Bet You Thought, Federal Reserve Bank of New York, p. 11. 

2. Ibid., p. 19. 

THE MANDRAKE MECHANISM 187 

What, then, makes these instruments—checks, paper money, and 

coins—acceptable at face value in payment of all debts and for other 

monetary uses? Mainly, it is the confidence people have that they will 

be able to exchange such money for other financial assets and real 

goods and services whenever they choose to do so. This partly is a 

matter of law; currency has been designated "legal tender" by the 

government—that is, it must be accepted. 1 

In the fine print of a footnote in a bulletin of the Federal Reserve 

Bank of St. Louis, we find this surprisingly candid explanation: 

Modern monetary systems have a fiat base—literally money by 

decree—with depository institutions, acting as fiduciaries, creating 

obligations against themselves with the fiat base acting in part as 

reserves. The decree appears on the currency notes: "This note is legal 

tender for all debts, public and private." While no individual could 

refuse to accept such money for debt repayment, exchange contracts 

could easily be composed to thwart its use in everyday commerce. 

However, a forceful explanation as to why money is accepted is that 

the federal government requires it as payment for tax liabilities. 

Anticipation of the need to clear this debt creates a demand for the 

pure fiat dollar. 

MONEY WOULD VANISH WITHOUT DEBT 

It is 

difficult for Americans to come to grips with the fact that 

their total money supply is backed by nothing but debt, and it 

even more mind boggling to visualize that, if everyone paid back all 

that was borrowed, there would be no money left 

is 

in existence. That's 

right, there would be not one penny in circulation—all coins and all 

paper currency would be returned to bank vaults—and there would 

be not one dollar in any one's checking account. In short, all money 

would disappear. 

Marriner Eccles was the Governor of the Federal Reserve System 

in 1941. On September 30 of that year, Eccles was asked to give 

testimony before the House Committee on Banking and Currency. 

The purpose of the hearing was to obtain information regarding the 

role of the Federal Reserve in creating conditions that led to the depression 

of the 1930s. Congressman Wright Patman, who was 

Chairman of that committee, asked how the Fed got the money to 

- Modern Money Mechanics, Federal Reserve Bank of Chicago, revised October 

1982, p. 3. 

2. "Money, Credit and Velocity," Review, May, 1982, Vol. 64, No. 5, Federal 

Reserve Bank of St. Louis, p. 25.



purchase two billion dollars worth of government bonds in 1933. 

This is the exchange that followed. 

ECCLES: We created it. 

PATMAN: Out of what? 

ECCLES: Out of the right to issue credit money. 

PATMAN: And there is nothing behind it, 

is there, except oux 

government's credit? 

ECCLES: That is what our money system is. If there were no 

debts in our money system, there wouldn't be any money. 

It must be realized that, while money may represent an asset to 

selected individuals, when it is considered as an aggregate of the 

total money supply, it is not an asset at all. A man who borrows 

$1,000 may think that he has increased his financial position by that 

amount but he has not. His $1,000 cash asset is offset by his $1,000 

loan liability, and his net position is zero. Bank accounts are exactly 

the same on a larger scale. Add up all 

nation, and it would be easy to assume that all 

the bank accounts in the 

that money represents 

a gigantic pool of assets which support the economy. Yet, 

every bit of this money is owed by someone. Some will owe 

nothing. Others will owe many times what they possess. All added 

together, the national balance is zero. What we think is money is but 

a grand illusion. The reality is debt. 

Robert Hemphill was the Credit Manager of the Federal Reserve 

Bank in Atlanta. In the foreword to a book by Irving Fisher, entitled 

100% Money, Hemphill said this: 

If all the bank loans were paid, no one could have a bank deposit, 

and there would not be a dollar of coin or currency in circulation. This 

is a staggering thought. We are completely dependent on the 

commercial banks. Someone has to borrow every dollar we have in 

circulation, cash, or credit. If the banks create ample synthetic money 

we are prosperous; if not, we starve. We are absolutely without a 

permanent money system. When one gets a complete grasp of the 

picture, the tragic absurdity of our hopeless situation is almost 

1 

incredible—but there it is. 

With the knowledge that money in America is based on debt, it 

should not come as a surprise to learn that the Federal Reserve 

System is not the least interested in seeing a reduction in debt in this 

1. Irving Fisher, 100% Money (New York: Adelphi, 1936), p. xxii. 

country, regardless of public utterances to the contrary. Here is the 

bottom line from the System's own publications. The Federal 

Reserve Bank of Philadelphia says: "A large and growing number of 

analysts, on the other hand, now regard the national debt as something 

useful, if not an actual blessing... . [They believe] the national 

debt need not be reduced at all." 

The Federal Reserve Bank of Chicago adds: "Debt — public and 

private—is here to stay. It plays an essential role in economic processes.. 

What . . 

is required is not the abolition of debt, but its prudent 

use and intelligent management. "2 

WHAT'S WRONG WITH A LITTLE DEBT? 

There is a kind of fascinating appeal to this theory. It gives those 

who expound it an aura of intellectualism, the appearance of being 

able to grasp a complex economic principle that is beyond the comprehension 

of mere mortals. And, for the less academically minded, 

it offers the comfort of at least sounding moderate. After all, whafs 

wrong with a little debt, prudently used and intelligently managed? 

The answer is nothing, provided the debt is based on an honest transaction. 

There is plenty wrong with it if it is based upon fraud. 

An honest transaction is one in which a borrower pays an 

agreed upon sum in return for the temporary use of a lender's asset. 

That asset could be anything of tangible value. If it were an automobile, 

for example, then the borrower would pay "rent." If it is 

money, then the rent is called "interest." Either way, the concept is 

the same. 

When we go to a lender—either a bank or a private party—and 

receive a loan of money, we are willing to pay interest on the loan in 

recognition of the fact that the money we are borrowing is an asset 

which we want to use. It seems only fair to pay a rental fee for that 

asset to the person who owns it. It is not easy to acquire an automobile, 

and it is not easy to acquire money real money, that is. If the 

money we are borrowing was earned by someone's labor and talent, 

they are fully entitled to receive interest on it. 

But what are we to 

Wnk of money that is created by the mere stroke of a pen or the 

click of a computer key? Why should anyone collect a rental fee on 

that? 

] TheNational Debt, Federal Reserve Bank of Philadelphia, pp. 2, 11 

2 

- Two Faces of Debt, Federal Reserve Bank of Chicago, p. 33.


When banks place credits into your checking account, they are 

merely pretending to lend you money. In reality, they have nothing 

to lend. Even the money that non-indebted depositors have placed 

with them was originally created out of nothing in response to 

someone else's loan. So what entitles the banks to collect rent on 

nothing? It is immaterial that men everywhere are forced by law to 

accept these nothing certificates in exchange for real goods and 

services. We are talking here, not about what is legal, but what is 

moral. As Thomas Jefferson observed at the time of his protracted 

battle against central banking in the United States, "No one has a 

natural right to the trade of money lender, but he who has money to 

lend/' 1 

THIRD REASON TO ABOLISH THE SYSTEM 

Centuries ago, usury was defined as any interest charged for a 

loan. Modern usage has redefined it as excessive interest. Certainly, 

any amount of interest charged for a pretended loan is excessive. The 

dictionary, therefore, needs a new definition. Usury: The charging of 

any interest on a loan offiat money. 

Let us, therefore, look at debt and interest in this light Thomas 

Edison summed up the immorality of the system when he said: 

People who will not turn a shovel full of dirt on the project nor 

contribute a pound of materials will collect more money...than will the 

people who will supply all the materials and do all the work 

Is that an exaggeration? Let us consider the purchase of a 

$100,000 home in which $30,000 represents the cost of the land, 

architect's fee, sales commissions, building permits, and that sort of 

thing and $70,000 is the cost of labor and building materials. If the 

home buyer puts up $30,000 as a down payment, then $70,000 must 

be borrowed. If the loan is issued at 11% over a 30-year period, the 

amount of interest paid will be $167,806. That means the amount 

paid to those who loan the money is about 2 V2 times greater than 

1. The Writings of Thomas Jefferson, Library Edition (Washington: Jefferson Memorial 

Association, 1903), Vol XIII, p. 277-78. 

2. As quoted by Brian L. Bex, The Hidden Hand (Spencer, Indiana: Owen Litho, 

1975), p. 161. Unfortunately, Edison did not understand the whole problem. He was 

correctly opposed to paying interest to banks for their fiat money, but he was not 

opposed to government fiat money. It was only the interest to which he objected. He 

did not see the larger picture of how fiat money, even when issued solely by the 

government and without interest has always been destructive of the economy 

through the creation of inflation, booms, and busts. 


paid to those who provide all the labor and all the materials. It is 

that this figure represents the time-value of that money over 

true 

thirty years and easily could be justified on the basis that a lender 

deserves to be compensated for surrendering the use of his capital 

for half a lifetime. But that assumes the lender actually had something 

to surrender, that he had earned the capital, saved it, and then 

loaned it for construction of someone else's house. What are we to 

think, however, about a lender who did nothing to earn the money, 

had not saved it, and, in fact, simply created it out of thin air? What 

is the time-value of nothing? 

As we have already shown, every dollar that exists today, either 

in the form of currency, checkbook money, or even credit card 

money—in other words, our entire money supply—exists only 

because it was borrowed by someone; perhaps not you, but someone. 

That means all the American dollars in the entire world are earning 

daily and compounded interest for the banks which created them. A 

portion of every business venture, every investment, every profit, 

every transaction which involves money—and that even includes 

losses and the payment of taxes—a portion of all that is earmarked as 

payment to a bank. And what did the banks do to earn this perpetually 

flowing river of wealth? Did they lend out their own capital 

obtained through the investment of stockholders? Did they lend out 

the hard-earned savings of their depositors? No, neither of these 

were their major source of income. They simply waved the magic 

wand called fiat money. 

The flow of such unearned wealth under the guise of interest 

can only be viewed as usury of the highest magnitude. Even if there 

were no other reasons to abolish the Fed, the fact that it is the supreme 

instrument of usury would be more than sufficient by itself. 

WHO CREATES THE MONEY TO PAY THE INTEREST? 

One of the most perplexing questions associated with this process 

is "Where does the money come from to pay the interest?" If you 

borrow $10,000 from a bank at 9%, you owe $10,900. But the bank 

Only manufactures $10,000 for the loan. It would seem, therefore, 

that there is no way that you—and all others with similar loans 

can possibly pay off your indebtedness. The amount of money put 

into circulation just isn't enough to cover the total debt, including 

interest. This has led some to the conclusion that it is necessary for 

you to borrow the $900 for the interest, and that, in turn, leads to still


more interest. The assumption is that, the more we borrow, the more 

we have to borrow, and that debt based on fiat money is a neverending 

spiral leading inexorably to more and more debt. 

This is a partial truth. It is true that there is not enough money 

created to include the interest, but it is a fallacy that the only way to 

pay it back is to borrow still more. The assumption fails to take into 

account the exchange value of labor. Let us assume that you pay 

back your $10,000 loan at the rate of approximately $900 per month 

and that about $80 of that represents interest. You realize you are 

hard pressed to make your payments so you decide to take on a 

part-time job. The bank, on the other hand, is now making $80 profit 

each month on your loan. Since this amount is classified as "interest," 

it is not extinguished as is the larger portion which is a return 

of the loan itself. So this remains as spendable money in the account 

of the bank. The decision then is made to have the bank's floors 

waxed once a week. You respond to the ad in the paper and are 

hired at $80 per month to do the job. The result is that you earn the 

money to pay the interest on your loan, and—this is the point—the 

money you receive is the same money which you previously had 

paid. As long as you perform labor for the bank each month, the 

same dollars go into the bank as interest, then out the revolving 

door as your wages, and then back into the bank as loan repayment. 

It is not necessary that you work directly for the bank. No matter 

where you earn the money, its origin was a bank and its ultimate 

destination is a bank. The loop through which it travels can be large 

or small, but the fact remains all interest is paid eventually by 

human effort. And the significance of that fact is even more startling 

than the assumption that not enough money is created to pay back 

the interest. It is that the total of this human effort ultimately is for 

the benefit of those who create fiat money. It is a form of modern 

serfdom in which the great mass of society works as indentured 

servants to a ruling class of financial nobility. 

UNDERSTANDING THE ILLUSION 

That's really all 

one needs to know about the operation of the 

banking cartel under the protection of the Federal Reserve. But it 

would be a shame to stop here without taking a look at the actual 

cogs, mirrors, and pulleys that make the magical mechanism work. 

It is 

a truly fascinating engine of mystery and deception. Let us, 

therefore, turn our attention to the actual process by which the 


magicians create the illusion of modern money. First we shall stand 

back for a general view to see the overall action. Then we shall move 

in closer and examine each component in detail. 

THE MANDRAKE MECHANISM: AN OVERVIEW 

DEBT 

The entire function of this machine is 

to convert debt 

into money. It's just that simple. First, the Fed takes all 

the government bonds which the public does not buy 

and writes a check to Congress in exchange for them. (It 

acquires other debt obligations as well, but government 

bonds comprise most of its inventory.) There is no 

money to back up this check. These fiat dollars are created 

on the spot for that purpose. By calling those bonds 

"reserves," the Fed then uses them as the base for creating 

9 additional dollars for every dollar created for the 

bonds themselves. The money created for the bonds is 

spent by the government, whereas the money created on 

top of those bonds is the source of all the bank loans 

made to the nation's businesses and individuals. The 

result of this process is the same as creating money on a 

printing press, but the illusion is based on an accounting 

trick rather than a printing trick. The bottom line is that 

Congress and the banking cartel have entered into a 

partnership in which the cartel has the privilege of 

collecting interest on money which it creates out of nothing, 

a perpetual override on every American dollar that 

exists in the world. Congress, on the other hand, has 

access to unlimited funding without having to tell 

the 

voters their taxes are being raised through the process of 

inflation. If you understand this paragraph, you understand 

the Federal Reserve System. 

MONEY 

Now for a more detailed view. There are three general ways in 

which the Federal Reserve creates fiat money out of debt. One is by 

making loans to the member banks through what is called the 

Discount Window. The second is by purchasing Treasury bonds and


other certificates of debt through what is called the Open Market 

Committee. The third is by changing the so-called reserve ratio that 

member banks are required to hold. Each method is merely a different 

path to the same objective: taking in IOUs and converting them 

into spendable money. 

THE DISCOUNT WINDOW 

The Discount Window is merely bankers' language for the loan 

window. When banks run short of money, the Federal Reserve 

stands ready as the "bankers' bank" to lend it. There are many reasons 

for them to need loans. Since they hold "reserves" of only 

about one or two per cent of their deposits in vault cash and eight or 

nine per cent in securities, their operating margin is extremely thin. 

It is common for them to experience temporary negative balances 

caused by unusual customer demand for cash or unusually large 

clusters of checks all clearing through other banks at the same time. 

Sometimes they make bad loans and, when these former "assets" 

are removed from their books, their "reserves" are also decreased 

and may, in fact, become negative. Finally, there is the profit motive. 

When banks borrow from the Federal Reserve at one interest rate 

and lend it out at a higher rate, there is an obvious advantage. But 

that is merely the beginning. When a bank borrows a dollar from the 

Fed, it becomes a one-dollar reserve. Since the banks are required to 

keep reserves of only about ten per cent, they actually can loan up to 

nine dollars for each dollar borrowed. 

Let's take a look at the math. Assume the bank receives $1 million 

from the Fed at a rate of 8%. The total annual cost, therefore, is 

$80,000 (.08 X $1,000,000). The bank treats the loan as a cash deposit, 

which means it becomes the basis for manufacturing an additional 

$9 million to be lent to its customers. If we assume that it lends that 

money at 11% interest, its gross return would be $990,000 (.11 X 

$9,000,000). Subtract from this the bank's cost of $80,000 plus an 

appropriate share of its overhead, and we have a net return of about 

$900,000. In other words, the bank borrows a million and can almost 

1. This 10% figure (ten-to-one ratio) is based on averages. The Federal Reserve 

requires a minimum reserve of 10% on deposits over $46.8 million but only 3% on 

deposits up to that amount. Deposits in Eurodollars and nonpersonal time deposits 

require no reserves at all. Reserves consist of vault cash and deposits at the Federal 

Reserve. See Regulation D; Reserve Requirements of Depositor]/ Institutions, Federal 

Reserve document 12 CFR 204; as amended effective December 22, 1992, p. 23. 


double it in one year. 1 

That's leverage] But don't forget the source of 

that leverage: the manufacture of another $9 million which is added 

to the nation's money supply. 

THE OPEN MARKET OPERATION 

The most important method used by the Federal Reserve for the 

creation of fiat money is the purchase and sale of securities on the 

open market. But, before jumping into this, a word of warning. 

Don't expect what follows to make any sense. Just be prepared to 

know that this is how they do it. 

The trick lies in the use of words and phrases which have technical 

meanings quite different from what they imply to the average 

citizen. So keep your eye on the words. They are not meant to 

explain but to deceive. In spite of first appearances, the process is 

not complicated. It is just absurd. 

THE MANDRAKE MECHANISM: A DETAILED VIEW 

Start with... 

GOVERNMENT DEBT 

The federal government adds ink to a piece of paper, 

creates impressive designs around the edges, and calls it 

a bond or Treasury note. It is merely a promise to pay a 

specified sum at a specified interest on a specified date. 

As we shall see in the following steps, this debt eventually 

becomes the foundation for almost the entire 

nation's money supply. 2 In reality, the government has 

created cash, but it doesn't yet look like cash. To convert 

these IOUs into paper bills and checkbook money is the 

function of The Federal Reserve System. To bring about 

that transformation, the bond is given to the Fed where it 

is then classified as a ... 

(Continued on next page) 

I lite banks must cover these loans with bonds or other interest-bearing assets 

wnich it possesses, but that does not diminish the money-multiplier 

new effect of the 

deposit. 

r 

I Debt obligations from the private sector and from other governments also are 

used in the same way, but government bonds are the primary instruments.


THE MANDRAKE MECHANISM 

197 

(Continued from previous page) 

SECURITIES ASSET 

An instrument of government debt is 

considered an 

asset because it is assumed the government will keep its 

promise to pay. This is based upon its ability to obtain 

whatever money it needs through taxation. Thus, the 

strength of this asset is the power to take back that which 

it 

gives. So the Federal Reserve now has an "asset" 

which can be used to offset a liability. It then creates this 

liability by adding ink to yet another piece of paper and 

exchanging that with the government in return for the 

asset. That second piece of paper is a ... 

FEDERAL RESERVE CHECK 

There is no money in any account to cover this check. 

Anyone else doing that would be sent to prison. It is 

legal for the Fed, however, because Congress wants the 

money, and this is the easiest way to get it. (To raise 

taxes would be political suicide; to depend on the public 

to buy all the bonds would not be realistic, especially if 

interest rates are set artificially low; and to print very 

large quantities of currency would be obvious and controversial.) 

This way, the process is mysteriously 

wrapped up in the banking system. The end result, however, 

is the same as turning on government printing 

presses and simply manufacturing fiat money (money 

created by the order of government with nothing of tangible 

value backing it) to pay government expenses. Yet, 

in accounting terms, the books are said to be balanced" 

because the liability of the money is offset by the "asset" 

of the IOU. The Federal Reserve check received by the 

government then is endorsed and sent back to one of the 

Federal Reserve banks where it now becomes a ... 

i 

c 

c 

(Continued from previous page) 

GOVERNMENT DEPOSIT 

Once the Federal Reserve check has been deposited into 

the government's account, it is used to pay government 

expenses and, thus, is transformed into many ... 

GOVERNMENT CHECKS 

These checks become the means by which the first wave 

of fiat money floods into the economy. Recipients now 

deposit them into their own bank accounts where they 

become ... 

COMMERCIAL BANK DEPOSITS 

Commercial bank deposits immediately take on a split 

personality. On the one hand, they are liabilities to the 

bank because they are owed back to the depositors. But, 

as long as they remain in the bank, they also are considered 

as assets because they are on hand. Once again, the 

books are balanced: the assets offset the liabilities. But 

the process does not stop there. Through the magic of 

fractional-reserve banking, the deposits are made to 

serve an additional and more lucrative purpose. To 

accomplish this, the on-hand deposits now become 

reclassified in the books and called ... 

BANK RESERVES 

Reserves for what? Are these for paying off depositors 

should they want to close out their accounts? No. That's 

the lowly function they served when they were classified 

as mere assets. Now that they have been given the name 

of "reserves," they become the magic wand to materialize 

even larger amounts of fiat money. This is where the 

real action is: at the level of the commercial banks. Here's 

how it works. The banks are permitted by the Fed to 

hold as little as 10% of their deposits in "reserve." That 

means, if 

they receive deposits of $1 million from the 

first wave of fiat money created by the Fed, they have


$900,000 more than they are required to keep on hand 

($1 million less 10% reserve). In bankers' language, that 

$900,000 is called ... 

EXCESS RESERVES 

The word "excess" is a 

tipoff that these so-called 

reserves have a special destiny. Now that they have been 

transmuted into an excess, they are considered as available 

for lending. And so in due course these excess 

reserves are converted into ... 

BANK LOANS 

But wait a minute. How can this money be loaned out 

when it is owned by the original depositors who are still 

free to write checks and spend it any time they wish? 

Isn't that a double claim against the same money? The 

answer is that, when the new loans are made, they are 

not made with the same money at all. They are made 

with brand new money created out of thin air for that 

purpose. The nation's money supply simply increases by 

ninety per cent of the bank's deposits. Furthermore, this 

new money is far more interesting to the banks than the 

old. The old money, which they received from depositors, 

requires them to pay out interest or perform services 

for the privilege of using it. But, with the new 

money, the banks collect interest, instead, which is not 

too bad considering it cost them nothing to make. Nor is 

that the end of the process. When this second wave of hat 

money moves into the economy, it comes right back into 

the banking system, just as the first wave did, in the form 

of... 

MORE COMMERCIAL BANK DEPOSITS 

The process now repeats but with slightly smaller numbers 

each time around. What was a "loan" on Friday 

comes back into the bank as a "deposit" on Monday. The 

deposit then is reclassified as a "reserve" and ninety per 

cent of that becomes an "excess" reserve which, once 

again, is available for a new "loan." Thus, the $1 million 


of first wave fiat money gives birth to $900,000 in the 

second wave, and that gives birth to $810,000 in the third 

wave ($900,000 less 10% reserve). It takes about twentyeight 

times through the revolving door of deposits 

becoming loans becoming deposits becoming more 

loans until the process plays itself out to the maximum 

effect, which is... 

BANK FIAT MONEY = UP TO 9 TIMES GOVERNMENT 

The amount of fiat money created by the banking cartel 

is approximately nine times the amount of the original 

government debt which made the entire process possible. 

When the original debt itself is added to that figure, 

we finally have ... 

[TOTAL FIAT MONEY = UP TO 10 TIMES GOVERNMENT 

[*• 

The total amount of fiat money created by the Federal 

Reserve and the commercial banks together is approximately 

ten times the amount of the underlying government 

debt. To the degree that this newly created money 

floods into the economy in excess of goods and services, 

it causes the purchasing power of all money, both old 

and new, to decline. Prices go up because the relative 

value of the money has gone down. The result is the 

same as if that purchasing power had been taken from us 

in taxes. The reality of this process, therefore, is that it is 

a ... 

HIDDEN TAX = UP TO 10 TIMES THE NATIONAL DEBT 

Without realizing it, 

Americans have paid over the 

years, in addition to their federal income taxes and excise 

taxes, a completely hidden tax equal to many times the 

national debt! And that still is not the end of the process. 

Since our money supply is purely an arbitrary entity 

with nothing behind it except debt, its quantity can go 

That is a theoretical maximum. In actual practice, the banks can seldom loan out 

all of the money they are allowed to create, and the numbers fall short of the 

rciaximum.


down as well as up. When people are going deeper into 

debt, the nation's money supply expands and prices go 

up, but when they pay off their debts and refuse to 

renew, the money supply contracts and prices rumble. 

That is exactly what happens in times of economic or 

political uncertainty. This alternation between periods of 

expansion and contraction of the money supply is the 

underlying cause of ... 

BOOMS, BUSTS, AND DEPRESSIONS 

Who benefits from all of this? Certainly not the average 

citizen. The only beneficiaries are the political scientists 

in Congress who enjoy the effect of unlimited revenue to 

perpetuate their power, and the monetary scientists 

within the banking cartel called the Federal Reserve 

System who have been able to harness the American 

people, without their knowing it, to the yoke of modern 

feudalism. 

RESERVE RATIOS 

The previous figures are based on a "reserve" ratio of 10% (a 

money-expansion ratio of 10-to-l). It must be remembered, however, 

that this is purely arbitrary. Since the money is fiat with no 

precious-metal backing, there is no real limitation except what the 

politicians and money managers decide is expedient for the 

moment. Altering this ratio is the third way in which the Federal 

Reserve can influence the nation's supply of money. The numbers, 

therefore, must be considered as transient. At any time there is a 

"need" for more money, the ratio can be increased to 20-to-l or 50- 

to-1, or the pretense of a reserve can be dropped altogether. There is 

virtually no limit to the amount of fiat money that can be manufactured 

under the present system. 

NATIONAL DEBT NOT NECESSARY FOR INFLATION 

Because the Federal Reserve can be counted on to "monetize" 

(convert into money) virtually any amount of government debt, and 

because this process of expanding the money supply is the primary 

cause of inflation, it is tempting to jump to the conclusion that federal 

debt and inflation are but two aspects of the same phenomenon. 

This, however, is not necessarily true. It is quite possible to have 

either one without the other. 


The banking cartel holds a monopoly in the manufacture of 

money. Consequently, money is created only when lOUs are 

"monetized" by the Fed or by commercial banks. When private 

individuals, corporations, or institutions purchase government 

bonds, they must use money they have previously earned and 

saved. In other words, no new money is created, because they are 

using funds that are already in existence. Therefore, the sale of government 

bonds to the banking system is inflationary, but when sold 

to the private sector, it is not . That is the primary reason the United 

States avoided massive inflation during the 1980s when the federal 

government was going into debt at a greater rate than ever before in 

its history. By keeping interest rates high, these bonds became 

attractive to private investors, including those in other countries. 

Very little new money was created, because most of the bonds were 

purchased with American dollars already in existence. This, of 

course, was a temporary fix at best. Today, those bonds are continually 

maturing and are being replaced by still more bonds to include 

the original debt plus accumulated interest. Eventually this process 

must come to an end and, when it does, the Fed will have no choice 

but to literally buy back all the debt of the '80s—that is, to replace all 

of the formerly invested private money with newly manufactured 

fiat money— plus a great deal more to cover the interest. Then we 

will understand the meaning of inflation. 

On the other side of the coin, the Federal Reserve has the option 

of manufacturing money even if the federal government does not go 

deeper into debt. For example, the huge expansion of the money 

supply leading up to the stock market crash in 1929 occurred at a 

time when the national debt was being paid off. In every year from 

1920 through 1930, federal revenue exceeded expenses, and there 

were relatively few government bonds being offered. The massive 

inflation of the money supply was made possible by converting 

commercial bank loans into "reserves" at the Fed's discount window 

and by the Fed's purchase of banker's acceptances, which are 

commercial contracts for the purchase of goods. 

Now the options are even greater. The Monetary Control Act of 

1980 has made it possible for the Creature to monetize virtually any 

1. Only about 11 to 15 per cent of the federal debt at that time was held by the 

Federal Reserve System. 

2. See chapter twenty-three.

: 

202 THE CREATURE FROM JEKYLL ISLAND THE MANDRAKE MECHANISM 203 

debt instrument, including IOUs from foreign governments. The 

apparent purpose of this legislation is to make it possible to bail out 

those governments which are having trouble paying the interest on 

their loans from American banks. When the Fed creates fiat Ameri~ 

can dollars to give foreign governments in exchange for their worthless 

bonds, the money path is slightly longer and more twisted, but 

the effect is similar to the purchase of U.S. Treasury Bonds. The 

newly created dollars go to the foreign governments, then to the 

American banks where they become cash reserves. Finally, they 

flow back into the U.S. money pool (multiplied by nine) in the form 

of additional loans. The cost of the operation once again is born by 

the American citizen through the loss of purchasing power. Expansion 

of the money supply, therefore, and the inflation that follows, 

no longer even require federal deficits. As long as someone is willing 

to borrow American dollars, the cartel will have the option of creating 

those dollars specifically to purchase their bonds and, by so doing, 

continue to expand the money supply. 

We must not forget, however, that one of the reasons the Fed 

was created in the first place was to make it possible for Congress to 

spend without the public knowing it was being taxed. Americans 

have shown an amazing indifference to this fleecing, explained 

undoubtedly by their lack of understanding of how the Mandrake 

Mechanism works. Consequently, at the present time, this cozy contract 

between the banking cartel and the politicians is in little danger 

of being altered. As a practical matter, therefore, even though the 

Fed may also create fiat money in exchange for commercial debt 

and for bonds of foreign governments, its major concern likely will 

be to continue supplying Congress. 

The implications of this fact are mind boggling. Since our money 

supply, at present at least, is tied to the national debt, to pay off that 

debt would cause money to disappear. Even to seriously reduce it 

would cripple the economy. 1 

Therefore, as long as the Federal 

Reserve exists, America will be, must be, in debt. 

The purchase of bonds from other governments is accelerating 

in the present political climate of internationalism. Our own money 

1. With the Fed holding only 7% of the national debt, the effect would still be 

devastating. Since the money supply is pyramided ten times on top of the underlying 

government bonds, each $1 eliminated from the federal debt would cause the 

money supply to shrink by 70


generates our most unfair tax. Both the tax and the System that makes 

it possible should be abolished. 

The political scientists who authorize this process of monetizing 

the national debt, and the monetary scientists who carry it out, 

know that it is not true debt. It is not true debt, because no one in 

Washington really expects to repay it ever. The dual purpose of 

this magic show is simply to create free spending money for the 

politicians, without the inconvenience of raising direct taxes, and 

also to generate a perpetual river of gold flowing into the banking 

cartel. The partnership is merely looking out for itself. 

Why, then, does the federal government bother with taxes at all? 

Why not just operate on monetized debt? The answer is twofold 

First, if it did, people would begin to wonder about the source of the 

money, and that might cause them to wake up to the reality that 

inflation is a tax. Thus, open taxes at some level serve to perpetuate 

public ignorance which is essential to the success of the scheme. The 

second reason is that taxes, particularly progressive taxes, are weapons 

by which elitist social planners can wage war on the middle 

class. 

A TOOL FOR SOCIAL PLANNING 

The January 1946 issue of American Affairs carried an article written 

by Beardsley Ruml who, at that time, was Chairman of the Federal 

Reserve Bank of New York. Ruml had devised the system of 

automatic withholding during World War II, 

so he was well qualified 

to speak on the nature and purpose of the federal income tax. 

His theme was spelled out in the title of his article: "Taxes for Revenue 

Are Obsolete." 

In an introduction to the article, the magazine's editor summarized 

Ruml's views as follows: 

His thesis is that, given control of a central banking system and an 

inconvertible currency [a currency not backed by gold], a sovereign 

national government is finally free of money worries and needs no 

longer levy taxes for the purpose of providing itself with revenue. All 

taxation, therefore, should be regarded from the point of view of social 

and economic consequences. 

Ruml explained that, since the Federal Reserve now can create 

out of nothing all the money the government could ever want, there 

Iof 


remain only two reasons to have taxes at all. The first of these is to 

combat a rise in the general level of prices. His argument was that, 

when people have money in their pockets, they will spend it for 

goods and services, and this will bid up the prices. The solution, he 

says, is to take the money away from them through taxation and let 

the government spend it instead. This, too, will bid up prices, but 

Ruml chose not to go into that He explained his theory this way: 

The dollars the government spends become purchasing power in 

the hands of the people who have received them. The dollars the 

government takes by taxes cannot be spent by the people, and 

therefore, these dollars can no longer be used to acquire the things 

which are available for sale. Taxation is, therefore, an instrument of the 

first importance in the administration of any fiscal and monetary 

policy. 

REDISTRIBUTION OF WEALTH 

The other purpose of taxation, according to Ruml, is to redistribute 

the wealth from one class of citizens to another. This must 

always be done in the name of social justice or equality, but the real 

objective is to override the free market and bring society under the 

control of the master planners. Ruml said: 

The second principle purpose of federal taxes is to attain more 

equality of wealth and of income than would result from economic 

forces working alone. The taxes which are effective for this purpose 

are the progressive individual income tax, the progressive estate tax, 

and the gift tax. What these taxes should be depends on public policy 

with respect to the distribution of wealth and of income. These taxes 

should be defended and attacked in terms of their effect on the 

character of American life, not as revenue measures. 2 

As we have seen, Senator Nelson Aldrich was one of the creators 

of the Federal Reserve System. That is not surprising in light of the 

cai cartel nature of the System and the financial interests which he represented. 

Aldrich also was one of the prime sponsors of the federal 

come tax. The two creations work together as a far more delicate 

mechanism for control over the economic and social life of society 

than either one alone. 

In more recent years, there has been hopeful evidence that the 

master planners were about to abandon Ruml's blueprint. We have 

1. "Taxes for Revenue Are Obsolete/' by Beardsley Ruml, American Affairs, 

January, 1946, p. 35. 

* Ruml, p. 36. 

2 

- Ibid., p. 36.

206 THE CREATURE FROM JEKYLL ISLAND THE MANDRAKE MECHANISM 207 

heard a great deal both in Congress and at the Federal Reserve 

about the necessity of reducing expenses so as to diminisn the 

growth of federal debt and inflation. But it has been lip service only, 

The great bulk of federal funding continues to be created by the 

Mandrake Mechanism, the cost of government continues to outpace 

tax revenues, and the Ruml formula reigns supreme. 

EXPANSION LEADS TO CONTRACTION 

While it is true that the Mandrake Mechanism is responsible for 

the expansion of the money supply, the process also works in 

reverse. Just as money is created when the Federal Reserve purchases 

bonds or other debt instruments, it is extinguished by the sale of 

those same items. When they are sold, the money is given back to 

the System and disappears into the inkwell or computer chip from 

which it came. Then, the same secondary ripple effect that created 

money through the commercial banking system causes it to be withdrawn 

from the economy. Furthermore, even if the Federal Reserve 

does not deliberately contract the money supply, the same result 

can and often does occur when the public decides to resist the availability 

of credit and reduce its debt. A man can only be tempted to 

borrow, he cannot be forced to do so. 

There are many psychological factors involved in a decision to 

go into debt that can offset the easy availability of money and a low 

interest rate: A downturn in the economy, the threat of civil disorder, 

the fear of pending war, an uncertain political climate, to name 

just a few. Even though the Fed may try to pump money into the 

economy by making it abundantly available, the public can thwart 

that move simply by saying no, thank you. When this happens, the 

old debts that are being paid off are not replaced by new ones to 

take their place, and the entire amount of consumer and business 

debt will shrink. That means the money supply also will shrink, 

because, in modern America, debt is money. And it is this very 

expansion and contraction of the monetary pool—a phenomenon 

that could not occur if based upon the laws of supply and 

demand—that is at the very core of practically every boom and bust 

that has plagued mankind throughout history. 

In conclusion, it can be said that modern money is a grand illu~ 

sion conjured by the magicians of finance and politics. We are living 

in an age of fiat money, and it is sobering to realize that every previous 

nation in history that has adopted such money eventually was 

economically destroyed by it. Furthermore, there is nothing in our 

present monetary structure that offers any assurance that we may 

be exempted from that morbid roll call. 

Correction. There is one. It is still within the power of Congress 

to abolish the Federal Reserve System. 

SUMMARY 

The American dollar has no intrinsic value. It is a classic example 

of fiat money with no limit to the quantity that can be produced. 

Its primary value lies in the willingness of people to accept it and, to 

that end, legal tender laws require them to do so. It is true that our 

money is created out of nothing, but it is more accurate to say that it 

is based upon debt. In one sense, therefore, our money is created out 

of less than nothing. The entire money supply would vanish into 

bank vaults and computer chips if all debts were repaid. Under the 

present System, therefore, our leaders cannot allow a serious reduction 

in either the national or consumer debt. Charging interest on 

pretended loans is usury, and that has become institutionalized 

under the Federal Reserve System. The Mandrake Mechanism by 

which the Fed converts debt into money may seem complicated at 

first, but it is simple if one remembers that the process is not 

intended to be logical but to confuse and deceive. The end product 

of the Mechanism is artificial expansion of the money supply which 

is the root cause of the hidden tax called inflation. This expansion 

then leads to contraction and, together, they produce the destructive 

boom-bust cycle that has plagued mankind throughout history 

wherever fiat money has existed.

Cecil Rhodes made one of the 

world's greatest fortunes of the 18th 

century. Financed by Nathan 

Rothschild and the Bank of England, 

he established a monopoly over the 

diamond output of South Africa and 

most of the gold as well. He formed 

a secret society which included 

many of the top leaders of British 

government. Their elitist goal was 

nothing less than world domination 

and the establishment of a modern 

feudalist society controlled by 

themselves through the world's 

central banks. In America, the 

Council on Foreign Relations (CFR) 

was an outgrowth of that group. 

August Belmont came to New York 

in 1837 as the financial agent of the 

Rothschilds. He funneled vast 

amounts of capital into American I 

investments, often without anyone } 

knowing whose money he was 

Library of Congress Library of Congress 

spending. The purpose of 

J .P. Morgan, Sr. (left) 

concealment was to blunt the 

was brought into banking by his father, Junius Morgan, in 

growing anti-Rothschild nesentmer 

:ngland. The Morgans were friendly competitors with the Rothschilds and became 

that was then prevalent in Europe socially close to them. Morgan's London-based firm was saved from financial ruin in 

1857 

as well as America. When his 

by the Bank of England over which the Rothschilds held great influence, 

affiliation became commonly kno ^hereafter, Morgan appears to have served as a Rothschild financial agent and went 

his usefulness came to an end ar 

tC) 

great length to appear totally American. 

he was replaced by J.P. Morgan. °bn D. Rockefeller (right) made his initial fortune in oil but soon gravitated into 

Ranking and finance. His entry into the field was not welcomed by Morgan, and they 

came fierce competitors. Eventually, they decided to minimize their competition by 

tering into joint ventures. In the end, they worked together to create a national 

inking cartel called the Federal Reserve System.

'DEE'LlGhTED'" 

K 1 

I 

r w A LL 

111 *r".i' ST. 

M 

Above is the clubhouse for the 

private resort on Jekyll Island in 

Georgia where the Federal Reserve 

great 

System was conceived in 

secrecy in 1910. It is shown here 

shortly after completion. 

Jekytl Island Muset/i 

Jacob Schiff (right) was head of the 

New York investment firm, Kuhn, 

Loeb & Co. He was one of the 

principal backers of the Bolshevik 

revolution and personally financed 

Trotsky's trip from New York to 

Russia. He was a major contributor to 

Woodrow Wilson's presidential 

campaign and an advocate for 

passage of the Federal Reserve Act. 

This cartoon by Robert Minor appeared in the St Louis Post-Dispatch in 

1 91 1 . It shows Karl Marx surrounded by enthusiastic Wall Street financiers: 

Morgan partner George Perkins; J.P. Morgan; John Ryan of National City 

Bank; John D. Rockefeller; and Andrew Carnegie. Immediately behind 

Marx is Teddy Roosevelt, leader of the Progressive Party. 

upi/b^

J 

Harry Dexter White (left) and 

John Maynard Keynes (right) 

were the theoreticians who 

guided the 1944 Bretton Woods 

Monetary Conference at which 

the IMF/World Bank was 

created. White was a member of 

the Communist Party. Keynes 

was a member of the Fabian 

Society. They shared the same 

goal of international socialism. 

The IMF/World Bank has 

furthered that goal ever since. 

Edward Mandell House was the 

man who secured Wood row 

Wilson's nomination for 

President and who, thereafter, 

became the hidden power at the 

White House. He negotiated a 

secret agreement to draw the 

U.S. into World War I at the very 

time Wilson was campaigning 

on the promise to keep America 

out of the war. On behalf of Wall 

Street, House lobbied Congress 

to pass the Federal Reserve Act. 

Macr 

National Archives 

Raymond Robins is shown here as 

the Chairman of the Progressive PaW 

convention in Chicago in 1912. He 

later became head of the American 

Red Cross Mission in Russia after th* 

Bolshevik revolution. Although he 

represented Wall Street interests,^ 

was a disciple of Cecil Rhodes and , 

was anti-capitalist in his beliefs- He 

held great influence over Lenin. 

Carroll Quigley was a professor of 

Nstory at Georgetown University. His 

book, Tragedy and Hope, revealed 

mat the Council on Foreign Relations 

(CFR) is an outgrowth of the secret 

society formed by Cecil Rhodes. 

He wrote the history of how an 

international network of financiers 

bas created a system of financial 

control able to dominate the political 

systems of all countries through their 

central banks. He named names and 

Provided meticulous documentation. 

His book was suppressed. 

I IDI/Roiirrtann

l 

Winston Churchill was the First Lord of the 

Admiralty in World War I. As the Lusitania, 

' 

entered into an area where a German 

U-Boat was known to be operating, he 

called off the destroyer escort that had been 

assigned to protect her. He calculated that 

the destruction of a British ship with U.S. 

passengers aboard would inflame Amencan 

passions against Germany and help create a 

political climate for coming into the war. 

Hulton Deutsch 

Section III 

THE NEW 

ALCHEMY 

U.S. Army Pictoral Service 

The ancient alchemists sought in vain to convert 

lead into gold. Modern alchemists have 

succeeded in that quest. The lead bullets of war 

have yielded an endless source of gold for those 

magicians who control the Mandrake 

Mechanism. The startling fact emerges that, 

without the ability to create fiat money, most 

modern wars simply would not have occurred. 

As long as the Mechanism is allowed to function, 

future wars are inevitable. This is the story of how 

that came to pass. 

Lord Mersey (right) was put in charge of 

an official inquiry into the sinking of the 

Lusitania. It was not an investigation but a 

coverup. He was instructed by the 

Admiralty to place the entire blame on the 

Captain of the ship. Mersey obeyed his 

orders but refused payment for his 

services and declined to accept further 

judicial assignments. In later years, he 

said the affair "was a damn dirty business."

Chapter Eleven 

THE ROTHSCHILD 

FORMULA 

The rise of the House of Rothschild in Europe; the 

tradition among financiers of profiting from both 

sides of armed conflict; the formula by which war 

is 

converted into debt and debt converted back 

into war. 

So far we have adhered closely to the subject of money and the 

history of its manipulation by political and monetary scientists. 

Now we are going to take a short detour along a parallel path and 

view some of the same historical scenery from a different perspective. 

As we progress, it may seem that we have lost our way, and 

you may wonder what connection any of this can possibly have 

with the Federal Reserve System. Please be assured, however, it has 

everything to do with it, 

and, when we finally return to that topic, 

the connection will have become painfully clear. 

THE PROFITS OF WAR 

The focus of this chapter is 

on the profits of war and, more 

specifically, the tendency of those who reap those profits to 

manipulate governments into military conflicts, not for national or 

patriotic reasons, but for private gain. The mechanism by which 

this was accomplished in the past was more complex than simply 

lending money to warring governments and then collecting interest, 

although that was part of it The real payoff has always been in 

the form of political favoritism in the market place. Writing in the 

year 1937, French historian Richard Lewinsohn explains: 

Although often called bankers, those who financed wars in the 

pre-capitalist period ... were not bankers in the modern sense of the 

word. Unlike modern bankers who operate with money deposited 

with them by their clients [or, in more recent times, created out of 

nothing by a central bank—E.G.], they generally worked with the 

fortune which they themselves had amassed or inherited, and which


they lent at a high rate of interest Thus those who risked the financing 

of a war were for the most part already very rich, and this was the case 

down to the seventeenth century. 

When they agreed to finance a war, these rich lenders did not, 

however, always attach great importance to the rate of interest In this 

respect they often showed the greatest compliance to their august 

clients. But in return they secured for themselves privileges which 

could be turned into industrial or commercial profit, such as mining 

concessions, monopolies of sale or importation, etc. Sometimes even 

they were given the right to appropriate certain taxes as a guarantee of 

their loans. So though the loan itself carried a very real risk and often 

did not bring in much interest, the indirect profits were very 

considerable, and the lenders' leniency well rewarded. 

THE ROTHSCHILD DYNASTY 

No discussion of banking as a mechanism for financing wars 

would be complete without turning eventually to the name 

Rothschild. It was Mayer Amschel Rothschild who is quoted as 

saying: "Let me issue and control a nation's money and I care not 

who writes the laws. 

the Rothschild dynasty had: "...conquered 

Biographer Frederic Morton concluded that 

the world more thoroughly, 

more cunningly, and much more lastingly than all the 

Ceasars before or all the Hitlers after them." The dynasty was 

begun in Frankfurt, Germany, in the middle of the eighteenth 

century by Mayer Amschel Bauer, the son of a goldsmith. Mayer 

became a clerk in the Oppenheimer Bank in Hanover and was 

eventually promoted to junior partner. After his father's death, he 

returned to his home in Frankfurt to continue the family business. 

Over the door hung a red shield with an eagle as a sign to identify 

the establishment. The German words for red shield are roth schild, 

so he changed his name from Bauer to Rothschild and added five 

gold arrows held in the talons of the eagle to represent his five sons. 

1 Richard Lewinsohn, The Profits of War through the Ages (New York: E.P. Dutton, 

1937), pp. 55-56. 

2. Quoted by Senator Robert L. Owen, former Chairman of the Senate Committee 

on Banking and Currency and one of the sponsors of the Federal Reserve Act, 

National Economy and the Banking System, (Washington, D.C.: U.S. Government 

Printing Office, 1939), p. 99. This quotation could not be verified in a primary 

reference work. However, when one considers the life and accomplishments of the 

elder Rothschild, there can be little doubt that this sentiment was, in fact, his 

outlook and guiding principle. 

3. Frederic Morton, The Rothschilds: A Family Portrait (New York: Atheneum, 1962), 

p. 14. 

of 

THE ROTHSCHILD FORMULA 219 

The Rothschild fortune began when Mayer adopted the practice 

fractional-reserve banking. As we have seen, he was not alone in 

this, but the House of Rothschild greatly surpassed the competition. 

That was due to his sharp business acumen and also because 

of his five most unusual sons, all of whom became financial power 

centers of their own. As they matured and learned the magic of 

converting debt into money, they moved beyond the confines of 

Frankfurt and established additional operations in the financial 

centers, not only of Europe, but of much of the civilized world. 

Throughout the first half of the nineteenth century, the brothers 

conducted important transactions on behalf of the governments of 

England, France, Prussia, Austria, Belgium, Spain, Naples, 

Portugal, Brazil, various German states, and other smaller countries. 

They were the personal bankers of many of the crowned 

heads of Europe. They made large investments, through agents, in 

markets as distant as the United States, India, Cuba, and Australia. 

They were financiers to Cecil Rhodes, making it possible for him to 

establish a monopoly over the diamond fields of South Africa. They 

are still connected with the de Beers. 

Biographer Derek Wilson writes: 

Those who lampooned or vilified the Rothschilds for their 

"sinister" influence had a considerable amount of justification for their 

anger and anxiety. The banking community had always constituted a 

"fifth estate" whose members were able, by their control of royal purse 

strings, to affect important events. But the house of Rothschild was 

immensely more powerful than any financial empire that had ever 

preceded it. It commanded vast wealth. It was international. It was 

independent. Royal governments were nervous of it because they 

could not control it. Popular movements hated it because it was not 

answerable to the people. Constitutionalists resented it because its 

influence was exercised behind the scenes—secretly. 

Secrecy, of course, is essential for the success of a cabal, and the 

Rothschilds perfected the art. By remaining behind the scenes, they 

Were able to avoid the brunt of public anger which was directed, 

instead, at the political figures which they largely controlled. This is 

a technique which has been practiced by financial 

1- Morton, pp. 145, 219. 

manipulators 

2, Derek Wilson, Rothschild: The Wealth and Power of A Dynasty (New York: Charles 

Scribner's Sons, 1988), pp. 79, 98^-99.

, 

meet 


ever since, and it is fully utilized by those who operate the Federal 

Reserve System today. Wilson continues: 

Clandestinity was and remained a feature of Rothschild political 

activity. Seldom were they to be seen engaging in open public debate 

on important issues. Never did they seek government office. Even 

when, in later years, some of them entered parliament, they did not 

feature prominently in the assembly chambers of London, Paris or 

Berlin. Yet all the while they were helping to shape the major events of 

the day: by granting or withholding funds; by providing statesmen 

with an official diplomatic service; by influencing appointments to 

high office; and by an almost daily intercourse with the great decision 

makers. 

A FORTUNE IN SMUGGLING 

Continual war in Europe created excellent opportunities for 

profit from smuggling scarce consumer goods past military blockades. 

Since the Rothschilds often financed both sides in a conflict 

and were known to have great political influence, the mere sight of 

the red shield on a leather pouch, a carriage, or a ship's flag was 

sufficient to insure that the messenger or his cargo could pass 

through check points in either direction. This immunity allowed 

them to deal in a thriving black market for cotton goods, yarn, 

tobacco, coffee, sugar, and indigo; and they moved freely through 

the borders of Germany, Scandinavia, Holland, Spain, England, 

and France. This government protection was one of those indirect 

benefits that generated commercial profits far in excess of the 

interest received on the underlying government loans. 

It is generally true that, one man's loss is another man's gain. 

And even the friendliest of biographers admit that, for more than 

two centuries, the House of Rothschild profited handsomely from 

wars and economic collapses, the very occasions on which others 

sustained the greatest losses. 

NAPOLEON VS THE BANKERS 

If one picture is worth a thousand words, then one example 

surely must be worth a dozen explanations. There is no better 

example than the economic war waged by the financiers of 

nineteenth-century Europe against Napoleon Bonaparte. It is an 

easily forgotten fact of history that Napoleon had restored law and 

1. Derek Wilson, p. 99. 

2. Morton, pp. 40-41. 

f THE ROTHSCHILD FORMULA 221 

order to a chaotic, post-revolutionary France and had turned his 

attention, not to war, but to establishing peace and improving 

economic conditions at home. He was particularly anxious to get 

jus country and his people out of debt and out of the control of 

bankers. R. McNair Wilson, in Monarchy or Money Power, says: 

It was ordained by him that money should not be exported from 

France on any pretext whatever except with the consent of the 

Government, and that in no circumstance should loans be employed to 

current expenditure whether civil or military. . . . "One has only to 

consider," Napoleon remarked, "what loans can lead to in order to 

realize their danger. Therefore, I would never have anything to do 

with them and have always striven against them."... 

The object was to withhold from finance the power to embarrass 

the Government as it had embarrassed the Government of Louis XVI. 

When a Government, Bonaparte declared, is dependent for money 

upon bankers, they and not the leaders of that Government control the 

situation, since "the hand that gives is above the hand that takes."... 

"Money/' he declared, "has no motherland; financiers are without 

patriotism and without decency: their sole object is gain." 

One of Napoleon's first blows against the bankers was to 

establish an independent Bank of France with himself as president. 

But even this bank was not trusted, and government funds were 

never placed into it It was his refusal to borrow, however, that 

caused the most concern among the financiers. Actually, to them 

this was a mixture of both bad and good news. The bad news was 

that they were denied the benefit of royalty payments on fractional 

money. The good news was that, without resorting to debt, they 

were confident Napoleon could not militarily defend himself. Thus, 

he easily could be toppled and replaced by Louis XVI of the old 

monarchic dynasty who was receptive to banker influence. Wilson 

continues: 

pi. 

They had good hope of compassing his downfall. None believed 

that he could finance war on a great scale now that the resource of 

paper money had been denied him by the destruction of the Assignaf 

Where would he obtain the indispensable gold and silver to feed and 

equip a great army? Pitt [the Prime Minister of England] counted 

already on a coalition of England, Austria, Prussia, Russia, Spain, 

R. McNair Wilson, Monarchy or Money Power (London: Eyre and Spottiswoode, 

Ltd., 1933), pp. 68, 72. 

2. The Assignat was pure fiat money which rapidly became totally worthless in 

commerce and which all but destroyed the French economy.

222 THE CREATURE FROM JEKYLL ISLAND THE ROTHSCHILD FORMULA 223 

Sweden, and numerous small states. Some 600,000 men would be put 

the northern states, united with Canada, while the southern states 

into the field. All the resources of England's wealth—that is to say, of 

would fall to France. Napoleon was to be tempted by offering him 

the world's wealth—would be placed at the disposal of this 

the awesome title of "King of America." McNair Wilson tells us: 

overwhelming force. Could the Corsican muster 200,000? Could he 

arm them? Could he feed them? If the lead bullets did not destroy 

Labouchere wrote to Baring on March 21, and enclosed a note for 

him, 

[British Foreign Secretary] Wellesley dictated by Ouvrard which ran: 

the gold bullets would soon make an end. He would be forced, like his 

"From a conqueror he (Napoleon) is becoming a preserver; the 

neighbors, to come, hat in hand, for loans and, like them, to accept the 

first result of his marriage with Marie Louise will be that he will make 

banker's terms.... 

He could not put his hands on £2,000,000, so empty was 

an offer of peace to England. It is to this nation's (i.e., England's) 

the 

interest to make peace, for it has the command of the sea; on the 

Treasury and so depleted the nation's stock of metallic money. 

contrary, it is really in the interest of France to continue war, which 

London waited with interest to see how the puzzle would be solved. 

allows her to expand indefinitely and make a fresh fleet, which cannot 

Napoleon solved the puzzle quite simply by selling off some 

be done once peace is established. Why does not the English Cabinet 

real estate. Those crazy Americans gave him £3,000,000 for a vast 

make a proposal to France to destroy the United States of America, 

and by making them again dependent on England, persuade 

swamp called Louisiana. 

Napoleon to lend his aid to destroy the life-work of Louis XVI?... It is 

A PLAN TO DESTROY THE UNITED STATES 

to her (England's) interest to conclude peace and to flatter Napoleon's 

Napoleon did not want war, but he knew that Europe's 

vanity by recognizing his work and his imperial title."... 

1. R. McNair Wilson, pp. 71-72. 1. R. McNair Wilson, pp. 81-82. 

financial rulers would not settle for peace—unless, of course, they 

The Cabinet discussed the proposals and approved them. 

were forced into it by the defeat of their puppet regimes or unless, 

Wellesley at once hurried to Baring's house to give him the good 

news.... 

somehow, it would be to their monetary advantage. It was 

The Dutch would be able to pay and would be compelled to 

in 

pay in gold. 

pursuit of the latter tactic that he threatened to take direct possession 

of Holland, which then was ruled by his brother, King Louis. 

somewhat strong objections to the plan of a joint attack on the United 

Unhappily Napoleon found out what was afoot and took 

Napoleon knew that the Dutch were heavily in debt to the English 

States. He arrested Ouvrard, dismissed and exiled Fouche, and 

bankers. If Holland were to be annexed by France, this debt would 

published the whole story, to the grave distress of Wellesley and 

never be repaid. So Napoleon made a proposal to England's 

Baring. 

bankers that, if they would convince the English government to 

It must not be concluded from this that Napoleon was a 

accept peace with France, he would agree to leave Holland alone. 

paragon of virtue or a champion of honest money. His objection to 

The negotiations were handled by the banker, Pierre-Cesar 

the bankers was that their monetary power was able to threaten the 

Labouchere, who was sent by the Dutch, and the English banker, 

Sir Francis Baring who was Labouchere's father-in-law. Although 

sovereignty of his own political power. He allowed them a free 

hand while they served the purpose of the state. Then, when the 

this was an attractive proposal to the bankers, at least on a 

need for military financing subsided, he would condemn them for 

short-term basis, it was still against their nature to forego the 

making "unholy profits" and simply take it from them in the name 

immense profits of war and mercantilism. They revised the proposal, 

i'of the people. If the bankers protested, they were sent to prison. 

therefore, to include a plan whereby both England and 

And so the battle lines were drawn. Napoleon had to be 

France would combine forces to destroy the newly independent 

destroyed at all costs. To make this possible, the Bank of England 

United States and bring at least half of it—the industrial half—back 

created vast new amounts of fiat money to "lend" to the government 

so it could finance an overpowering army. A steady stream of 

under the domination of England. The incredible plan, conceived 

by the French banker, Ouvard, called for military invasion and 

gold flowed out of the country to finance the armies of Russia, 

conquest followed by division of the spoils. England would receive 

[Prussia, and Austria. The economy staggered once again under the



load of war debt, and the little people paid the bill with hardly a 

grumble because they hadn't the slightest knowledge it was being 

charged to their account. Wilson concludes the story: 

The bankers won. Louis XVIII was restored by British arms and 

British diplomacy to the throne of his ancestors. Loans were placed at 

his disposal, though Napoleon had left a France which enjoyed a credit 

balance. 

A year later the man whom every King and every banker in 

Europe called "usurper" won back his throne with 800 men and 

without the firing of a single shot. On this occasion he had no option 

but to raise a loan for the defense of France. The City of London 

[banking district] accommodated him with £5,000,000. With this sum 

he equipped the army which Wellington defeated at Waterloo. 

GOLD FOR THE DUKE OF WELLINGTON 

One of the most fascinating and revealing episodes to be 

recorded by Rothschild biographers concerns the smuggling of a 

large shipment of gold to finance the Duke of Wellington who was 

attempting to feed and equip an army in Portugal and in the 

Pyrenees mountains between Spain and France. 

It was not at all certain that Wellington would be able to defeat 

Napoleon in the coming battle, and the Duke was hard pressed to 

convince bankers and merchants in Portugal and Spain to accept 

his written promises-to-pay, even though they were officially 

guaranteed by the British government These notes were deeply 

discounted, and Wellington was desperate for gold coin. It was at 

this point that Nathan Rothschild offered the services of himself 

and his brothers. With an efficient smuggling apparatus already 

functioning throughout Europe, he was able to offer Wellington 

much better terms while still making a magnificent profit. But, to 

accomplish this, the gold had to pass right under Napoleon's nose. 

Frederic Morton describes the scene: 

There was only one way to route the cash: through the very France 

England's army was fighting. Of course, the Rothschild 

blockade-running machine already had superb cogs whirring all over 

Germany, Scandinavia and England, even in Spain and Southern 

France. But a very foxy new wheel was needed in Napoleon's capital 

itself. Enter Jacob—henceforth called James—the youngest of Mayer's 

sons. 

1. R. McNair Wilson, p. 83. 

2. Morton, p. 46. 

James was only nineteen years old but was well trained by his 

father in the art of deception. He arrived in Paris with a dual 

mission. First, he was to provide the French authorities with a false 

report about the British gold movement, with just enough truth in it 

lo sound convincing. He presented the government with falsified 

letters indicating that the English were desperate to halt the flow of 

their gold into France. The ploy paid off when the French authorities 

then actually encouraged the financial community to accept 

British gold and to convert it into commercially sound banknotes. 

Second, James was to serve as a vital link in a financial chain 

stretching between London and the Pyrenees. He was to coordinate 

the receipt of the gold into France, the conversion of that gold into 

Spanish banknotes, and the movement of those notes out of the 

country on their way to Wellington. All of this he did with amazing 

dexterity, especially considering his youth. Morton concludes: 

In the space of a few hundred hours Mayer's youngest had not 

only gotten the English gold rolling through France, but conjured a 

fiscal mirage that took in Napoleon himself. A teen-age Rothschild 

tricked the imperial government into sanctioning the very process that 

helped to ruin it... 

The family machine began to hum. Nathan sent big shipments of 

British guineas, Portuguese gold ounces, French napoleons d'or (often 

freshly minted in London) across the Channel. From the coast James 

saw them to Paris and secretly transmuted the metal into bills on 

certain Spanish bankers. South of the capital, Kalmann [another of 

Mayer's sons] materialized, took over the bills, blurred into a 

thousand shadowed canyons along the Pyrenees—and reappeared, 

with Wellington's receipts in hand. Salomon [another son] was 

everywhere, trouble-shooting, making sure the transit points were 

diffuse and obscure enough not to disturb either the French delusion 

or the British guinea rate. Amschel stayed in Frankfurt and helped 

father Mayer to staff headquarters. 

The French did catch a few whiffs of the 

truth. Sometimes the 

suspicious could be prosperously purged of their suspicion. The police 

chief of Calais, for example, suddenly was able to live in such 

distracting luxury that he found it difficult to patrol the shoreline 

thoroughly.... 

While Napoleon struggled his might away in the Russian Winter, 

there passed through France itself a gold vein to the army staving in 

the Empire's back door. 

I Morton, p. 47.

• 

we 

226 THE CREATURE FROM JEKYLL ISLAND THE ROTHSCHILD FORMULA 227 

At a dinner party in later years, Nathan casually summed up 

At least one friendly biographer claims that Nathan's first act 

the episode as though it were merely a good piece of routine 

was to deliver the news to the Prime Minister, but that government 

business. He said: 

officials were hesitant at first to believe it, because it ran contrary to 

reports they had received 

The East India Company had £800,000 worth 

previously 

of 

telling 

gold to of 

sell. I went 

serious British 

to the sale and bought it all. I knew the Duke of Wellington must 

setbacks. At any rate, there is 

have 

no doubt that Nathan's second act of 

it. The government sent for me and said they must have the gold. I sold 

the morning was to set off for the stock exchange to take up a 

the gold to them, but they didn't know how to get it to the Duke in 

position at his usual pillar. 

Portugal. I undertook all that and sent it through France. It was the 

All eyes were upon him as he slumped dejectedly, staring at the 

best business I have ever done. 

floor. Then, he raised his gaze and, with pained expression, began 

to sell The whisper 

THE BATTLE OF WATERLOO 

went through the crowded room, "Nathan is 

i selling?" 

The final outcome of the battle at Waterloo between 

"Nathan is 

Wellington 

selling*" "Wellington must have lost." "Our 

government bonds will 

and Napoleon was crucial to Europe both politically and never 

economically. 

If Napoleon had been victorious, England would have 

be repaid/' "Sell them now. Sell. Sell!" 

Prices tumbled, and Nathan sold again. 

been 

Prices plummeted, and 

still Nathan sold. Finally, prices 

in even greater economic trouble than before. Not only would 

collapsed 

she 

altogether and, in one 

quick move, Nathan reversed his call 

have lost international power and prestige, but even at home, 

and 

her 

purchased the entire 

market in government bonds. In a matter 

subjects would have been further disgruntled over 

of just 

such 

a 

great 

few hours, he 

had acquired the dominant holding of England's entire 

personal and financial wartime sacrifices. Her defeat almost surely 

debt at but 

a tiny fraction of its worth. 

would have resulted in not being able to repay the great amounts 

she had borrowed to conduct the war. In the London stock SIDONIA 

exchange, therefore, where British government bonds were traded 

Benjamin Disraeli, the Prime Minister of England, wrote a book 

in 

along with other securities, everyone waited anxiously for news of 

1844 called Coningsby. It was a political novel in which the author 

the outcome. 

expressed his views about contemporary issues. One of the strong 

It was well known that the Rothschilds had developed a private 

characters in the book was a financier named Sidonia, but every 

detail 

courier service that was used, not only to transport gold and other 

of Sidonia's actions was an exact replica of the real Lord 

Rothschild, 

tangible cargo, but to rapidly move information that could be useful 

whom Disraeli greatly admired. In the guise of a novel, 

we read 

in making investment decisions. It was 

about 

expected, therefore, that 

Rothschild's emigration from Germany, his family 

and banking ties 

Nathan in London would be the first to know the name of the victor 

throughout Europe, his handling of the gold for 

Wellington, and his financial 

after the cannon smoke had cleared from the battlefield. And they 

coup after Waterloo. Then Disraeli 

wrote: 

were not to be disappointed. The first news of Wellington's victory 

arrived in Brussels around midnight on June 18, 1815, where a 

Europe did require money, and Sidonia was ready to lend it to 

Rothschild agent named Rothworth was waiting in readiness. He 

Europe. France wanted some; Austria more; Prussia a little; Russia a 

few 

immediately mounted a fresh horse and set off for the port of 

millions. Sidonia could furnish them all.... 

It is not difficult to 

Ostend where a boat was standing by to speed him across the 

conceive that, after having pursued the career 

have intimated for about ten years, Sidonia had 

channel to London. In the early hours of June 20, the exhausted 

become one of the 

messenger was pounding on Nathan's door, a full twenty-four 

* The New York Times, in its April 1, 1915, edition, reported that Baron Nathan 

hours before Wellington's own courier, Major Henry Percy, 

Mayer de Rothschild had attempted to secure a court order to suppress a book 

vvntten by Ignatious Balla entitled 

arrived. 

The Romance of the Rothschilds on the grounds that 

£e Waterloo story about his grandfather was untrue and libelous. The court ruled 

pt the story was true, dismissed the suit, and ordered Rothschild to pay all court 

1. Morton, p. 45. costs. r J



most considerable personages in Europe. He had established a 

brother, or a near relative, in whom he could confide, in most of the 

the courts. They are the police. Who will seize their assets? 

principal capitals. He was lord and master of the money market of the 

answer is another government. Speaking of a relatively 

world, and of course virtually lord and master of everything else. He 

example of this principle, Ron 

literally held the revenues of Southern Italy in pawn; and 

Chernow explains: 

monarchs 

The 

modern 

3. Quoted in The New York Times, October 21, 1987, cited by Chernow, p. 13. 

1 Quoted by Jacques Attali, translated by Barbara Ellis, A Man of Influence: Sir 

4. Disraeli, p. 229. siegmund Warburg, 1902-82 (London: Weidenfeld, & Nicolson, 1986), p. 57. 

and ministers of all countries courted his advice and were guided by 

The new alliance [between the monetary and political scientists] 

his suggestions. 

was mutually advantageous, Washington wanted to harness the new 

financial power to coerce 

That Disraeli was not exaggerating was made clear 

foreign 

by the boast 

governments into opening their 

markets to American goods or adopting 

of James Rothschild himself. When U.S. Treasury agents 

pro-American policies. 

approached 

him in Paris in 1842 with a request for a loan to the 

the government's police powers in distant places. The threat of 

The 

banks, in turn, needed levers to force debt repayment and welcomed 

American government, he said to them: "You have seen the man 

military intervention was an excellent means by which to speed loan 

who is at the head of the finances of Europe." 

repayment. When Kuhn, Loeb considered a loan to the Dominican 

There have always been men who were in a position to make 

Republic, backed by customs receipts, Jacob Schiff inquired of his 

private fortunes out of cooperating with both sides in a war. The 

London associate Sir Ernest Cassel, "If they do not pay, who will 

Rothschilds were not unique in this, but they no doubt perfected 

the art and became the personification of that breed. They were not 

collect 

ours." 1 

these customs duties?" Cassel replied, "Your marines and 

necessarily evil in a moral sense. What preoccupied their minds 

One of the great puzzles of history is why governments always 

were not questions of right or wrong but of profit and loss. This 

go into debt and seldom attempt to put themselves on a "pay-asyou-go" 

basis, A partial answer is that kings and politicians lack 

analytical indifference to human suffering was aptly described by 

one Rothschild when he said: "When the streets of Paris are 

the courage to tax their subjects the enormous sums that would 

Q 

be 

running with blood, I buy." They may have held citizenship in the 

required under such an arrangement. There is also the deeper 

country of their residence, but patriotism was beyond their comprehension. 

question of why the expenditures are so high in the first place. 

They were also very bright, if not cunning, and these 

Given the mentality of the world's financial lords and masters, 

combined traits made them the role model of the cool pragmatists 

as Disraeli described them, it is conceivable that a coldly calculated 

who dominate the political and financial world of today. Disraeli 

strategy has been developed over the years to insure this result. In 

well described this type when he wrote of Sidonia: 

fact, the historical evidence strongly suggests that just such a plan 

He was a man without affections. It would be harsh to say he had 

was developed in eighteenth-century Europe and perfected in 

no heart, for he was susceptible of deep emotions, but not for 

twentieth-century America. For the purposes of hypothetical analysis, 

individuals.... The individual never touched him. Woman was to him 

a toy, man a machine. 

let us identify this strategy as The Rothschild Formula. 

THE FORMULA 

It would seem that an absence of patriotism and a cold, 

Let us imagine a man who is totally pragmatic. He is smarter 

analytical outlook would lead financiers to avoid making loans to 

and more cunning than most men and, in fact, holds them in thinly 

governments, particularly foreign ones. Private borrowers can be 

disguised contempt. He may respect the talents of a few, but has 

hauled into court and their assets confiscated to make good on their 

little concern over the condition of mankind. He has observed that 

kings and politicians are always fighting over something or other 

1 Benjamin Disraeli, Coningsby (New York: Alfred A. Knopf, originally published 

and has concluded that wars are inevitable. He 

in England 

also has learned 

in 1844), p. 225. 

that 

2. Stephen Birmingham, "Our Crowd": The Great Jewish Families ofNew York (New 

wars can be profitable, not only by lending or creating the 

York: Harper & Row, 1986), p. 73.


money to finance them, but from government favoritism in the 

granting of commercial subsidies or monopolies. He is not capable 

of such a primitive feeling as patriotism, so he is free to participate 

in the funding of any side in any conflict, limited only by factors of 

self interest. If such a man were to survey the world around him, it 

is not difficult to imagine that he would come to the following 

conclusions which would become the prime directives of his career: 

1. War is the ultimate discipline to any government. If it can 

successfully meet the challenge of war, it will survive. If it 

cannot, it will perish. All else is secondary. The sanctity of its 

laws, the prosperity of its citizens, and the solvency of its 

treasury will be quickly sacrificed by any government in its 

primal act of self-survival. 

2. All that is necessary, therefore, to insure that a government will 

maintain or expand its debt is to involve it in war or the threat of 

war. The greater the threat and the more destructive the war, the 

greater the need for debt. 

3. To involve a country in war or the threat of war, it will be 

necessary for it to have enemies with credible military might. If 

such enemies already exist, all 

the better. If they exist but lack 

military strength, it will be necessary to provide them the 

money to build their war machine. If an enemy does not exist at 

all, then it will be necessary to create one by financing the rise of 

a hostile regime. 

x 

4. The ultimate obstacle is a government which declines to finance 

its wars through debt. Although this seldom happens, when it 

does, it will be necessary to encourage internal political 

opposition, insurrection, or revolution to replace that 

government with one that is more compliant to our will. The 

assassination of heads of state could play an important role in 

this process. 

5. No nation can be allowed to remain militarily stronger than its 

adversaries, for that could lead to peace and a reduction of debt. 

To accomplish this balance of power, it may be necessary to 

finance both sides of the conflict. Unless one of the combatants 

is hostile to our interests and, therefore, must be destroyed, 

neither side should be allowed a decisive victory or defeat. 

While we must always proclaim the virtues of peace, the 

unspoken objective is perpetual war. 

r 


Whether anyone actually put this strategy into words or passed 

it along from generation to generation is not important. In fact, it is 

doubtful it has ever worked that way. Whether it is the product of 

conscious planning or merely the consequence of men responding 

to the profit opportunities inherent in fiat money, the world's 

financial 

lords have acted as though they were following such a 

plan, and this has become especially apparent since the creation of 

the central-bank Mandrake Mechanism three centuries ago. 

The "balance-of-power" question is particularly intriguing. 

Most history texts present the concept as though it were some kind 

of natural, social phenomenon which, somehow, has worked to the 

benefit of mankind. The implication is that it's just wonderful how, 

after all those European wars, no nation was strong enough to 

completely dominate the others. When the United States emerged 

from World War II with exactly such power, it was widely 

deplored, and massive political/financial mechanisms such as 

foreign aid and disarmament were set in motion to restore the 

balance. This has become almost a revered doctrine of international 

democracy. But the overlooked consequence of this sentimental 

notion is that wars "between equals" have become the permanent 

landscape of history. 

This does not mean that every war-like group that comes along 

will find easy financing from the lords and masters. It depends on 

whom they threaten and how likely they are to succeed. In 1830, for 

example, the Dutch were facing an uprising of their subjects in 

Belgium. Both the ruling government and the revolutionaries were 

dependent upon the Rothschilds for financing their conflict. 

The 

Dutch rulers were reliable customers for loans and, just as important, 

they were reliable in their payment of interest on those loans. 

It would have been foolhardy to provide more than token assistance 

to the rebels who, if they came to power, quite likely would 

have refused to honor the debts of the former puppet regime. 

Salomon Rothschild explained: 

These gentlemen should not count on us unless they decide to 

follow a line of prudence and moderation.... Our goodwill does not 

yet extend to the point of putting clubs into the hands that would beat 

us, that is, lending money to make war and ruin the credit that we 

sustain with all our efforts and all our means. 1 

I- As quoted by Derek Wilson, p. 100.


After the revolution was resolved by negotiation rather than by 

arms, the new government in Brussels was a natural target 

financial takeover. James Rothschild laid out the strategy that has 

become the model of such operations ever since: 

Now is the moment of which we should take advantage to make 

ourselves absolute masters of that country's finances. The first step 

will be to establish ourselves on an intimate footing with Belgium's 

new Finance Minister, to gain his confidence ... and to take all the 

treasury bonds he may offer us. 

PERPETUAL WAR IN OGHTEENTH CENTURY ENGLAND 

Wars, great and small, have always been a plague to Europe, 

but it was not until they were easy to finance through central 

banking and fiat money that they became virtually perpetual. For 

example, the following war chronicle begins immediately following 

the formation of the Bank of England which, as you recall, was 

created for the specific purpose of financing a war: 

1689-1697 The War of the League of Augsberg 

1702-1713 The War of Spanish Succession 

1739-1742 The War of Jenkin's Ear 

1744-1748 The War of Austrian Succession 

1754-1763 The French and Indian War 

1793-1801 The War against Revolutionary France 

1803-1815 The Napoleonic Wars 

In addition to these European conflicts, there also wer^ two 

wars with America: the War for Independence and the War of 1812. 

In the 126 years between 1689 and 1815, England was at war 63 of 

them. That is one out of every two years in combat. The others were 

spent preparing for combat. 

The mark of the Rothschild Formula is unmistakable in these 

conflicts. The monetary scientists often were seen financing both 

sides. Whether ending in victory or defeat, the outcome merely 

preserved or restored the European "balance of power/ 7 

And the 

most permanent result of any of these wars was expanded government 

debt for all parties. 

SUMMARY 

By the end of the eighteenth century, the House of Rothschild 

had become one of the most successful financial institutions the 


for 

world has ever known. Its 


meteoric rise can be attributed to the 

great industry and shrewdness of the five brothers who established 

themselves in various capitals of Europe and forged the world's 

first international financial network. As pioneers in the practice of 

lending money to governments, they soon learned that this provided 

unique opportunities to parlay wealth into political power as 

Before long, most of the princes and kings of Europe had 

well. 

come within their influence. 

The Rothschilds also had mastered the art of smuggling on a 

grand scale, often with the tacit approval of the governments 

whose laws they violated. This was perceived by all parties as an 

unofficial bonus for providing needed funding to those same 

governments, particularly in time of war. The fact that different 

branches of the Rothschild network also might be providing funds 

for the enemy was pragmatically ignored. Thus, a time-honored 

practice among financiers was born: profiting from both sides. 

The Rothschilds operated a highly efficient intelligence gathering 

system which provided them with advance knowledge of 

important events, knowledge which was invaluable for investment 

decisions. When an exhausted Rothschild courier delivered the first 

news of the Battle of Waterloo, Nathan was able to deceive the 

London bond traders into a selling panic, and that allowed him to 

acquire the dominant holding of England's entire debt at but a tiny 

fraction of its worth. 

A study of these and similar events reveals a personality 

profile, not just of the Rothschilds, but of that special breed of 

international financiers whose success typically is built upon 

certain character traits. Those include cold objectivity, immunity to 

patriotism, and indifference to the human condition. That profile is 

the basis for proposing a theoretical strategy, called the Rothschild 

Formula, which motivates such men to propel governments into 

war for the profits they yield. This formula most likely has never 

been consciously phrased as it appears here, but subconscious 

motivations and personality traits work together to implement it 

nevertheless. As long as the mechanism of central banking exists, it 

will be to such men an irresistible temptation to convert debt into 

perpetual war and war into perpetual debt. 

In the following chapters we shall track the distinctive footprint 

of the Rothschild Formula as it leads up to our own doorstep in the 

present day.

Chapter Twelve 

SINK THE LUSITANIA! 

The role of J. P. Morgan in providing loans to 

England and France in World War I; 

the souring 

of those loans as it became apparent that Germany 

would win; the betrayal of a British ship and the 

sacrifice ofAmerican passengers as a stratagem to 

bring America into the war; the use of American 

taxes to pay off the loans. 

Historisches Museum, Frankfurt, Germany 

A satirical cartoon of 1848 depicts "Rothschild" 

pondering over which of Europe's rulers to 

favor with loans, while revolutionaries 

challenge the ancient order he is supporting. 

A caricature of Nathan Rothschild, 

showing him in his habitual position 

before one of the pillars in the Exchange. 

It was here that he capitalized on his 

advance knowledge of Wellington's 

defeat of Napoleon at Waterloo and was 

able to acquire the dominant holding of 

England's entire debt at but a small 

fraction of its worth. 

The origin of World War I usually is attributed to the assassination 

of Archduke Francis Ferdinand of Austria-Hungary by a 

Serbian nationalist in 1914. This was a serious affront to Austria but 

hardly sufficient reason to plunge the world into a mortal conflict 

that would claim over ten million lives and twenty million 

wounded. American schoolchildren are taught that Uncle Sam 

came into the war "to make the world safe for democracy/ 7 

But, as 

we shall see, the American war drums were pounded by men with 

far less idealistic objectives. 

Since the latter part of the eighteenth century, the Rothschild 

Formula had controlled the political climate of Europe. Nations had 

increasingly confronted each other over border disputes, colonial 

territories, and trade routes. An arms race had been in progress for 

many years; large, standing armies had been recruited and trained; 

military alliances had been hammered together; all in preparation 

for war. The assassination of Ferdinand was not the cause but the 

trigger. It was merely the spark that lit the fuse that fired the first 

loaded cannon. 

AN INVESTMENT IN WAR 

The exigencies of war in Europe required England and France to 

go heavily into debt When their respective central banks and local 

merchant banks could no longer meet that need, the beleaguered 

governments turned to the Americans and selected the House of 

Morgan—acting as partners of the Rothschilds—to act as sales agent 

for their bonds. Most of the money raised in this fashion was 

234 

British Museum Print Room


SINK THE LUSITANIA! 237 

quickly returned to the United States to acquire war-sensitive materials, 

and Morgan was selected as the U.S. purchase agent for those 

as well. A commission was paid on all 

transactions in both directions: 

once when the money was borrowed and again when it was 

spent. Furthermore, many of the companies receiving production 

contracts were either owned outright by Morgan holding companies 

or were securely within his orbit of bank control- Under such an 

arrangement it will not be surprising to learn, as we shall in a 

moment, that Morgan was not overly anxious to see hostilities come 

to a close. Even the most honorable of men can be corrupted by the 

temptation of such gigantic flows of cash. 

Writing in the year 1919, just a few months after the end of the 

war, John Moody says: 

Not only did England and France pay for their supplies with 

money furnished by Wall Street, but they made their purchases 

through the same medium.... Inevitably the house of Morgan was 

selected for this important task Thus the war had given Wall Street an 

entirely new role. Hitherto it has been exclusively the headquarters of 

finance; now it became the greatest industrial mart the world had ever 

known. In addition to selling stocks and bonds, financing railroads, 

and performing the other tasks of a great banking center, Wall Street 

began to deal in shells, cannon, submarines, blankets, clothing, shoes, 

canned meats, wheat and the thousands of other articles needed for 

the prosecution of a great war. 

The money began to flow in January of 1915 when the Hduse of 

Morgan signed a contract with the British Army Council and the 

Admiralty. The first purchase, curiously, was for horses, and the 

amount tendered was $12 million. But that was but the first drop of 

rain before the deluge. Total purchases would eventually climb to 

an astronomical $3 billion. The firm became the largest consumer on 

earth, spending up to $10 million per day. Morgan offices at 23 Wall 

Street were mobbed by brokers and manufacturers seeking to cut a 

deal The bank had to post guards at every door and at the partners' 

homes as well. Each month, Morgan presided over purchases which 

were equal to the gross national product of the entire world just one 

generation before. 

1. John Moody, The Masters of Capital (New Haven: Yale University Press, 1919), 

pp. 164-165. 

2. Chemow, pp. 187-89. 

1 

Throughout all this, Morgan vigorously claimed to be a pacifist. 

"Nobody could hate war more than I do/' he told the Senate 

Munitions Committee. But such professions of righteousness were 

difficult to accept. Lewinsohn comments: 

The 500 million dollar loan contracted in autumn 1915 brought to 

the group of bankers, at whose head Morgan was, a net profit of 9 

million dollars.... Again, in 1917, the French government paid to 

Morgan's and other banks a commission of 1,500,000 dollars, and a 

further million in 1918. 

Besides the issue of loans there was another source of profit: the 

purchase and sale of American stock which the Allies surrendered so 

that they could buy munitions in the States. It is estimated that in the 

course of the war some 2000 million [two billion] dollars passed in this 

way through Morgan's hands. Even if the commission was very small, 

transactions of such dimensions would give him an influence on the 

stock market which would carry very real advantages.. . 

His hatred against war did not prevent him, citizen of a neutral 

country, from furnishing belligerent powers with 4,400,000 rifles for a 

matter of $194,000,000.... The profits were such as to compensate to 

some degree his hatred of warfare. According to his own account, he 

received, as agent of the English and French governments, a 

commission of 1% on orders totalling $3,000,000,000. That is, he 

received some $30,000,000.... Besides these two chief principals, 

Morgan, however, also acted for Russia (for whom he did business 

amounting to $412,000,000) and for Italy and Canada (figures for his 

business with the last two not having been published).. . 

J.P. Morgan, and some of his partners in the bank, were at the time 

shareholders in companies that were ... concerns which made 

substantial profits from the orders he placed with them.... It is really 

astonishing that a central buying organization should have been 

confided to one who was buyer and seller at the same time. 

GERMANY'S U-BOATS ALMOST WON THE WAR 

But there were dark clouds gathering above Wall Street as the 

war began to go badly for the Allies. With the passage of time and 

the condensing of history, it is easy to forget that Germany and the 

Central Powers almost won the war prior to U.S. entry. Employing 

a small fleet of newly developed submarines, Germany was well on 

her way to cutting off England and her allies from all outside help. 

It was an amazing feat and it changed forever the concept of naval 

warfare. Germany had a total of twenty-one U-boats, but, because 

1- Lewinsohn, pp. 103-4, 222-24.

238 THE CREATURE FROM JEKYLL ISLAND SINK THE LUSITANIA! 239 

they constantly had to be repaired and serviced, the maximum 

number at sea was only seven at any one time. Yet, between 1914 

and 1918, German submarines had sunk over 5,700 surface ships. 

Three-hundred thousand tons of Allied shipping were sent to the 

bottom every week. One out of every four steamers leaving the 

British Isles never returned. In later years, British Foreign Secretary, 

Arthur Balfour, wrote: "At that time, it certainly looked as though 

we were going to lose the war/' Robert Ferrell, in his Woodrow 

Wilson and World War J, concluded: "The Allies approached the 

brink of disaster, with no recourse other than to ask Germany for 

terms." 

William McAdoo, who was Secretary of the Treasury at the 

time, says in his memoirs: 

Across the sea came the dismay of the British—a dismay that 

carried a deepening note of disaster. There was a fear, and a 

well-grounded one, that England might be starved into abject 

surrender.... On April 27, 1917, Ambassador Walter H. Page reported 

confidentially to the President that the food in the British Isles was not 

more than enough to feed the civil population for six weeks or two 

months. 

rAs 

previously mentioned by William McAdoo, the American 

ambassador to England at that time was Walter Hines Page, a trustee 

of Rockefeller's social-engineering foundation called the 

General Education Board. It was learned by the Nye committee that, 

in addition to his government salary, which he complained was not 

high enough, Page also received an allowance of $25,000 a year (an 

enormous amount in 1917) from Cleveland Dodge, president of 

Rockefeller's National City Bank. On March 15, 1917, Ambassador 

Page sent a telegram to the State Department outlining the financial 

crisis in England. Since sources of new capital had dried up, the 

only way to keep the war going, he said, was to make direct grants 

from the U.S. Treasury. But, since this would be a violation of neutrality 

treaties, the United States would have to abandon its neutrality 

and enter the war. He said: 

I think that the pressure of this approaching crisis has gone 

beyond the ability of the Morgan Financial Agency for the British and 

French Governments.... The greatest help we could give the Allies 

would be such a credit.... Unless we go to war with Germany, our 

Government, of course, cannot make such a direct grant of credit. 1 

Under these circumstances, it became impossible for Morgan to 

find new buyers for the Allied war bonds, neither for fresh funding 

nor to replenish the old bonds which were coming due and facing 

default. This was serious on several counts. If bond sales came to a 

halt, there would be no money to continue purchasing war materials. 

Commissions would be lost at both ends. Furthermore^ if the 

previously sold bonds were to go into default, as they certainly 

would if Britain and France were forced to accept peace on 

Germany's terms, the investors would sustain gigantic losses. Something 

had to be done. But what? Robert Ferrell hints at the answer: 

In the mid thirties a Senate committee headed by Gerald P. Nye of 

North Dakota investigated the pre-1917 munitions trade and raised a 

possibility that the Wilson administration went to war because 

American bankers needed to protect their Allied loans. 

1. Balfour MSS, FO/800/208, British Foreign Office records, Public Record Office, 

London, as cited by Robert H. Ferrell, Woodrow Wilson and World War I (New York: 

Harper & Row, 1985), p. 35. 

2. Ferrell, p. 12. 

3. William G. McAdoo, Crowded Years (New York: Houghton Mifflin, 1931; rpt. 

New York: Kennikat Press, 1971), p. 392. 

4. Ferrell, p. 88. 

The Morgan group had floated one-and-a-half billion dollars in 

loans to Britain and France. With the fortunes of war turning against 

them, investors were facing the threat of a total loss. As Ferdinand 

Lundberg observed: "The declaration of war by the United States, in 

addition to extricating the wealthiest American families from a dangerous 

situation, also opened new vistas of profits." 2 

COLONEL HOUSE 

One of the most influential men behind the scenes at this time 

was Colonel Edward Mandell House, personal adviser to Woodrow 

Wilson and, later, to F.D.R. House had close contacts with both J.P. 

Morgan and the old banking families of Europe. He had received 

several years of his schooling in England and, in later years, surrounded 

himself with prominent members of the Fabian Society. 

Furthermore, he was a man of great personal wealth, most of it 

acquired during the War Between the States. His father, Thomas 

William House, had acted as the confidential American agent of 

1- Quoted by Ferdinand Lundberg, America's Sixty Families (New York: Vanguard 

Press, 1937), p. 141. Also see Link et al, eds., The Papers of Woodrow Wilson, Vol. 41 

(1983), pp. 336-37, cited by Ferrell, p. 90. 

2- Lundberg, pp. 141-42.



unknown banking interests in London. It was commonly believed 

he represented the Rothschilds. Although settled in Houston, Texas, 

the elder often remarked that he wanted his sons to "know and 

serve England." He was one of the few residents of a Confederate 

state who emerged from the War with a great fortune. 

It is widely acknowledged that Colonel House was the man who 

selected Wilson as a presidential candidate and who secured his 

nomination. He became Wilson's constant companion, and the 

President admitted publicly that he depended on him greatly for 

instruction and guidance. Many of Wilson's important appointive 

posts in government were hand selected by House. He and Wilson 

even went so far as to develop a private code so they could communicate 

freely over the telephone. The President himself had written: 

"Mr. House is my second personality. He is my independent self. 

His thoughts and mine are one," 

George Viereck, an admiring biographer of House, tells us: 

House had the Texas delegation in his pocket.... Always moving 

quietly in the background, he made and unmade several governors of 

Texas.... House selected Wilson because he regarded him as the best 

available candidate.... 

For seven long years Colonel House was Woodrow Wilson's other 

self. For six long years he shared with him all but the title of the Chief 

Magistracy of the Republic. For six years two rooms were at his 

disposal in the North Wing of the White House.... It was House who 

made the slate for the Cabinet formulated the first policies of the 

Administration and practically directed the foreign affairs of the 

United States. We had, indeed, two Presidents for one!... 

Super-ambassador, he talked to emperors and kings as an equal. He 

was the spiritual generalissimo of the Administration. He was the pilot 

who guided the ship. 

A SECRET AGREEMENT TO GET THE U.S. INTO WAR 

As the presidential election neared for Wilson's second term, 

Colonel House entered into a series of confidential talks with Sir 

1. The Columbia Encyclopedia (Third Edition, 1962, p. 2334) says the Democratic 

Party nomination went to Wilson when William Jennings Bryan switched his 

support to him "prompted by Edward M. House." For details, see Martin, p. 155- 

2. Charles Seymour, The Intimate Papers of Colonel House (New York: Houghton 

Mifflin Co., 1926), Vol 1, pp. 114-15. 

3. Seymour, Vol . I, p 

. 1 1 4 

4. George Sylvester Viereck, The Strangest Friendship in History: Woodrow Wilson 

and Colonel House (New York: Liveright Publishers, 1932), pp. 4, 18-19, 33, 35. 

William Wiseman, who was attached to the British embassy in 

Washington and who acted as a secret intermediary between House 

and the British Foreign Office. Charles Seymour writes: "Between 

House and Wiseman there were soon to be few political secrets." 1 

his was upsetting to the Secretary of State, William Jennings 

Bryan. Mrs. Bryan, as co-author of her husband's memoirs, writes: 

While Secretary Bryan was bearing the heavy responsibility of the 

Department of State, there arose the curious conditions surrounding 

Mr. E.M. House's unofficial connection with the President and his 

voyages abroad on affairs of State, which were not communicated to 

Secretary Bryan.. . . The President was unofficially dealing with foreign 

governments. 

What was the purpose of those dealings? It 

was nothing less 

than to work out the means whereby the United States could be 

brought into the war. Viereck explains: 

Ten months before the election which returned Wilson to the 

White House in 1916 "because he kept us out of war," Colonel House 

negotiated a secret agreement with England and France on behalf of 

Wilson which pledged the United States to intervene on behalf of the 

Allies. 

On March 9, 1916, Woodrow Wilson formally sanctioned the 

undertaking. If an inkling of the conversations between Colonel 

House and the leaders of England and France had reached the 

American people before the election, it might have caused incalculable 

revulsions of public opinion.... 

From this conversation and various conferences with Sir Edward 

Grey grew the Secret Treaty, made without the knowledge and 

consent of the United States Senate, by which Woodrow Wilson and 

House chained the United States to the chariot of the Entente.... After 

the War the text of the agreement leaked out. Grey was the first to 

tattle. Page discussed it at length. Colonel House tells its history. 

C. Hartley Grattan discusses it at length in his book, Why We FoughL 

But for some incomprehensible reason the enormous significance of 

the revelation never penetrated the consciousness of the American 

people. 3 

l> Seymour, Vol. 11, p. 399. 

|- William Jennings Bryan and Mary Baird Bryan, The Memoirs of William Jennings 

Bryan (New York: Kennikat Press, 1925), Vol. II, pp. 404^5. 

3 

- Viereck, pp. 106-08. This matter, along with the complete text of Sir Grey's 

memorandum, is discussed in The Memoirs of William Jennings Bryan Vol. 11, pp.



The basic terms of the agreement were that the United States 

government would offer to negotiate a peaceful settlement between 

Germany and the Allies and would then put forth a specific proposal 

for the terms of that settlement. If either side refused to accept 

the proposal, then the United States would come into the war as an 

ally of the other side. The catch was that the terms of the proposal 

were carefully drafted so that Germany could not possibly accept 

them. Thus, to the world, it would look as though Germany was at 

fault and the United States was humanitarian. As Ambassador Page 

observed in a memorandum dated February 9, 1916: 

House arrived from Berlin-Havre-Paris full of the idea of 

American intervention. First his plan was that he and I and a group of 

the British Cabinet (Grey, Asquith, Lloyd George, Reading, etc.) 

should at once work out a minimum programme of peace—the least 

that the Allies would accept, which, he assumed, would be unacceptable to 

the Germans; and that the President would take this programme and 

present it to both sides; the side that declined would be responsible for 

continuing the war.... Of course, the fatal moral weakness of the 

foregoing scheme is that we should plunge into the War, not on the 

merits of the cause, but by a carefully sprung trick. 

On the surface it is a paradox that Wilson, who had always been 

a pacifist, should now enter into a secret agreement with foreign 

powers to involve the United States in a war which she could easily 

avoid. The key that unlocks this mystery is the fact that Wilson also 

was an internationalist. One of the strongest bonds between House 

and himself was their common dream of a world government. They 

both recognized that the American people would never accept such 

a concept unless there were extenuating circumstances. They reasoned 

that a long and bloody war was probably the only event that 

could condition the American mind to accept the loss of national 

sovereignty, especially if it were packaged with the promise of putting 

an end to all wars in the future. Wilson knew, also, that, if the 

United States came into the war early enough to make a real difference 

on the battlefield and if large amounts of American dollars 

could be loaned to the Allied powers, he would be in a position after 

the war to dictate the terms of peace. He wrote to Colonel House: 

"England and France have not the same views with regard to peace 

as we have by any means. When the war is over, we can force them 

1. Quoted by Viereck, pp. 112-13. 

lo our way of thinking, because by that rime they will among other 

things be financially in our hands." 1 

And so Wilson tolerated the 

agony of mixed emotions as he plotted for war as a necessary evil to 

bring about what he perceived as the ultimate good of world government. 

With the arrival of 1917, the President was planting hints of both 

war and world government in almost every public utterance. In a 

typical statement made in March of that year, he said: "The tragic 

ents of the thirty months of vital turmoil through which we have 

just passed have made us citizens of the world. There can be no 

turning back. Our own fortunes as a nation are involved, whether 

we would have it so or not/ 

It was about this same time that Wilson called together the 

Democratic leaders of Congress to a special breakfast meeting at the 

White House. He told them that, in spite of public sentiment, there 

were many sound reasons for the country to enter the war and he 

asked them to help him sell this plan to Congress and the voters. 

Harry Elmer Barnes tells us: 

These men were opposed to war and, hence, rejected his proposals 

somewhat heatedly. Wilson knew that it was a poor time to split the 

party just before an election, so he dropped the matter at once and, 

with Col. House, mapped out a pacifist platform for the coming 

campaign. Governor Martin Glynn of New York and Senator Ollie 

James of Kentucky were sent to the St. Louis convention to make 

keynote speeches, which were based on the slogan: "He kept us out of 

war!"... Before he had been inaugurated a second time, the Germans 

played directly into his hands by announcing the resumption of 

submarine warfare. ... 

It was fortunate for Britain and the bankers that 

the Germans made this timely blunder, as Great Britain had 

overdrawn her American credit by some $450,000,000 and the bankers 

were having trouble in floating more large private loans. It was 

necessary now to_pass on the burden of financing the Entente to the 

Federal Treasury. 

1- Quoted by Ferrell, p. 88. 

2- Ferrell, p. 12. 

3. Harry Elmer Barnes, In Quest of Truth and Justice: De-Bunkmg the War Guilt Myth 

(Chicago: National Historical Society, 1928; rpt. New York: Arno Press & The New 

York Times, 1972), p. 104. For an additional account of this meeting, see Viereck, pp. 

180—83.



Lundberg, p. 257. 

financial group, a factor which immediately gives the banking 

SELLING WAR TO THE AMERICAN PEOPLE 

house the respectful attention of all alert independent publishers." 

Through secret agreements and trickery, America had been 

Morgan control over the media at that time is well documented, 

committed to war, but the political and monetary scientists realized 

that something still had to be done to change public sentiment. How 

» but he was by no means alone in this. During the 1912 hearings held 

could that be accomplished? 

by the Senate Privileges and Elections Committee, it was revealed 

Wall Street control over important segments of the media was 

that Representative Joseph Sibley from Pennsylvania was acting as 

3. 

considerable. George Wheeler tells us: "Around this time the 

a funnel for Rockefeller money to various cooperative Congressmen. 

A letter was introduced to the Committee written by Sibley in 

Morgan firm was choosing the top executives for the old and troubled 

Harper & Brothers publishing house.. . . In the newspaper field, 

1905 to John D. Archbold, the man at Rockefeller's Standard Oil 

Pierpont Morgan at this period was in effective control of the New Company who provided the money. In that letter Sibley said: "An 

York Sun,... the Boston News Bureau, Barron's magazine, and the 

efficient literary bureau 

Wall Street Journal." 1 

is needed, not for a day or a crisis but a 

permanent healthy control of the Associated Press and kindred 

On February 9, 1917, Representative Callaway from Texas took 

avenues. It will cost 

the floor of Congress and provided further insight. He 

money but will be the cheapest in the end." 

said: 

Lundberg comments further: 

In March, 1915, the J. 

P. Morgan interests, the steel, shipbuilding, 

and powder interests, and their subsidiary organizations, got together 

12 men high up in the newspaper world and employed them to select 

the most influential newspapers in the United States and sufficient 

number of them to control generally the policy of the daily press.... 

They found it was only necessary to purchase the control of 25 of the 

So far as can be learned, the Rockefellers have given up their old 

policy of owning newspapers and magazines outright, relying now 

upon the publications of all camps to serve their best interests in return 

for the vast volume of petroleum and allied advertising under 

Rockefeller control. After the J.P. Morgan bloc, the Rockefellers have 

greatest papers.. . . An agreement was reached; the policy of the papers 

the most advertising of any group to dispose of. And when advertising 

was bought to be paid for by the month; an editor was furnished for 

alone is not sufficient to insure the fealty of a newspaper, the 

each paper to properly supervise and edit information regarding the 

Rockefeller companies have been known to make direct payments in 

questions of preparedness, militarism, financial policies, and other 

return for a friendly editorial attitude. 

things of national and international nature considered vital to the 

interests of the purchasers. 

I 

It is not surprising, therefore, that a large part of the nation's 

Charles S. Mellen of the New Haven Railroad testified before 

press, particularly in the East, began to editorially denounce 

Congress that his Morgan-owned railroad had more than onethousand 

Germany. The cry spread across the land to take up arms against 

New England newspapers on the payroll, costing about 

"the enemy of western civilization." Editors became eloquent on the 

$400,000 annually. The railroad also held almost a half-million dollars 

in bonds issued by the Boston Herald. This web of control was 

patriotic duty of all Americans to defend world democracy. Massive 

"preparedness" demonstrations and parades were organized. 

multiplied by hundreds of additional companies which also were 

But it was not enough. In spite of this massive sales campaign, 

controlled by Morgan and other investment-banking houses. 

the American people still were not buying. Polls conducted at the 

In addition, the Morgan trust exercised media control by its 

time 

power 

showed popular sentiment continuing to run ten-to-one in 

of advertising. Writing in 1937, Lundberg says: "More advertising 

is controlled by the 

favor of J.P. Morgan junta than by any 

staying 

single 

out of Europe's war. Clearly, what was needed was 

something both drastic and dramatic to change public opinion. 

1. George Wheeler, Pierpont Morgan and Friends: The Anatomy of a Myth (Englewood 

Cliffs, New Jersey: Prentice Hall, 1973), pp. 283-84. 

1- Lundberg, p. 252. 

2. Congressional Record, Vol. 54, Feb- 9, 1917, p. 2947 

2- Ibid.,pp.97,249. 

3- ifctf.,p.247.


MORGAN CONTROL OVER SHIPPING 

Banking was not the only business in which Morgan had a 

strong financial interest. Using his control over the nation's railroads 

as financial leverage, he had created an international shipping 

trust which included Germany's two largest lines plus one of the 

two in England, the White Star Lines. Morgan had attempted in 

1902 to take over the remaining British line, the Cunard Company, 

but was blocked by the British Admiralty which wanted to keep 

Cunard out of foreign control so her ships could be pressed into 

military service, if necessary, in time of war. The Lusitania and the 

Mauretania were built by Cunard and became major competitors of 

the Morgan cartel. It is an interesting footnote of history, therefore, 

that, from the Morgan perspective, the Lusitania was quite dispensable. 

Ron Chernow explains: 

Pierpont assembled a plan for an American-owned shipping trust 

that would transpose his "community of interest" 

principle—cooperation among competitors in a given industry—to a 

global plane. He created ... the world's largest [fleet] under private 

ownership.... An important architect of the shipping trust was Albert 

Ballin, whose Hamburg-Amerika Steamship Line, with hundreds of 

vessels, was the world's largest shipping company.... Pierpont had to 

contend with a single holdout, Britain's Cunard Line.. . . After the Boer 

War, the Morgan combine and Cunard exhausted each other in 

debilitating rate wars." 1 

As stated previously, Morgan had been retained as the official 

trade agent for Britain. He handled the purchasing of all war materials 

in the United States and coordinated their shipping as well. 

Following in the footsteps of the Rothschilds of centuries past, he 

quickly learned the profitable skills of war-time smuggling. Colin 

Simpson, author of The Lusitania, describes the operation: 

Throughout the period of America's neutrality, British servicemen 

in civilian clothes worked at Morgan's. This great banking combine 

rapidly established such a labyrinthine network of false shippers, bank 

accounts and all the paraphernalia of smuggling that, although they 

fooled the Germans, there were also some very serious occasions 

when they flummoxed the Admiralty and Cunard, not to speak of the 

unfortunate passengers on the liners which carried the contraband. 2 

1 Chernow, . 

pp 1 00-01 

2. Colin Simpson, The Lusitania (Boston: Little, Brown & Co., 1 972), p. 50. 

THE LUSITANIA 

The Lusitania was a British passenger liner that sailed regularly 

between Liverpool and New York. She was owned by the Cunard 

Company, which, as previously mentioned, was the only major ship 

line which was a competitor of the Morgan cartel. She left New York 

harbor on May 1, 1915, and was sunk by a German submarine off 

the coast of Ireland six days later. Of the 1,195 persons who lost their 

lives, 195 were Americans. It was this event, more than any other, 

that provided the advocates of war with a convincing platform for 

their views, and it became the turning point where Americans reluctantly 

began to accept, if not the necessity of war, at least its inevitability. 

The fact that the Lusitania was a passenger ship is misleading. 

Although she was built as a luxury liner, her construction specifications 

were drawn up by the British Admiralty so that she could be 

converted, if necessary, into a ship of war. Everything from the 

horsepower of her engines and the shape of her hull to the placement 

of ammunition storage areas were, in fact, military designs. 

She was built specifically to carry twelve six-inch guns. The construction 

costs for these features were paid for by the British government. 

Even in times of peace, it was required that her crew include 

officers and seamen from the Royal Navy Reserve. 

In May of 1913, she was brought back into dry dock and outfitted 

with extra armor, revolving gun rings on her decks, and shell 

racks in the hold for ammunition. Handling elevators to lift 

shells to the guns were also installed. Twelve high-explosive cannons 

were delivered to the dry dock. All this is a matter of public 

record at the National Maritime Museum in Greenwich, England, 

but whether the guns were actually installed at that time is still hotly 

debated. There is no evidence that they were. In any event, on 

September 17, the Lusitania returned to sea ready for the rigors of 

war, and she was entered into the Admiralty fleet register, not as a 

passenger liner, but an armed auxiliary cruiser] From then on, she was 

listed in Jane's Fighting Ships as an auxiliary cruiser and in the British 

publication, The Naval Annual, as an armed merchant man. 

Part of the dry dock modification was to remove all the passenger 

accommodations in the lower deck to make room for more 

I. Simpson, pp. 17-28, 70. 

the

248 THE CREATURE FROM JEKYLL ISLAND SINK THE LUSTTANIA! 249 

military cargo. Thus, the Lusitania became one of the most important 

carriers of war materials—including munitions—from the 

United States to England. On March 8, 1915, after several close calls 

with German submarines, the captain of the Lusitania turned in his 

resignation. He was willing to face the U-boats, he said, but he was 

no longer willing "to carry the responsibility of mixing passengers 

with munitions or contraband/' 

CHURCHILL SETS A TRAP 

From England's point of view, the handwriting on the wall was 

clear. Unless the United States could be brought into the war as her 

ally, she soon would have to sue for peace. The challenge was how 

to push Americans off their position of stubborn neutrality. How 

that was accomplished is one of the more controversial aspects of 

the war. It is inconceivable to many that English leaders might have 

deliberately plotted the destruction of one of their own vessels with 

American citizens aboard as a means of drawing the United States 

into the war as an ally. Surely, any such idea is merely German 

propaganda. Robert Ballard, writing in National Geographic, says: 

"Within days of the sinking, German sympathizers in New York 

came up with a conspiracy theory. The British Admiralty, they said, 

had deliberately exposed Lusitania to harm, hoping she would be 

attacked and thus draw the U.S. into the war." 

Let's take a closer look at this conspiracy theory. Winston 

Churchill, who was First Lord of the Admiralty at that time, said: 

There are many kinds of maneuvers in war.... There are 

maneuvers in time, in diplomacy, in mechanics, in psychology; all of 

which are removed from the battlefield, but react often decisively 

upon it.... The maneuver which brings an ally into the field is as 

serviceable as that which wins a great battle. The maneuver which 

gains an important strategic point may be less valuable than that 

which placates or overawes a dangerous neutral. 

The maneuver chosen by Churchill was particularly ruthless. 

Under what was called the Cruiser Rules, warships of both England 

and Germany gave the crews of unarmed enemy merchant ships a 

1 Sunpson, p. 87. 

2. "Riddle of the Lusitania/' by Robert Ballard, National Geographic, AprU, 1994, 

p. 74. 

3. Winston Churchill, The World Crisis (New York: Scribner's Sons, 1949), p. 300. 

This appears on p. 464 of the Barnes & Noble 1993 reprint. 

chance to take to the lifeboats before sinking them. But, in October 

of 1914, Churchill issued orders that British merchant ships must no 

longer obey a U-boat order to halt and be searched. If they had 

armament, they were to engage the enemy, If they did not, they 

were to attempt to ram the sub. The immediate result of this change 

was to force German U-boats to remain submerged for protection 

and to simply sink the ships without warning. 

Why would the British want to do such a stupid thing that 

would cost the lives of thousands of their own seamen? The answer 

is that it was not an act of stupidity. It was cold blooded strategy. 

Churchill boasted: 

The first British countermove, made on my responsibility,... was to 

deter the Germans from surface attack. The submerged U-boat had to 

rely increasingly on underwater attack and thus ran the greater risk of 

mistaking neutral for British ships and of drowning neutral crews and 

thus embroiling Germany with other Great Powers. 1 

To increase the likelihood of accidentally sinking a ship from a 

neutral "Great Power," Churchill ordered British ships to remove 

their names from their hulls and, when in port, to fly the flag of a 

neutral power, preferably that of the United States. As further 

provocation, the British navy was ordered to treat captured U-boat 

crew members not as prisoners of war but as felons. "Survivors/' 

wrote Churchill, "should be taken prisoner or shot—whichever is 

the most convenient." 

Other orders, which now are an embarrassing 

part of official navy archives, were even more ruthless: "In a)] 

actions, white flags should be fired upon with promptitude/ 

The trap was carefully laid. The German navy was goaded into 

a position of shoot-first and ask questions later and, under those 

conditions, it was inevitable that American lives would be lost 

A FLOATING MUNITIONS DEPOT 

After many years of investigation, it is now possible to identify 

the cargo that was loaded aboard the Lusitania on her last voyage. It 

included 600 tons of pyroxyline (commonly called gun cotton), 4 

I Churchill, pp. 274-75. 

2. Taken from the Diaries of Admiral Sir Hubert Richmond, Feb. 27, 1915, National 

Maritime Museum, Greenwich, as quoted by Simpson, p. 37. 

3- P.R.O., ADM/116/1359, Dec. 23, 1914, quoted by Simpson, p. 37. 

4. Gun cotton explodes with three-times the force of gunpowder in a confined 

space and can be ignited at a much lower flash point. See Eissler, Manuel, Modern 

Higt 

High Explosives (New York John Wiley & Sons, 1914), pp. 110, 112, 372.


six-million rounds of ammunition, 1,248 cases of shrapnel shells 

(which may not have included explosive charges), plus an unknown 

quantity of munitions that completely filled the holds on the lowest 

deck and the trunkways and passageways of F deck. In addition, 

there were many tons of "cheese," "lard," "furs" and other items 

which were shown later to be falsely labelled. What they were is not 

now known, but it is certain they were at least contraband if not 

outright weapons of war. They were all consigned through the J.P. 

Morgan Company. But none of this was suspected by the public, 

least of all those hapless Americans who unknowingly booked a 

passage to death for themselves and their families as human decoys 

in a global game of high finance and low politics. 

The German embassy in Washington was well aware of the 

nature of the cargo being loaded aboard the Lusitania and filed a 

formal complaint to the United States government, because almost 

all of it was in direct violation of international neutrality treaties. 

The response was a flat denial of any knowledge of such cargo. 

Seeing that the Wilson Administration was tacitly approving the 

shipment, the German embassy made one final effort to avert disaster. 

It placed an ad in fifty East Coast newspapers, including those 

in New York City, warning Americans not to take passage on the 

Lusitania. The ad was prepaid and requested to be placed on the 

paper's travel page a full week before the sailing date. It read as 

follows: 

NOTICE! 

TRAVELERS intending to embark on the Atlantic voyage 

are reminded that a state of war exists between Germany 

and her allies and Great Britain and her allies; that the zone 

of war includes the waters adjacent to the British Isles; that, 

in accordance with formal notice given by the Imperial 

German Government, vessels flying the flag of Great 

Britain, or of any of her allies, are liable to destruction in 

those waters and that travelers sailing in the war zone on 

ships of Great Britain or her allies do so at their own risk. 

IMPERIAL GERMAN EMBASSY 

Washington, D.C., April 22, 1915. 

Icial 

Although the ad was in the hands of newspapers in time for the 

requested deadline, the State Department intervened and, raising 

the specter of possible libel suits, frightened the publishers into not 

printing it without prior clearance from State Department attorneys. 

Of the fifty newspapers, only the Des Moines Register carried the ad 

pn the requested date. What happened next is described by 

Simpson: 

George Viereck [who was the editor of a German-owned 

newspaper at that time and who had placed the ads on behalf of the 

embassy] spent April 26 asking the State Department why his 

advertisement had not been published. Eventually he managed to 

obtain an interview with [Secretary of State, William Jennings] Bryan 

and pointed out to him that on all but one of her wartime voyages the 

Lusitania had carried munitions. He produced copies of her 

supplementary manifests, which were open to public inspection at the 

collector's office. More important, he informed Bryan, no fewer than 

six million rounds of ammunition were due to be shipped on the 

Lusitania the following Friday and could be seen at that moment being 

loaded on pier 54. Bryan picked up the telephone and cleared the 

publication of the advertisement. He promised Viereck that he would 

endeavor to persuade the President publicly to warn Americans not to 

travel. No such warning was issued by the President, but there can be 

no doubt that President Wilson was told of the character of the cargo 

destined for the Lusitania. He did nothing, but was to concede on the 

day he was told of her sinking that his foreknowledge had given him 

many sleepless hours. 

It is probably true that Wilson was a pacifist at heart, but it is 

equally certain that he was not entirely the master of his own destiny. 

He was a transplanted college professor from the ivy-covered 

walls of Princeton, an internationalist at heart who dreamed of helping 

to create a world government and to usher in a millennium of 

peace. But he found himself surrounded by and dependent upon 

men of strong wills, astute political aptitudes, and powerful finan- 

resources. Against these forces, he was all but powerless to act 

on his own, and there is good reason to believe that he inwardly 

suffered over many of the events in which he was compelled to participate. 

We shall leave it to others to moralize about a man who, by 

his deliberate refusal to warn his countrymen of their mortal peril, 

sends 195 of them to their watery graves. We may wonder, also, 

1. Simpson, p. 97.


about how such a man can commit the ultimate hypocrisy of 

condemning the Germans for this act and then doing everything 

possible to prevent the American public from learning the truth. It 

would be surprising if the extent of his private remorse was not 

greater than merely a few sleepless hours. 

THE FINAL VOYAGE 

But we are getting slightly ahead of the story. While Morgan 

and Wilson were setting the deadly stage on the American side of 

the Atlantic, Churchill was playing his part on the European side. 

When the Lusitania left New York Harbor on May 1, her orders were 

to rendezvous with a British destroyer, the Jnno, just off the coast of 

Ireland so she would have naval protection as she entered hostile 

waters. When the Lusitania reached the rendezvous point, however, 

she was alone, and the captain assumed they had missed each other 

in the fog. In truth, the Juno had been called out of the area at the last 

minute and ordered to return to Queenstown. And this was done 

with the full knowledge that the Lusitania was on a direct course 

into an area where a German submarine was known to be operating. 

To make matters worse, the Lusitania had been ordered to cut 

back on the use of coal, not because of shortages, but because it 

would be less expensive. Slow targets, of course, are much easier to 

hit. Yet, she was required to shut down one of her four boilers and, 

consequently, was now entering submarine-infested waters at only 

75% of her potential speed. 

As the Lusitania drew closer to hostile waters, almost everyone 

knew she was in grave danger. Newspapers in London were alive 

with the story of German warnings and recent sinkings. In the map 

room of the British Admiralty, Churchill watched the play unfold 

and coldly called the shots. Small disks marked the places where 

two ships had been torpedoed the day before. A circle indicated the 

area within which the U-boat must still be operating. A larger disk 

represented the Lusitania travelling at nineteen knots directly into the 

circle. Yet, nothing was done to help her. Admiral Coke at Queenstown 

was given perfunctory instructions to protect her as best he 

could, but he had no means to do so and, in fact, no one even bothered 

to notify the captain of the Lusitania that the rendezvous with 

the Juno had been canceled. 

One of the officers present in the high-command map room on 

that fateful day was Commander Joseph Kenworthy, who pre- 3. 

viously had been called upon by Churchill to submit a paper on 

w hat would be the political results of an ocean liner being sunk with 

American passengers aboard. He left the room in disgust at the 

cynicism of his superiors. In 1927, in his book, The Freedom of the 

Seas, he wrote without further comment: "The Lusitania was sent at 

considerably reduced speed into an area where a U-boat was 

known to be waiting and with her escorts withdrawn/' Further 

comment is not needed. 

Colonel House was in England at that time and, on the day of 

the sinking, was scheduled to have an audience with King 

George V. He was accompanied by Sir Edward Grey and, on the 

way, Sir Grey asked him: "What will America do if the Germans 

sink an ocean liner with American passengers on board?" As 

recorded in House's diaries, he replied: "I told him if 

this were 

done, a flame of indignation would sweep America, which would in 

itself probably carry us into the war." 2 Once at Buckingham Palace, 

King George also brought up the subject and was even more specific 

about the possible target. He asked, "Suppose they should sink the 

." 

Lusitania with American passengers on board.. . 

A MIGHTY EXPLOSION, A WATERY GRAVE 

Four hours after this conversation, the black smoke of the 

Lusitania was spotted on the horizon through the periscope of the 

German submarine, 17-20. The ship came directly toward the 

U-boat, allowing it to full-throttle out of her path and swing around 

for a ninety-degree shot at her bow as she passed only 750 yards 

away. The torpedo struck nine feet below the water line on the starboard 

side slightly forward of the bridge. A second torpedo was 

readied but not needed. Quickly after the explosion of the impact, 

there was a second and much larger explosion that literally blew the 

side off of cargo hold number two and started the great ship immediately 

toward the bottom. And what a hole it must have been. The 

Lusitania, one of the largest ships ever built, sank in less than eightn 

minutes! 

| Joseph M. Kenworthy and George Young, The Freedom of the Seas (New York: 

Ayer Company, 1929), p. 211. 

Seymour, Vol I, p. 432 

&&., p. 432.



Survivors among the crew who were working in the boiler 

, In the final analysis, it makes little difference whether the explosion 

was caused by munitions or coal dust. The fact that it could have 

rooms during the attack have attested that the boilers did not blow 

at that time. Simpson tells us: 

been caused by munitions is sufficient for the case. 

The G torpedo had failed to blow in the inner bulkhead of No l A HURRIED COVER-UP 

boiler room, but just further forward something blew out most of the 

bottom 

An official inquiry, under the direction of Lord Mersey, was 

of the bow of the ship. It may have been the Bethlehem 

Company's 3-inch held to determine the facts of the sinking and to place the blame. It 

shells, the six million rounds of rifle ammunition or 

the highly dubious contents of the bales was a rigged affair from the beginning. All evidence and testimony 

of furs or the small 

forty-pound boxes of cheese. Divers who have been down was carefully pre-screened to make sure that nothing was admitted 

to the wreck 

unanimously testify that the bow was blasted by a massive internal 

ffnto the record which would reveal duplicity on the part of British 

explosion, and large pieces of the bow plating, buckled from the 

or American officials. Among the papers submitted to Lord Mersey 

inside, are to be found some distance from the hull. 1 

prior to the hearings was one from Captain Richard Webb, one of 

When a search team from the Woods Hole Oceanographic Institute 

surveyed the wreckage in the summer of 1993, they directed by the board of Admiralty to inform you that it is consid- 

the men chosen by the navy to assist in the cover up. It read: "I am 

reported: 

"When our cameras swept across the hold, we got a big surpriseered 

politically expedient that Captain Turner, the master of the 

There was no hole.... We found no evidence that U-20's torpedo Lusitania, 

had 

be most prominently blamed for the disaster." 

detonated an explosion, undermining one theory of why the The final report was a most interesting document. Anyone reading 

it without knowledge of the facts would conclude that Captain 

liner 

sank.' 

It is difficult to share the team's surprise. Photographs show that 

William Turner was to blame for the disaster. Even so, Mersey 

the wreck is resting on its starboard (right) side. Since that is where 

'attempted to soften the blow. He wrote: "...blame ought not to be 

the torpedo struck, it is logical that the hole would not be visible. 

imputed to the captain.... His omission to follow the advice in all 

It 

would be on the side buried in the ocean floor. The team reported 

respects cannot fairly be attributed either to negligence or incompetence." 

And then he added a final paragraph which, on the surface, 

that they were able to inspect only part of the hull's underside. That 

is because most of it—plus the entire starboard side—is buried in the 

appears to be a condemnation of the Germans but which, if read 

muck. Since the torpedo struck only nine feet below the waterline, 

with understanding of the background, was an indictment of 

the hole would not logically be anywhere near the bottom of the 

Churchill, Wilson, House and Morgan. He wrote: 

hull but at a point midway between the main deck and the bottom 

The whole blame for the cruel destruction of life in this 

In other words, it would be at the midpoint of the side that is now 

catastrophe must rest solely with those who plotted and with those 

facing down. Failure to see the hole does not undermine the theory 

L who committed the crime. 

of internal explosion. It is exactly what one would expect. 

Did Lord Mersey know that there could be a dual meaning to his 

In any event, it should be obvious that the Lusitania would not 

Words? Perhaps not, but, two days after delivering his judgment, he 

have gone to the bottom in eighteen minutes without a hole someivhere. 

Even the search team had to acknowledge that fact indirectly 

ices. 

wrote to Prime Minister Asquith and turned down his fee for serv- 

when 

He added: "I must request that henceforth I be excused from 

it addressed the question of what might have caused the 

pdministering His Majesty's Justice." In later years, his only comment 

on the event was: "The Lusitania case was a damn dirty 

second explosion. In an obvious effort to avoid giving support to a 

"conspiracy theory," the report concluded that the explosion probably 

was caused, not by munitions, but by coal dust. 

business." 3 

1- The Papers of Lord Mersey, Bignor Park, Sussex, as quoted by Simpson, p. 190. 

1. Simpson, p. 157. 

2. Simpson, p. 241. 

2. Ballard, "Riddle of the Lusitania/' pp. 74, 76. 

3. Ibid., p. 241.


THE CRY FOR WAR 

The purposes of the Cabal would have been better served had 

an American ship been sunk by the Germans, but a British ship with 

195 Americans drowned was sufficient to do the job. The players 

wasted no time in whipping up public sentiment. Wilson sent a note 

of outraged indignation to the Imperial German Government and 

this was widely quoted in the press. 

By that time, Bryan had become completely disillusioned by the 

duplicity of his own government. On May 9, he sent a dour note to 

Wilson: 

Germany has a right to prevent contraband going to the Allies 

and a ship carrying contraband should not rely upon passengers to 

protect her from attack-it would be like putting women and children 

in front of an army. 

This did not deter Wilson from his commitment. The first note 

was followed by an even stronger one with threatening overtones 

which was intensely discussed at the Cabinet meeting on the first of 

June. McAdoo, who was present at the meeting, says: 

I remember that Bryan had little to say at this meeting; he sat 

Uvoughout the proceedings with his eyes half closed most of the time 

After the meeting he told the President, as I learned later, that he could 

not sign the note.... Bryan went on to say that he thought his 

usefulness as Secretary of State was over, and he proposed to resign. 2 

At the request of Wilson, McAdoo was dispatched to the Bryans' 

home to persuade the Secretary to change his mind, lest his resignation 

be taken as a sign of disunity within the President's Cabinet. 

Bryari agreed to think it over one more day but, the following morning 

his decision remained firm. In his memoirs, annotated by his 

wife, Mrs. Bryan reveals that her husband could not sleep that night 

He was so restless I suggested that he read a little rill he should 

become drowsy. He had in his handbag a copy of an old book 

printed in 1829 and called A Wreath of Appreciation of Andrew 

Jackson. He found it very interesting." 

3 

What irony. In chapter seventeen we shall review the total war 

waged by President Jackson against the Bank of the United States, 

the 

predecessor of the Federal Reserve System, and we shall be 

reminded that it was Jackson who prophesied: 

Is there no danger to our liberty and independence in a bank that 

in its nature has so little to bind it to our country?... [Is there not] cause 

to tremble for the purity of our elections in peace and for the 

independence of our country in war?... Controlling our currency, 

receiving our public monies, and holding thousands of our citizens in 

dependence, it would be more formidable and dangerous than a naval 

and military power of the enemy. 

One can only wonder what thoughts went through Bryan's 

mind as he recalled Jackson's warning and applied it to the artificially 

created war hysteria that, at that very moment, was being 

generated by the financial powers on Wall Street and at the newly 

created Federal Reserve. 

From England, Colonel House sent a telegram to President 

Wilson which he, in turn, read to his Cabinet It became the genesis 

of thousands of newspaper editorials across the land. He said 

piously: 

America has come to the parting of the ways, when she must 

determine whether she stands for civilized or uncivilized warfare. We 

can no longer remain neutral spectators. Our action in this crisis will 

determine the part we will play when peace is made, and how far we 

may influence a settlement for the lasting good of humanity. We are 

being weighed in the balance, and our position amongst nations is 

being assessed by mankind. 

In another telegram two days later, House reveals himself as the 

master psycho-politician playing on Wilson's ego like a violinist 

stroking the strings of a Stradivarius. He wrote: 

If, unhappily, it is necessary to go to war, I hope you will give the 

world an exhibition of American efficiency that will be a lesson for a 

century or more. It is generally believed throughout Europe that we 

are so unprepared and that it would take so long to put our resources 

into action, that our entering would make but little difference. 

In the event of war, we should accelerate the manufacture of 

munitions to such an extent that we could supply not only ourselves 

but the Allies, and so quickly that the world would be astounded. 

1 - Bryan, Vol II, 

pp. 398-9. 

2. McAdoo, p. 333. 

3. Bryan, Vol. II, p. 424. 

1 - Herman E. Krooss, ed., Documentary History of Banking and Currency in the Unites 

States (New York: Chelsea House, 1983), Vol. ni, pp. 26-27. 

2. Seymour, p. 434. 

3. JM.,p.435.


Congress could not resist the combined pressure of the press 

and the President On April 16, 1917, the United States officially 

declared war on the Axis powers. Eight days later, Congress dutifully 

passed the War Loan Act which extended $1 billion in credit to 

the Allies. The first advance of $200 million went to the British the 

next day and was immediately applied as payment on the debt to 

Morgan. A few days later, $100 million went to France for the same 

purpose. But the drain continued. Within three months the British 

had run up their overdraft with Morgan to $400 million dollars, and 

the firm presented it to the government for payment. The Treasury, 

however, was unable to put its hands on that amount of money 

without jeopardizing its own spendable funds and, at first, refused 

to pay. The problem was quickly solved, however, through a 

maneuver described at some length in chapter ten. The Federal 

Reserve System under Benjamin Strong simply created the needed 

money through the Mandrake Mechanism. "The Wilson Administration 

found itself in an extremely awkward position, having to 

bail out J.P. Morgan," wrote Ferrell, but Benjamin Strong "offered to 

help [Treasury-Secretary] McAdoo out of the difficulty. Over the 

following months in 1917-18 the Treasury quietly paid Morgan 

piecemeal for the overdraft." 1 

By the time the war was over, the 

Treasury had loaned a total of $9,466,000,000 including 

$2,170,000,000 given after the Armistice. 

That was the cash flow they had long awaited. In addition to 

saving the Morgan loans, even larger profits were to be made from 

war production. The government had been secretly preparing for 

war for six months prior to the actual declaration. According to 

Franklin D. Roosevelt, then Assistant Secretary of the Navy, the 

Navy Department began extensive purchasing of war supplies in 

the Fall of 1916. 

Ferdinand Lundberg adds this perspective: 

By no accident all the strategic government posts, notably those 

concerned with buying, were reserved for the Wall Street patriots. On 

the most vital appointments, Wilson consulted with Dodge [President 

of Rockefeller's National City Bank], who ... 

recommended the 

hitherto unknown [Bernard] Baruch, speculator in copper stocks, as 

chairman of the all-powerful War Industries Board.... 

1. Ferrell, p. 89,90. 

2. Clarence W. Barron, They Told Barron- Notes of Clarence Walker Barron, edited 

and SamUel Tayl°r M°0re (NeW Y° rk; 

193$' 

Har 

51 

P er and Br0*e

260 THE CREATURE FROM JEKYLL ISLAND SINK THE LUSITANIA! 

between the political and monetary scientists had performed its 

mission well. 

SUMMARY 

To finance the early stages of World War I, England and France 

had borrowed heavily from investors in America and had selected 

the House of Morgan as sales agent for their bonds. Morgan also 

acted as their U.S. purchasing agent for war materials, thus profiting 

from both ends of the cash flow: once when the money was borrowed 

and again when it was spent. Further profits were derived 

from production contracts placed with companies within the 

Morgan orbit. But the war began to go badly for the Allies when 

Germany's submarines took virtual control of the Atlantic shipping 

lanes. As England and France moved closer to defeat or a negotiated 

peace on Germany's terms, it became increasingly difficult to sell 

their bonds. No bonds meant no purchases, and the Morgan cash 

flow was threatened. Furthermore, if the previously sold bonds 

should go into default, as they certainly would in the wake of 

defeat, the Morgan consortium would suffer gigantic losses. 

The only way to save the British Empire, to restore the value of 

the bonds, and to sustain the Morgan cash flow was for the United 

States government to provide the money. But, since neutral nations 

were prohibited from doing that by treaty, America would have to 

be brought into the war. A secret agreement to that effect was made 

between British officials and Colonel House, with the concurrence 

of the President. From that point forward, Wilson began to pressure 

Congress for a declaration of war. This was done at the very time he 

was campaigning for reelection on the slogan "He kept us out of 

war." Meanwhile, Morgan purchased control over major segments 

of the news media and engineered a nation-wide editorial blitz 

against Germany, calling for war as an act of American patriotism. 

Morgan had created an international shipping cartel, including 

Germany's merchant fleet, which maintained a near monopoly on 

the high seas. Only the British Cunard Lines remained aloof. The 

Lusitania was owned by Cunard and operated in competition with 

Morgan's carteL The Lusitania was built to military specifications 

and was registered with the British Admiralty as an armed auxiliary 

cruiser. She carried passengers as a cover to conceal her real mission, 

which was to bring contraband war materials from the United 

States. This fact was known to Wilson and others in his administration, 

but they did nothing to stop it. 

261 

When the German en*assy 

Xd to publish a warning to American passengers, the Sta e 

Apartment intervened and prevented newspapers from printing it 

wC*e Lusitania left New York harbor on her final voyage, she 

-^»^2S«States into the war 

7Z that could accomplish that was proper-^ven the coldly calcu- 

SacrificeofoneofhergreatshipswithEngUshmenaboardû 

ht trick was to have Americans on board also in order to create the 

toper emotional climate in the United States. As the Lus^nn 

Cved -to hostile waters, where a German U-boat was known o 

"operating, First Lord of the Admiralty Winston Church 

would mean the difference between defeat and victory, and any- 

ordered her destroyer protection to abandon her. This, plus the fact 

SJ£ had been oVred to travel at reduced speed, made her an 

easy target. After the impact of one well placed torpedo, a mighty 

second explosion from within ripped her apart, and the ship that 

many believed could not be sunk, guxgled to the bottom in less than 

ei^hTd^tad been done, and it set in motion great waves of 

revulsion against the Germans. These waves eventually flooded 

through Washington and swept the United States into war. Within 

days of the declaration, Congress voted $1 bilhon in credit for 

England and France. $200 million was sent to England immediately 

and was applied to the Morgan account. The vast quantity of money 

needed to" finance the war was created by the Federal Reserve 

System, which means it was collected from Americans through that 

fully one-half of all they had saved. The infinitely higher cost in 

American blood was added to the bill. 

>rs0nali- 

Thus it was that the separate motives of such diverse personal! 

ties as Winston Churchill, J.P. Morgan, Colonel House, and 

Woodrow Wilson all found common cause in bringing America into 

World War I. Churchill maneuvered for military advantage 

Morean sought the profits of war, House schemed for political 

power, and Wilson Lamed of a chance to dominate a post-war 

League of Nations.

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Ilusitania: 

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W» m AtWk Svricc Sufi 

J*"*- : 

F*i,M* * J Wit I 

Chapter Thirteen 

ASQUERADE 

N MOSCOW 

The secret societyfounded by Cecil Rhodes for the 

purpose of world dominion; the establishment in 

America of a branch of tluit group called the 

Council cm Foreign Relations; the role played by 

financiers 

representing both of these groups in 

financing the Russian revolution; the use of the 

Red Cross mission in Moscow as a caver for that 

maneuver. 

The German 

Embassy attempted 

to place ads in 50 

newspapers warning 

that the Lusitania was 

a target of war, but 

the U.S. government 

prevented them from 

being printed except 

for this one which 

was run in the 

Des Moines Register. 

When the ship was 

sunk off the coast of 

Ireland with 195 

Americans aboard, it 

became the center of 

a national campaign 

to generate emotional 

support for coming 

into the war. 

One of the greatest myths of contemporary history is that the 

Bolshevik Revolution in Russia was a popular uprising of the 

downtrodden masses against the hated ruling class of the Tsars. As 

we shall see, however, the planning, the leadership, and especially 

the financing came entirely from outside Russia, mostly from 

ifinanciers in Germany, Britain, and the United States. Furthermore, 

we shall see that the Rothschild Formula played a major role in 

shaping these events. 

This amazing story begins with the war between Russia and 

Japan in 1904. Jacob Schiff, who was head of the New York 

investment firm of Kuhn, Loeb, and Company, had raised the 

capital for large war loans to Japan. It was due to this funding that 

the Japanese were able to launch a stunning attack against the 

Russians at Port Arthur and, the following year, to virtually 

decimate the Russian fleet. In 1905, the Mikado awarded Jacob 

Schiff a medal, the Second Order of the Treasure of ]apan, in 

recognition of his important role in that campaign. 

During the two years of hostilities, thousands of Russian 

soldiers and sailors were taken as prisoners. Schiff paid for the 

printing of one-and-a-half tons of Marxist propaganda and had it 

delivered to the prison camps. He also sent scores of Russianspeaking 

revolutionaries, trained in New York, to distribute the


MASQUERADE IN MOSCOW 265 

pamphlets among the prisoners and to indoctrinate them into 

Russian revolution as "...what we had hoped and striven for these 

rebellion against their own government. When the war was ended, 

long years." 

50,000 officers and enlisted men returned home to become virtual 

In the February 3, 1949, issue of the New York Journal American, 

seeds of treason against the Tsar. They were to play a major role a 

Schiff's grandson, John, was quoted by columnist Cholly Knickerbocker 

as saying that his grandfather had given about $20 million 

few years later in creating mutiny among the military during the 

Communist takeover of Russia. 

for the triumph of Communism in Russia. 

TROTSKY WAS SCHIFFS AGENT 

When Trotsky returned to Petrograd in May of 1917 to organize 

One of the best known Russian revolutionaries at that time was 

the Bolshevik phase of the Russian Revolution, he carried $10,000 

Leon Trotsky. In January of 1916, Trotsky was expelled from France 

for travel expenses, a generously ample fund considering the value 

and came to the United States at the invitation of Schiff. His travel 

of the dollar at that time. The amount is known with certainty 

expenses aboard the Monserrat were paid by his host. He remained 

because Trotsky was arrested by Canadian and British naval 

for several months while writing for a Russian socialist paper 

personnel when the ship on which he was travelling, the S.S. 

the 

Novy Mir (New World), and giving revolutionary Kristianiafjord, put in at Halifax. 

speeches 

The money in his possession is now 

at mass 

meetings in New York City. According to Trotsky himself, 

a matter of official record. Because Trotsky 

on many 

was a known enemy of 

occasions a chauffeured limousine was placed the Tsar and because Germany was then at war with Russia, it was 

at the service of his 

family by a wealthy friend identified as Dr. M. In his book, 

assumed that the $10,000 was German money given to him in 

My 

New 

Life' 

Trotsky wrote: 

York. The evidence, however, is that this, too, came from Kuhn, 

The 

Loeb and Company. 

doctor's wife took my wife and the boys out driving and was 

very kind Trotsky was not arrested 

to them. 

on a whim. He was recognized as a 

But she was a mere mortal, whereas the chauffeur 

was a magician, a titan, a 

threat to 

superman! 

the best interests of England, Canada's mother country in 

With the wave of his hand he 

made the machine obey his slightest command. the British 

To 

Commonwealth. Russia was an ally of England in the 

sit beside him was 

the supreme delight. When they went into a tea-room, the 

First 

boys would 

World War which then was raging in Europe. Anything that 

anxiously demand of their mother, "Why doesn't the chauffeur come 

would weaken Russia—and that certainly included internal revolution—would 

be, in effect, to strengthen Germany and weaken 

in? 

It must have been a curious sight to see the 

England. In 

family 

New York, on the night before his departure, Trotsky 

of the great 

socialist radical, defender of the working class, 

had given a 

enemy 

speech in which he said: "I am going back to Russia to 

of capitalism, 

enjoying the pleasures of tea rooms and 

overthrow the provisional government and stop the war with 

chauffeurs, the very 

symbols of capitalist luxury. In any Germany." 

event, 

Trotsky, therefore, represented a real threat to 

it is now known that 

almost all of his expenses in New York, 

England's war effort. 

including 

He was arrested as a German agent and taken 

the mass rallies, 

were paid for by Jacob Schiff. 

as a prisoner of war. 

On March 23, 1917, a mass meeting was held 

With this in mind, at Carnegie 

we can appreciate the great strength of those 

Hall to 

celebrate the abdication of Nicholas II, which 

mysterious forces, both in England 

meant 

and the United States, that 

the overthrow 

of Tsanst rule in Russia. Thousands intervened 

of 

on Trotsky's behalf. Immediately, telegrams began to 

socialists, Marxists, nihilists, 

and anarchists attended to cheer come 

the 

into Halifax from such divergent sources as an obscure 

event. The following day there 

was published on page two of the New York Times, a telegram from 

1 

Jacob 

"Mayor Calls Pacifists Traitors/' The 

Schiff which 

New York Times, March 24, 1917, 

had p. 2. 

been read to this audience. He expressed 

|t See Anthony C. Sutton, Ph.D., Wall Street and the Bolshevik Revolution (New 

regrets that he could not attend and then described the Rochelle, 

successful 

New York: Arlington House, 1974), pp. 21-24. 

3. A full report on this meeting had been submitted to the U.S. Military Intelli- 

I- Leon Trotsky, My Life (New York: Scribner's, 1930), p. 277. 

gence. See Senate Document No. 62, 66th Congress, Report and Hearings of t\\e 

Subcommittee on the Judiciary, United States Senate, 1919, Vol. II, p. 2680.


attorney in New York City, from the Canadian Deputy Postmaster- 

General, and even from a high-ranking British military officer 

mqu^nng into Trotsky's situation and urging his immediate release 

The head of the British Secret Service in America at the time was Sir 

Wilham Wiseman who, as fate would have it, occupied t^ 

apartment directly above the apartment of Edward Mandell House 

and who had become fast friends with him. House advised 

Wiseman that President Wilson wished to have Trotsky released 

Wiseman advised his government, and the British Admiralty' 

issued orders on April 21st that Trotsky was to be sent on his waJ 

It was a fateful decision that would affect, not only the outcome of 

war, but the future of the entire world. 

SCHIFF WAS NOT ALONE 

It would be a mistake to conclude that Jacob Schiff acted alone 

m his drama. Trotsky could not have gone even as far as Halifax 

withou having been granted an American passport, and this 

accomplished 

was 

by the personal intervention of President Wilson. 

Professor Anthony Sutton says: 

President Woodrow Wilson was the fairy godmother 

provided 

who 

Trotsky with a passport to return to Russia to 

forward" the 

Cry 

revolution.... At the same time careful State DeparmS 

bureaucrats, concerned about such revolutionaries entering 

were unilaterally 

RusTa 

attempting to tighten up passport procedureJ 

oUh£ilf ere T' 6 °êTS ^^ 

3S WeU 

' 

- ^ 1911 the SL L' 

' 

s MP** 

""^ Robert Minor. Mnor 

^ 

* 

was lat r i X 

T1 

RUSSia f°r evolutionary and, fn f t i*??"** activities 

in fact, was himself bankrolled by famous Wall Street financartoonT 

7 "T i 

akly 3SSUme that hC^** to P ic we "' ^ 

t0riCal 

S£TT£ t *% inP****- ^Sc 

» strays Karl 

with 

Marx, 

a book entitled Sialism under his arm, standing amid a 

t^2r 

* 

^Jf Street Gathered ar0Und and 8^ng Hm 

: UdSêS are CharaCterS in Silk hats Stifled 

T^TT( D' 

Rockefe"^ J-P. Morgan, John D. Ryan of National City 

all 


What emerges from this sampling of events is a clear pattern of 

strong support for Bolshevism coming from the highest financial 

power centers in the United States; from men who, 

and political 

supposedly, were "capitalists" and who, according to conventional 

wisdom, should have been the mortal enemies of socialism and 

communism. 

Nor was this phenomenon confined to the United States. 

Trotsky, in his book, My Life, tells of a British financier who, in 1907, 

gave him a 

"large loan" to be repaid after the overthrow of the 

Tsar. Arsene de Goulevitch, who witnessed the Bolshevik Revolution 

first hand, has identified both the name of the financier and the 

amount of the loan. "In private interviews," he said, "I have been 

told that over 21 million roubles were spent by Lord [Alfred] 

Milner in financing the Russian Revolution,... The financier just 

mentioned was by no means alone among the British to support the 

Russian revolution with large financial donations." Another name 

specifically mentioned by de Goulevitch was that of Sir George 

Buchanan, the British Ambassador to Russia at the time. 

It was one thing for Americans to undermine Tsarist Russia 

and, thus, indirectly help Germany in the war, because Americans 

were not then into it, but for British citizens to do so was 

tantamount to treason. To understand what higher loyalty compelled 

these men to betray their battlefield ally and to sacrifice the 

blood of their own countrymen, we must take a look at the unique 

organization to which they belonged. 

THE SECRET SOCIETY 

Lord Alfred Milner was a key figure in organizing a secret 

society which, at the time of these events, was about sixteen years 

old. It was dedicated to nothing less than the quiet domination of 

the world. The conquest of Russia was seen as but the first phase of 

that plan. Since the organization is still in existence today and 

continues to make progress toward its goal, it is important to have 

its history included in this narrative. 

One of the most authoritative reference works on the history of 

this group is Tragedy and Hope by Dr. Carroll Quigley. Dr. Quigley 

Was a professor of history at Georgetown University where President 

Clinton had been one of his students. He was the author of the 

1 - See Arsene de Goulevitch, Czarism and Revolution (Hawthorne, California: Omni 

Publications, n.d v rpt. from 1962 French edition), pp. 224, 230.


widely used textbook, Evolution of Civilization; he was a member of 

the editorial board of the monthly periodical Current History; and 

7^,Îf consult^ h,rer and ^ such groups as the 

ndusâl CoUege of the Armed Forces, the Brooking Institution, 

the US. Naval Weapons Laboratory, the Naval College, the Smithsonian 

Institute, and the State Department But Dr. Quielev was 

mere 

no 

academic He also had been closely associated with many of 

the family dynasties of the super-rich. He was, by his own boast, an 

a fr0nt FOW 

^ 

°f 

sTucSre^ 

** W°rId,S m°ney P°wer 

When Dr. Quigley wrote his scholarly, 1300-page book of dry 

history, it was not intended for the masses. It was to be read by the 

intellectual elite and to that select readership he cautiously 

exposed one of the best-kept secrets of all time. He also made it 

dear however, that he was a friendly apologist for this group and 

that he supported its goals and purposes. Dr. Quigley said: 

I know of the operation of this network because I have studied it 

tor twenty years and was permitted for two years, in the 1960s to 

exarnme lts papers and secret record, I have no aversion toTor to 

mosl.of its aims and have, for much of my life, been close to it and to 

many of its mstruments. ... In general, my chief difference of opinion is 

that it wishes to remain unknown. F 

1 

As mentioned, Quigley's book was intended for an elite readership 

composed of scholars and network insiders. But, unexpectedly, 

it began to be quoted in the journals of the John Birch 

which 

Sodety 

correctly had perceived that his work provided a valuabfe 

insight to the inner workings of a hidden power structure 

That 

exposure triggered a large demand for the book by people who 

were opposed to the network and curious to see what LLfder had 

to say about it. 

faT That was not according to the original plan What 

by 

wSXi hT oeSmbed Q^' "«*•£ * a persona 

letter dated December 9, 1975, he wrote: 

brou^h?^VVT 

^^ °f^^ Und H °P e a book < "***^ 

KS 

3t 

and^H e °T^^ kn°Wn - 

P ubl^her stoppedLlHng it 

^ 

Sh,? ^ he W°Uld reprint^* 197 * ^ told my Wer 

1 

me ^ches as it apparently says something which 

that they had destroyed the plates in 1968). The rare-book price wIS 

MacMln^ 


up to $135 and parts were reprinted in violation of copyright, but I 

could do nothing because I believed the publisher, and he would not 

take action even when a pirate copy of the book appeared. Only when 

I hired a lawyer in 1974 did I get any answers to my questions.. . 

In another personal letter, Quigley commented further on the 

duplicity of his publisher: 

Tliey lied to me for six years, telling me that they would reprint 

when they got 2,000 orders, which could never happen because they 

told anyone who asked that it was out of print and would not be 

reprinted. They denied this to me until I sent them Xerox copies of 

such replies in libraries, at which they told me it was a clerk's error. In 

other words, they lied to me but prevented me from regaining 

publication rights.... I am now quite sure that Tragedy and Hope was 

suppressed.... 

To understand why "powerful people" would want to suppress 

this book, note carefully what follows. Dr. Quigley describes the 

goal of this network of world financiers as: 

. , . nothing less than to create a world system of financial control in 

private hands able to dominate the political system of each country 

and the economy of the world as a whole. This system was to be 

controlled in a feudalist fashion by the central banks of the world 

acting in concert, by secret agreements arrived at in frequent private 

meetings and conferences. . . 

Each central bank, in the hands of men like Montagu Norman 

of the Bank of England, Benjamin Strong of the New York Federal 

Reserve Bank, Charles Rist of the Bank of France, and HJalmar 

Schacht of the Reichsbank, sought to dominate its government by 

its ability to control treasury loans, to manipulate foreign 

exchanges, to influence the level of economic activity in the 

country, and to influence cooperative politicians by subsequent 

economic rewards in the business world. 

1. These letters were first published in the Summer, 1976, issue of Conspiracy 

Digest, published by Peter McAlpine (Alpine Press, Dearborn, Michigan). The 

originals cannot now be located. However, the author was able to locate the 

attorney, Mr. Paul Wolff (with the firm of Williams & Connolly in Washington, 

D.C.) who represented Quigley in his legal action against the publisher. Mr. Wolff 

cannot vouch for the authenticity of the letters themselves, but has confirmed in 

phone conversations and later in writing that the essential details are correct. He 

writes: "It is my recollection that they withheld from me and the Professor for some 

time the information that they had in fact destroyed 'the plates/" 

2. Quigley, Tragedy, p. 324.


That is the information that "powerful people" do not want the 

common man to know. 

Notice that Quigley refers to this group as a "network." That is 

a precise choice of words, and it is important to an understanding 

of the forces of international finance. The network to which he 

refers is not the secret society. It is no doubt directed by it, and there 

are society members in key positions within the network, but we 

can be sure that there are many in the network who have little or no 

knowledge of hidden control. To explain how this can be possible, 

let us turn to the origin and growth of the secret society itself. 

RUSKIN, RHODES, AND MILNER 

In 1870, a wealthy British socialist by the name of John Ruskin 

was appointed as professor of fine arts at Oxford University in 

London. He tjught that the state must take control of the means of 

production and organize them for the good of the community as a 

whole. He advocated placing control of the state into the hands of a 

small ruling class, perhaps even a single dictator. He said: "My 

continual aim has been to show the eternal superiority of some men 

to others, sometimes even of one man to all others." 

This, of course, is the same intellectual appeal of Communism. 

Lenin taught that the masses could not be trusted to handle their 

own affairs and that a special group of disciplined intellectuals 

must assume this role for them. That is the function of the 

Communist Party, which never comprises more than about three 

per cent of the population. Even when the charade of free elections 

is allowed, only members of the Party—or those over whom the 

KGB has total control—are permitted to run for office. The concept 

that a ruling party or class is the ideal structure for society is at the 

heart of all collectivist schemes, regardless of whether they are 

called Socialism, Communism, Nazism, Fascism, or any other 

"ism" which may yet be invented to disguise it. It is easy, therefore, 

for adherents of this elitist mentality to be comfortable in almost 

any of these collectivist camps, a fact to which Dr. Quigley alluded 

when he wrote: "This network, which we may identify as the 

Round Table Groups, has no aversion to cooperating with the 

Communists, or any other groups, and frequently does so." 


Returning to the subject of the origins of this group, however, 

t)r. Quigley tells us: 

Ruskin spoke to the Oxford undergraduates as members of the 

privileged ruling class. He told them that they were the possessors of 

a magnificent tradition of education, beauty, rule of law, freedom, 

decency, and self-discipline, but that this tradition could not be saved, 

and did not deserve to be saved, unless it could be extended to the 

lower classes in England itself and to the non-English masses 

throughout the world. 

Ruskin's message had a sensational impact. His inaugural lecture 

was copied out in long-hand by one undergraduate, Cecil Rhodes, 

who kept it with him for thirty years. 

Cecil Rhodes made one of the world's greatest fortunes. With 

the cooperation of the Bank of England and financiers like 

Rothschild, he was able to establish a virtual monopoly over the 

diamond output of South Africa and most of the gold as well. The 

major portion of this vast income was spent to advance the 

ruling-class ideas of John Ruskin. 

Dr. Quigley explains: 

The Rhodes Scholarships, established by the terms of Cecil 

Rhodes' seventh will, are known to everyone. What is not so widely 

known is that Rhodes in five previous wills left his fortune to form a 

secret society, which was to devote itself to the preservation and 

expansion of the British Empire. And what does not seem to be known 

to anyone is that this secret society was created by Rhodes and his 

principal trustee, Lord Milner, and continues to exist to this day.. .. In 

his book on Rhodes' wills, he [Stead, who was a member of the inner 

circle] wrote in one place: "Mr. Rhodes was more than the founder of 

a dynasty. He aspired to be the creator of one of those vast 

semi-religious, quasi-political associations which, like the Society of 

Jesus, have played so large a part in the history of the world. To be 

more strictly accurate, he wished to found an Order as the instrument 

of the will of the Dynasty. 2 ... 

In this secret society Rhodes was to be leader; Stead, Brett (Lord 

Esher), and Milner were to form an executive committee; Arthur 

(Lord) Balfour, (Sir) Harry Johnston, Lord Rothschild, Albert (Lord) 

Grey, and others were listed 

as potential members of a "Circle of 

Initiates;" while there was to be an outer circle known as the 

1. See Kenneth Clark, Ruskin Today (New York: Holt, Reinhart & Winston, 1964), 

p. 267. 

2. Quigley, Tragedy, p. 950. 

|- Quigley, Tragedy, p. 130. 

2 - 

Carroll Quigley, The Anglo-American Establishment: From Rhodes to Cliveden (N 

Y °rk: Books in Focus, 1981), pp. ix, 36. 

ew

272 THE CREATURE FROM JEKYLL ISLAND MASQUERADE IN MOSCOW 273 

"Association of Helpers" (later 

organized by MiLner as the Round 

Table organization). 

THE PATTERN OF CONSPIRACY 

Here, then, was the classical pattern of political conspiracy. This 

was the structure that made it possible for Quigley to differentiate 

between an international "network" and the secret society within 

that network. At the center, there is always a tiny group in 

complete control, with one man as the undisputed leader. Next is a 

circle of secondary leadership that, for the most part, is unaware of 

an inner core. They are led to believe that they are the inner-most 

ring. 

In time, as these conspiracies are built from the center out, they 

form additional rings of organization. Those in the outer echelons 

usually are idealists with an honest desire to improve the world. 

They never suspect an inner control for other purposes, and only 

At the end of the war of 1914, it became clear that the organization 

of this system had to be greatly extended. Once again the task was 

entrusted to Lionel Curtis who established, in England and each 

dominion, a front organization to the existing local Round Table 

Group. This front organization, called the Royal Institute of 

International Affairs, had as its nucleus in each area the existing 

submerged Round Table Group. In New York it was known as the 

Council on Foreign Relations, and was a front for J.P. 

Morgan and 

Company in association with the very small American Round Table 

Group. 

failure of the world's leaders at the end of World War I to embrace 

the League of Nations as a true world government. It became clear 

to the master planners that they had been unrealistic in their 

expectations for rapid acceptance. If their plan were to be carried 

forward, it would have to be done on the basis of patient gradualism 

symbolized by the Fabian turtle. Rose Martin says: 

those few who demonstrate a ruthless capacity for higher leadership 

are ever allowed to see it. 

After the death of Cecil 

Rhodes, the inner core of his secret 

society fell under the control of Lord Alfred Milner, Governor- 

General and High Commissioner of South Africa. As director of a 

number of public banks and as corporate precursor of England's 

Midland Bank, he became one of the greatest political and financial 

powers in the world. Milner recruited into his secret society a 

group of young men chiefly from Oxford and Toynbee Hall and, 

according to Quigley: 

Through his influence these men were able to win influential posts 

in government and international finance and became the dominant 

influence in British imperial and foreign affairs up to 1939.... In 

1909-1913 they organized semi-secret groups, known as Round Table 

Groups, in the chief British dependencies and the United States.... 

Money for the widely ramified activities of this organization came 

. . . chiefly from the Rhodes Trust itself, and from wealthy associates 

such as the Beit brothers, from Sir Abe Bailey, and (after 1915) from the 

Astor family ... and from foundations and firms associated with the 

international banking fraternity, especially the Carnegie United 

Kingdom Trust, and other organizations associated with J.P. Morgan, 

the Rockefeller and Whitney families, and the associates of Lazard 

Brothers and of Morgan, Grenfell, and Company. . . 

Colonel House was only one man, where a multitude was needed. 

He had set the pattern and outlined goals for the future, and he still 

had a scheme or two in mind. In particular, he foresaw it would be 

necessary for the Fabians to develop a top level Anglo-American 

, planning group in the field of foreign relations which could secretly 

1 . Quigley, Tragedy, p. 131 

2 - Martin, pp. 174-5. 

! Quigley, Tragedy, pp. 132, 951-52. 

influence policy on the one hand and gradually "educate" public 

opinion on the other.. . 

To the ambitious young Fabians, British and American, who had 

flocked to the peace conference as economists and junior officials, it 

soon became evident that a New World Order was not about to be 

produced at Paris.... For them, Colonel House arranged a dinner 

meeting at the Hotel Majestic on May 19, 1919, together with a select 

group of Fabian-certified Englishmen—notably, Arnold Toynbee, 

R.H. Tawney and John Maynard Keynes. All were equally 

disillusioned, for various reasons, by the consequences of the peace. 

They made a gentlemen's agreement to set up an organization, with 

branches in England and America, "to facilitate the scientific study of 

international questions." As a result two potent and closely related 

opinion-making bodies were founded.... The English branch was 

called the Royal Institute of International Affairs. The American 

branch, first known as the Institute of International Affairs, was 

reorganized in 1921 as the Council on Foreign Relations. 2



It is through this front group, called the Council on Foreign 

effect, purchased a franchise to operate in its name. Professor 

Relations, and its influence over the media, tax-exempt foundations, 

universities, and government agencies that the international 

The 1910 [Red Cross] fund-raising campaign for $2 million, for 

Sutton tells us: 

financiers have been able to dominate the domestic and foreign 

example, was successful only because it was supported by these 

policies of the United States ever since. 

wealthy residents of New York City. J.R Morgan himself contributed 

$100,000. . . . Henry P. Davison [a Morgan partner] was chairman of the 

We shall have more to say about the CFR, but our focal point 

1910 New York Fund-Raising Committee and later became chairman 

for now is Great Britain and, in particular, the help given to 

of the War Council of the American Red Cross.... The Red Cross was 

Communism in Russia by Lord Alfred Milner and his web of secret 

unable to cope with the demands of World War I and in effect was 

societies. 

taken over by these New York bankers. 

ROUND TABLE AGENTS IN RUSSIA 

For the duration of the war, the Red Cross had been made, 

In Russia, prior to and during the revolution, there were many 

nominally, a part of the armed forces and subject to orders from the 

local observers, tourists, and newsmen who reported that British 

proper military authorities. It was not clear who these authorities 

and American agents were everywhere, particularly in Petrograd, 

were and, in fact, there were never any orders, but the arrangement 

providing money for insurrection. One report said, for example, 

made it possible for the participants to receive military commissions 

and wear the uniform of American army officers. The entire 

that British agents were seen handing out 25-rouble notes to the 

men at the Pavlovski regiment just a few hours before it mutinied 

expense of the Red Cross Mission in Russia, including the purchase 

of uniforms, 

against its officers and sided with the revolution. The 

was paid for by the man who was appointed by 

subsequent 

President Wilson to become its head, "Colonel" William Boyce 

publication of various memoirs and documents made it clear that 

Thompson. 

this funding was provided by Milner and channeled through Sir 

Thompson was a classical specimen of the Round Table network. 

Having begun his career as a speculator in copper mines, he 

George Buchanan who was the British Ambassador to Russia at 

that time. It was a repeat of the ploy that had worked so well for 

soon moved into the world of high finance. He refinanced the 

the cabal many times in the past. Round Table members were once 

American Woolen Company and the Tobacco Products Companylaunched 

the Cuban Cane Sugar Company; purchased controlling 

again working both sides of the conflict to weaken and topple a 

target government Tsar Nicholas had every reason to believe that, 

interest in the Pierce Arrow Motor Car Company; organized the 

since the British were Russia's allies in the war against Germany, 

Submarine Boat Corporation and the Wright-Martin Aeroplane 

British officials would be the last persons on Earth to conspire 

Company; became a director of the Chicago Rock Island & Pacific 

against hirru Yet, the British Ambassador himself represented the 

Railway, the Magma Arizona Railroad, and the Metropolitan Life 

hidden group which was financing the regime's downfall. 

insurance Company; was one of the heaviest stockholders in the 

The Round Table agents from America did not have the 

Chase National Bank; was the agent for J.P. Morgan's British 

advantage of using the diplomatic service as a cover and, therefore, 

securities operation; became the first full-time director of the 

had to be considerably more ingenious. They came, not as diplomats 

or even as interested businessmen, but disguised as Red Cross 

Federal Reserve System; and, of course, contributed a quarter- 

Federal Reserve Bank of New York, the most important bank in the 

officials on a humanitarian mission. The group consisted almost 

million dollars to the Red Cross. 

entirely of financiers, lawyers, and accountants from New York 

When Thompson arrived in Russia, he made it clear that he was 

banks and investment houses. They simply had overpowered the 

not your typical Red Cross representative. According to Hermann 

American Red Cross organization with large contributions and, in 

Hagedorn, Thompson's biographer: 

1. See de Goulevitch, p. 230. 1. Sutton, Revolution, p. 72.

276 THE CREATURE FROM JEKYLL ISLAND MASQUERADE IN MOSCOW 277 

He deliberately created the kind of setting which would be 

expected of an American magnate: established himself in a suite in the 

Hotel de I'Europe, bought a French limousine, went dutifully to 

receptions and teas and evinced an interest in objects of art. Society 

and the diplomats, noting that here was a man of parts and power, 

began to flock about him. He was entertained at the embassies, at the 

houses of Kerensky's ministers. It was discovered that he was a 

collector, and those with antiques to sell fluttered around him, offering 

him miniatures, Dresden china, tapestries, even a palace or two. 1 

When Thompson attended the opera, he was given the imperial 

box. People on the street called him the American Tsar. And it 

not surprising that, according to George Kennan, "He was viewed 

by the Kerensky authorities as the 'real' ambassador of the United 

States/' 2 

It is now a matter of record that Thompson syndicated the 

purchase on Wall Street of Russian bonds in the amount of 

ten-million roubles. 

In addition, he gave over two-million roubles 

to Aleksandr Kerensky for propaganda purposes inside Russia 

and, with J.P. Morgan, gave the rouble equivalent of one-million 

dollars to the Bolsheviks for the spreading of revolutionary propaganda 

outside of Russia, particularly in Germany and Austria. 

photograph of the cablegram from Morgan to Thompson advising 

that the money had been transferred to the National City Bank 

branch in Petrograd is included in this book. 

AN OBJECT LESSON IN SOUTH AFRICA 

At first it may seem incongruous that the Morgan group would 

provide funding for both Kerensky and Lenin. These men may 

have both been socialist revolutionaries, but they were miles apart 

in their plans for the future and, in fact, were bitter competitors for 

control of the new government. But the tactic of funding both sides 

in a political contest by then had been refined by members of the 

1. Hermann Hagedorn, The Magnate: William Boyce Thompson and His Time (New 

York: Reynal & Hitchcock, 1935), pp. 192-93. 

2. George R Kennan, Russia Leaves the War; Soviet-American Relations, 1917-1920 

(Princeton, New Jersey: Princeton University Press, 1956), p. 60. 

3. Hagedorn,p. 192. 

4. Sutton, Revolution, pp. 83, 91. It was the agitation made possible by this funding 

that led to the abortive German Sparticus Revolt of 1918. See "W.B. Thompson, Red 

Cross Donor, Believes Parry Misrepresented," Washington Post, Feb. 2, 1918. 

is 

A 

Round Table into a fine art. A stunning example of this occurred in 

South Africa during the outset of Boer War in 1899. 

The British and Dutch had been active in the settlement of 

Southern Africa for decades. The Dutch had developed the provinces 

of Transvaal and the Orange Free State, while the British had 

colonized such areas as Rhodesia, Cape Hope, Basutoland, 

Swaziland, and Bechuanaland. Conflict was inevitable between 

these two groups of settlers whenever they found themselves in 

competition for the resources of the same territory, but it was the 

discovery of gold in the Whitewater area of the Transvaal that 

provided the motive for war. 

Politically, the Transvaal was in the hands of the Boers, who 

were the descendants of the Dutch settlers. But, after the discovery 

of gold in that area, the mine fields had been developed primarily 

by the British and became solidly under their control. Not surprisingly, 

one of the largest players in that game was Cecil Rhodes who 

already had monopolized the diamond fields under British control 

to the South. Historian Henry Pike tells us: 

With the discovery of gold in the Transvaal, Rhodes' greed 

became passionate. His hatred of Paul Kruger, the Afrikaner President 

of the Transvaal, knew no limits. He was bitterly opposed to Kruger's 

independent Transvaal, and viewed this as the main obstacle to his 

efforts to sweep all Southern Africa under British rule. 

In 1895, Rhodes set in motion a plan to overthrow Kruger's 

government by organizing an uprising among the British inhabitants 

in Johannesburg. The uprising was financed by himself and 

was to be led by his brother, Frank, and other loyal supporters. This 

was to be followed by a military invasion of the Transvaal by 

British troops from Bechuanaland and Rhodesia led by Sir Leander 

Jameson, The uprising fizzled and ended in Jameson's arrest and 

public disgrace. 

But Rhodes was determined to have the Transvaal, and began 

immediately to prepare a second, more patient ploy. Through 

Rhodes' influence, Lord Alfred Milner was appointed as the British 

High Commissioner of South Africa. In London, Lord Esher 

another member of the secret society—became the chief political 

adviser to King Edward and was in daily contact with him 

L 

Henry R. Pike, Ph.D., A History of Communism in South Africa (Germiston, South 

Africa: Christian Mission International of South Africa, 1985), p. 39.



throughout this period. That took care of the British 

side of this 

contest. With regard to the Boers' side, Professor Quigley tells the 

amazing story: 

By a process whose details are still obscure, a brilliant young 

graduate of Cambridge, Jan Smuts, who had been a vigorous 

supporter of Rhodes and acted as his agent in Kimberly [South 

Africa's largest diamond mine] as late as 1895 and who was one of the 

most important members of the Rhodes-Milner group in the period 

1908-1950, went to the Transvaal and, by violent anti-British agitation, 

became state secretary of that country (although a British subject) and 

chief political adviser to President Kruger; Milner made provocative 

troop movements on the Boer frontiers in spite of the vigorous protests 

of his commanding general in South Africa, who had to be removed; 

and, finally, war was precipitated when Smuts drew up an ultimatum 

insisting that the British troop movements cease and when this was 

rejected by Milner. 

And so, as a result of careful engineering by Round Table 

members on both sides—one making outrageous demands and the 

other responding to those demands in pretended indignation—the 

war finally began with a British invasion in October of 1899. After 

2 l /i years of fierce fighting, the Boers were forced to surrender, and 

Milner administered the former republic as a militarily occupied 

territory. Round Table members, known to the public as "Milner's 

Kindergarten," were placed into all key government posts, and the 

gold fields were finally secured. 

PLACING BETS ON ALL HORSES 

On the other side of the world, in New York City, the same 

tactic of playing both sides against each other was being applied 

with brilliant precision by Round Table member J.P. Morgan. 

Professor Quigley tells us: 

To Morgan all 

political parties were simply organizations to be 

used, and the firm always was careful to keep a foot in all camps. 

Morgan himself, Dwight Morrow, and other partners were allied with 

Republicans; Russell C. Leffingwell was allied with the Democrats; 

Grayson Murphy was allied with the extreme Right; and Thomas W. 

Lamont was allied with the Left. 2 

1. Quigley, Tragedy, pp. 137-38. 

2. m,p.945. 

regarded as a man of leftist persuasions, it 

Although it is true that Thomas Lamont was the father of 

Corliss Lamont, a well-known Communist, and was himself widely 

must also be remembered 

that he felt equally at home among the Fascists and, in fact, 

served as an unofficial business consultant for Mussolini in 

1920s. 1 

At the same time that Morgan was funding pro-Bolshevik 

groups, he founded what was probably the most virulent anti- 

Bolshevik organization ever to exist in America. It was called 

United Americans and it set about to frighten everyone into 

believing that a Red mob was at that very moment poised to 

capture New York City. It issued shocking reports warning about a 

pending financial collapse, widespread starvation, and a desperate 

working class being maneuvered into accepting Communist slogans 

and rhetoric as a last resort. Ironically, the officers of this 

organization were Allen Walker of the Guarantee Trust Company, 

which was then acting as the Soviet's fiscal agent in the U.S.; Daniel 

Willard, president of the Baltimore & Ohio Railway, which was 

then active in the development of Soviet railways; H.H. Westinghouse 

of Westinghouse Air Brake Company which was then 

operating a major plant in Russia; and Otto H. Kahn of Kuhn, Loeb 

& Company, which was one of the principal financial backers of the 

fledgling Soviet regime. 

Even inside Russia itself, 

the Round Table was spreading its 

bets. In addition to the funding, previously mentioned, which was 

given to the Bolsheviks and to their opponents, the Mensheviks, 

Morgan also financed the military forces of Admiral Kolchak who 

was fighting against the Bolsheviks in Siberia. Not surprisingly, 

Kolchak also received funding from a consortium of British financiers, 

including Alfred Milner. 

It is commonly stated that the original intent of the Red Cross 

mission to Moscow was to prevent the Russian government from 

making a separate peace with Germany which would release 

German troops to fight against England and France. According to 

that version of the story—which portrays the actors as patriots 

1. See John P. Diggins, Mussolini and Fascism: The View from America (Princeton, 

New Jersey: Princeton University Press, 1972). 

2. Sutton, Revolution, pp. 163-68. 

fe. Ibid., pp. 102,146,166-67. 

the


merely doing what was best for the war effort—the first goal was to 

support the Tsar. When the Tsar was overthrown, they supported 

the Mensheviks because they had pledged to stay in the war. When 

the Mensheviks were ousted, they continued to support the 

Bolsheviks in order to gain sufficient influence to convince them 

not to give aid to Germany. It 

takes a great deal of gullibility to 

swallow that line. A far more plausible reading is that the Morgan 

interests were merely doing what they had always done: placing 

bets on all horses so that, no matter which one crossed the finish 

line, the winner would be obligated to them. 

BRITISH AGENT OF THE ROUND TABLE 

After the Bolsheviks had seized power in Russia, Sir George 

Buchanan was recalled as the British Ambassador and replaced by 

a member of Milner's Kindergarten, a young man by the name of 

Bruce Lockhart. In his book, British Agent, Lockhart describes the 

circumstances of his assignment. Speaking of a meeting with Prime 

Minister Lloyd George, he wrote: 

I 

saw that his own mind was made up. He had been greatly 

impressed, as Lord Milner told me afterwards, by an interview with 

Colonel Thompson of the American Red Cross, who had just returned 

from Russia and who had denounced in blunt language the folly of the 

Allies in not opening up negotiations with the Bolsheviks.... 

Three days later all my doubts were put at rest. I was to go to 

Russia as head of a special mission to establish unofficial relations with 

the Bolsheviks.... I had been selected for this Russian mission not by 

the Foreign Secretary but by the War Cabinet—actually by Lord 

Milner and Mr. Lloyd George.... 

Lord Milner I saw almost daily. Five days before my departure I 

dined alone with him at Brook's. He was in his most inspiring mood. 

He talked to me with a charming frankness about the war, about the 

future of England, about his own career, and about the opportunities 

of youth.... He was, too, very far from being the Jingo and the 

Conservative reactionary whom popular opinion at one time 

represented him to be. On the contrary, many of his views on society 

were startling modern. He believed in the highly organized state, in 

which service, efficiency, and hard work were more important than 

titles or money-bags. 


AMERICAN AGENT OF THE ROUND TABLE 

When Thompson returned to the United States, the man he 

selected to replace himself as head of the American Red Cross 

Mission was his second-in-command, Raymond Robins. Not much 

known about Robins except that he was the protege of Col. 

is 

Edward Mandell House, and he might have remained an obscure 

player in this drama had it not been for the fact that he became one 

of the central characters in Bruce Lockhart's book. It is there that we 

get this inside view: 

Another new acquaintance of these first days in the Bolshevized 

St. Petersburg was Raymond Robins, the head of the American Red 

Cross Mission.... He had been a leading figure in Roosevelt's "Bull 

Moose" campaign for the American Presidency in 1912. Although a 

rich man himself, he was an anti-capitalist.... Hitherto, his two heroes 

had been Roosevelt and Cecil Rhodes. Now Lenin had captured his 

imagination..,. Robins was the only man whom Lenin was always 

willing to see and who ever succeeded in imposing his own 

personality on the unemotional Bolshevik leader. 

In a less official sense Robins had a similar mission to my own. He 

was the intermediary between the Bolsheviks and the American 

Government and had set himself the task of persuading President 

Wilson to recognize the Soviet regime. 

What an amazing revelation is contained in those words. First, 

we learn that Robins was a leader in the team effort that threw the 

election of 1912 to Woodrow Wilson. Then we learn that he was an 

anti-capitalist. Third, we discover that an anti-capitalist can heroworship 

Cecil Rhodes. Then we see the tremendous power he 

wielded over Lenin. And finally, we are told that, although he was 

part of a private group financed by Wall Street bankers, he was in 

reality the intermediary between the Bolsheviks and the American 

Government One will look in vain for a better summary. 

The fact that Cecil Rhodes was one of Robin's great heroes has 

special significance for this story. It was not merely an intellectual 

infatuation from college days. On the night before he left Russia, 

Robins dined with Lockhart. Describing the occasion, Lockhart 

says: "He had been reading Rhodes' life and after dinner he gave us 

a wonderful exposition of Rhodes' character." 

Thus, both Lockhart 

1. R.H. Bruce Lockhart, British Agent (New York and London: G.P. Putnam's Sons, 

1933), pp. 198-99, 204, 206-07. 

1. Lockhart, p. 220. 

2. JM.,p.270.


and Robins were dedicated disciples of Cecil Rhodes and both were 

undoubtedly part of the international network to which Professor 

Quigley alluded — possibly even members of the Round Table. 

Lockhart reported to the British group while Robins reported to the 

American group, but both were clearly working for identical 

objectives and doing the work of the unseen hand. 

The Bolsheviks were well aware of the power these men 

represented, and there was no door closed to them. They were 

allowed to attend meetings of the Central Executive Committee 1 , 

and were consulted regarding important decisions. 2 But perhaps 

the best way to appraise the extent of the influence these "capitalists" 

had over the "anti-capitalists" is to let Lockhart tell his own 

story. In his memoirs, he wrote: 

I returned from our interview to our flat to find an urgent message 

from Robins requesting me to come to see him at once. I found him in 

a state of great agitation. He had been in conflict with Saalkind, a 

nephew of Trotsky and then Assistant Commissar for Foreign Affairs. 

Saalkind had been rude, and the American, who had a promise from 

Lenin that, whatever happened, a train would always be ready for him 

at an hour's notice, was determined to exact an apology or to leave the 

country. When I arrived, he had just finished telephoning to Lenin. He 

had delivered his ultimatum, and Lenin had promised to give a reply 

within ten minutes. I waited, while Robins fumed. Then the telephone 

rang and Robins picked up the receiver. Lenin had capitulated. 

Saalkind was dismissed from his post. But he was an old member of 

the Party. Would Robins have any objection if Lenin sent him as a 

Bolshevik emissary to Beme? Robins smiled grimly. "Thank you, Mr. 

Lenin/' he said. "As I can't send the son of a bitch to hell, 'burn' is the 

next best thing you can do with him." 3 

Such was the raw power over the leaders of Communism that 

was concealed behind the innocent facade of the American Red 

Cross Mission. And yet, the world—even today—has no inkling of 

its reality. It has been a carefully guarded secret, and even many of 

those who were close to it were unable to see it. The assistant to 

William Thompson in Russia was Cornelius Kelleher. In later years, 

reflecting on the naivete of Dr. Franklin Billings, who was head of 

the mission's medical team, Kelleher wrote: 

1. Ibid., p. 253. 

2. U.S. State Dept. Decimal File, 861 .00/3449. 

3. Lockhart, pp. 225-26. 


Poor Mr. Billings believed he was in charge of a scientific mission 

for the relief of Russia.... He was in reality nothing but a mask—the 

Red Cross complexion of the mission was nothing but a mask. 

The purpose of a mask, of course, is to conceal. And so we are 

led to ask the question, what was behind that mask? What were the 

true motives and goals of the masqueraders? 

We shall turn to that subject next. 

SUMMARY 

The Bolshevik revolution was not a spontaneous uprising of the 

masses. It was planned, financed, and orchestrated by outsiders. 

Some of the financing came from Germany which hoped that 

internal problems would force Russia out of the war against her. 

But most of the money and leadership came from financiers in 

England and the United States. It was a perfect example of the 

Rothschild formula in action. 

This group centered mainly around a secret society created by 

Cecil Rhodes, one of the world's wealthiest men at the time. The 

purpose of that group was nothing less than world dorninion and 

the establishment of a modern feudalist society controlled by the 

world's central banks. Headquartered in England, the Rhodes 

inner-most directorate was called the Round Table. In other countries, 

there were established subordinate structures called Round- 

Table Groups. The Round-Table Group in the United States became 

known as the Council on Foreign Relations. The CFR y 

which was 

initially dominated by J.P. Morgan and later by the Rockefellers, is 

the most powerful group in America today. It is even more 

powerful than the federal government, because almost all of the 

key positions in government are held by its members. In other 

words, it is the United States government. 

Agents of these two groups cooperated closely in pre-revolutionary 

Russia and particularly after the Tsar was overthrown. The 

American contingent in Russia disguised itself as a Red Cross 

mission allegedly doing humanitarian work. Cashing in on their 

close friendship with Trotsky and Lenin, they obtained profitable 

business concessions from the new government which returned 

their initial investment many times over. 

1 . Kennan, 

Russia, p. 59.

Courtesy of Edward Warded 

Above is the "Red Cross Mission" in Moscow shortly after the Bolshevik 

Revolution. (L-R) J.W. Andrews, Raymond Robins, Allen Wardell, D. Heywood 

Hardy. Under the pretense of humanitarianism, the Misson's key personnel were 

Wall Street financiers following their own agenda for acquiring profitable 

commercial concessions from the new government. They heavily financed all 

factions of the revolutionary movement to be sure of gaining influence with 

whatever group should come out on top. 

Below is a cablegram from J.P. Morgan to William Boyce Thompson-head of the 

Red Cross Mission prior to Robins-advising that one million dollars had been 

transferred to Thompson via the National City Bank. There were many such 

infusions of "Capitalist" money into the new Communist regime. The process 

continues to this day. 

* V¥ 

I 

l£ff>A**A\f 

¥UU -JUL; JlifS '•; n W 

I 

»-Tl L r.Uotif pyfTMi ;.;*n . 

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Chapter Fourteen 

THE BEST ENEMY 

MONEY CAN BUY 

The coup d'etat in Russia in which the Bolshevik 

minority seized control from the revolutionary 

majority; the role played by New Yorkfinanciers, 

masquerading as Red Cross officials, 

in supporting 

the Bolsheviks; the unbroken record since their 

of American assistance in building Russia's warmaking 

potential; the emergence of a "credible 

enemy" in accordance with the Rothschild 

Formula. 

In the previous section we saw that the Red Cross Mission in 

revolutionary Russia was, in the words of its own personnel, 

"nothing but a mask/' This leads to the logical question, what were 

the true motives and goals that were hidden behind that mask. 

In later years, it would be explained by the participants 

themselves that they simply were engaged in a humanitarian effort 

to keep Russia in the war against Germany and, thus, to help the 

cause of freedom for England and her allies. For Jacob Schiff and 

other Jewish financiers in New York, there was the additional 

explanation that they opposed the Tsar because of his anti- 

Semitism. These, of course, are admirable motives, and they have 

been uncritically accepted by mainstream historians ever since. 

Unfortunately, the official explanations do not square with the 

facts. 

RUSSIA'S TWO REVOLUTIONS 

The facts are that there were two revolutions in Russia that 

year, not one. The first, called the February Revolution, resulted in 

the establishment of a provisional socialist government under the 

leadership of Aleksandr Kerensky. It was relatively moderate in its 

policies and attempted to accommodate all revolutionary factions 

including the Bolsheviks who were the smallest minority. When 

284

286 THE CREATURE FROM JEKYLL ISLAND THE BEST ENEMY MONEY CAN BUY 287 

the February Revolution occurred, neither Lenin nor Trotsky were 

even in Russia. Lenin was in Switzerland and didn't arrive until 

April. Trotsky was still in New York writing propaganda and 

giving speeches. 

The second revolution, called the October Revolution, was the 

one through which the Bolsheviks came to power. It was, in fact, no 

revolution at all. It was a coup d'etat. The Bolsheviks simply took 

advantage of the confusion and indecisiveness that existed among 

the various groups that comprised the new government and caught 

them by surprise with a lightening strike of force. With a combination 

of bribes and propaganda, they recruited several regiments of 

soldiers and sailors and, in the early morning darkness of October 

25, methodically took military possession of all government buildings 

and communication centers. No one was prepared for such 

audacity, and resistance was almost non-existent. By dawn, without 

the Russian people even knowing what had happened—much 

less having any voice in that action, their country had been captured 

by a minority faction and become the world's first so-called 

"people's republic." Within two days, Kerensky had fled for his 

life, and all Provisional Government ministers had been arrested. 

That is 

how the Communists seized Russia and that is how they 

held it afterward. Contrary to the Marxian myth, they have never 

represented the people. They simply have the guns. 

The basic facts of this so-called revolution are described by 

Professor Leonard Schapiro in his authoritative work, The Russian 

Revolutions of 1917: 

All the evidence suggests that when the crisis came the great 

majority of units of the Petrograd Garrison did not support the 

government but simply remained neutral.... The Cossack units 

rejected its call for support, leaving the government with only a few 

hundred women soldiers and around two thousand military cadets on 

its 

side. The Bolsheviks, on the other hand, could count on several 

regiments to carry out their orders. Units of the Baltic Fleet also 

supported them.. . 

In the event, the Bolshevik take-over was almost bloodless: in 

contrast with what had happened in February, nothing could have 

been less like a city in the throes of revolution than Petrograd on 25 

October. Crowds of well-dressed people thronged the streets in the 

evening. Theaters and restaurants were open, and at the opera, 

Shaliapin sang in Boris Godunov. The principal stations and services 

had all been taken over by the morning of 25 October without a shot 

being fired.... 

A battleship and several cruisers, including the Aurora, had 

reached Petrograd from Kronstadt and were anchored with their guns 

trained on targets in the city.. . 

The Provisional Government inside the Winter Palace...received 

an ultimatum calling for surrender of its members, under threat of 

bombardment of the palace by Aurora and by the guns of the Peter and 

Paul Fortress. ... 

It was only at 9:40 P.M. that the Aurora was ordered to 

fire—and discharged one blank shell. The main effect of this was to 

accelerate the thinning out of the cadet defenders of the palace, who 

had already begun to dwindle. The women soldiers, who had formed 

part of its defense force, also left before the palace was invaded. At 

11P.M. some live shells were fired, and the palace was slightly 

damaged., . 

The story of the dramatic storming of the Winter Palace, popular 

with Soviet historians and in the cinema, is a myth. At around 2 A.M. on 

26 October, a small detachment of troops, followed by an unruly 

crowd and led by two members of the MRC [Military Revolutionary 

Committee], entered the palace. The remaining officer cadets were, 

apparently, prepared to resist, but were ordered to surrender by the 

ministers. In the end, the total casualties were three officer cadets 

wounded. 

POPULAR SUPPORT WAS NOT NECESSARY 

Eugene Lyons had been a correspondent for United Press in 

revolutionary Russia. He began his career as highly sympathetic to 

the Bolsheviks and their new regime, but six years of actual living 

inside the new socialist Utopia shattered his illusions. In his 

acclaimed book, Workers' Paradise host, he summarizes the true 

meaning of the October Revolution: 

Lenin, Trotsky, and their cohorts did not overthrow the 

monarchy. They overthrew the first democratic society in Russian 

history, set up through a truly popular revolution in March, 1917.... 

They represented the smallest of the Russian radical movements.... 

But theirs was a movement that scoffed at numbers and frankly 

mistrusted the multitudes. The workers could be educated for their 

role after the revolution; they would not be led but driven to their 

terrestrial heaven. Lenin always sneered at the obsession of competing 

socialist groups with their "mass base." "Give us an organization of 

& Leonard Shapiro, The Russian Revolutions ofl917 (New York: Basic Books, 1984), 

pp. 135-36.


professional revolutionaries," he used to say, "and we will turn Russia 

upside down/'... 

Even these contingents were pathetically duped, having not the 

remotest notion of the real purposes for which they were being used. 

They were striking out, they thought, for the multi-party Soviets, for 

freedom, equality, and other goals which their organizers regarded as 

emotional garbage.. . 

On the brink of the dictatorship, Lenin dared to promise that the 

state will fade away, since "all need of force will vanish/' Not at some 

remote future, but at once: "The proletarian state begins to wither 

immediately after its triumph, for in a classless society a state is 

unnecessary and impossible.. . . Soviet power is a new kind of state, in 

which there is no bureaucracy, no police, no standing army." Also: "So 

long as the state exists, there is no freedom. When there is freedom, 

there will be no state." 

Within a few months after they attained power, most of the tsarist 

practices the Leninists had condemned were revived, usually in more 

ominous forms: political prisoners, convictions without trial and 

without the formality of charges, savage persecution of dissenting 

views, death penalties for more varieties of crime than in any other 

modern nation. The rest were put into effect in the following years, 

including the suppression of all other parties, restoration of the 

internal passport, a state monopoly of the press, along with repressive 

practices the monarchy had outlived for a century or more. 

All of this, of course, is a departure from the main narrative, but 

it has been necessary to illustrate a fact that has been obscured by 

the passage of time and the acceptance of myth by mainstream 

historians. The fact is that Lenin and Trotsky were not sent to 

Russia to overthrow the anti-Semitic Tsar. Their assignment from 

Wall Street was to overthrow the revolution. 

NOTES FROM LINCOLN STEFFENS' DIARY 

That this was the prevailing motive of the New York money 

powers was clearly brought to light in the diary of Lincoln Steffens, 

one of America's best-known leftist writers of that time. Steffens 

was on board the SS. Kristianwfjord when Trotsky was taken off 

and arrested in Halifax. He carefully wrote down the conversations 

he had with other passengers who also were headed to strife-torn 

Russia. One of these was Charles Crane, vice president of the Crane 

Company. Crane was a backer of Woodrow Wilson and former 

THE BEST ENEMY MONEY CAN BUY 289 

chairman of the Democratic Party's finance committee. He also had 

organized the Westinghouse Company in Russia and had made no 

less than twenty-three prior visits. His son, Richard Crane, was 

confidential assistant to then Secretary of State, Robert Lansing. It is 

instructive, therefore, to read Steffens' notes regarding the views of 

these traveling companions. He wrote: "... all agree that the 

revolution is in its first phase only, that it must grow. Crane and the 

Russian Radicals on the ship think we shall be in Petrograd for the 

re-revolution." 

Precisely. Re-revolution was the expectation and the goal, not 

the elimination of anti-Semitism. 

With regard to Thompson's claim that he was merely trying to 

keep Russia in the war against Germany, here again, the logic of 

actual events speak against it. Kerensky and the provisional 

government were for the war effort. Yet, the Red Cross masqueraders 

eventually threw their strongest support to the Bolsheviks who 

were against it. Their excuse was that it was obvious the Bolsheviks 

would soon control the new government and they were merely 

looking to the future. They did not like the Bolsheviks, they said, 

but had to deal with them pragmatically. So they became staunch 

supporters merely to gain influence with the inevitable victors and, 

hopefully, to persuade them to change their position on the war. 

Alas, it didn't work out that way. Influence they had, as we 

have seen, but the Bolsheviks never wavered in their views. After 

seizing control in the October coup d'etat, they did exactly what they 

claimed all along they would do. They signed a peace treaty with 

Germany and confiscated private property. They also began one of 

the world's greatest bloodbaths to eliminate their opposition. None 

of this could be blamed on the masqueraders, you understand. It 

was all the fault of Wilson and the other politicians at home who, 

.by not following Thompson's recommendation to send U.S. 

dollars to the Bolsheviks, forced them into such drastic action. That, 

at least, is the accepted view. 

In reality, a Bolshevik victory at that time was anything but 

certain, and there was little reason—beyond the support given by 

the New York financiers themselves—to believe they would 

become the dominant voice of Russia. But, even if we grant the 

tax 

1. Eugene Lyons, Workers' Paradise Lost (New York: Funk & Wagnalls, 1967) 

pp. 13-29. 

1. Lincoln Steffens, The Let ters ofLincoln Steffens (New York Harcourt, Brace, 1 94 1 ), 

p. 396.


assumption that these men were unusually astute political 

observers who were truly able to foresee the future course, we are 

still 

faced with serious obstacles^ not the least of which are the 

thoughts and words of the masqueraders themselves. For example, 

in February of 1918, Arthur Bullard was in Russia as head of the 

Russian branch of the Committee on Public Information, which was 

the war-propaganda arm of the U.S. government. Bullard was aptly 

described by historian George Kennan as a "liberal socialist, free 

lance writer, and private eye of Colonel House/ In his official 

capacity he had many occasions to consult with Raymond Robins 

and, in a report describing one of these conversations, Bullard 

wrote: 

He [Robins] had one or two reservations—in particular, that 

recognition of the Bolsheviks was long overdue, that it should have 

been effected immediately, and that had the U.S. so recognized the 

Bolsheviks, "I believe that we would now be in control of the surplus 

resources of Russia and have control officers at all points on the 

frontier." 2 

WOLVES BEHIND THE MASK 

The following year, the U.S. Senate conducted an investigation 

into the role played by prominent American citizens in supporting 

the Bolshevik's rise to power. One of the documents entered into 

the record was an early communique from Robins to Bruce 

Lockhart. In it Robins said: 

You will hear it said that I am an agent of Wall Street; that I am the 

servant of William B. Thompson to get Altai Copper for him; that I 

have already got 500,000 acres of the best timber land in Russia for 

myself; that I have already copped off the Trans-Siberian Railway; that 

they have given me a monopoly of the platinum in Russia; that this 

explains my working for the soviet.... You will hear that talk Now, I 

do not think it is true, Commissioner, but let us assume it is true. Let us 

assume that I am here to capture Russia for Wall Street and American 

business men. Let us assume that you are a British wolf and I am, an 

American wolf, and that when this war is over we are going to eat each 

other up for the Russian market; let us do so in perfectly frank, man 

fashion, but let us assume at the same time that we are fairly intelligent 


wolves, and that we know that if we do not hunt together in this hour 

the German wolf will eat us both up. 

Professor Sutton has placed all this into perspective. In the 

following passage, he is spealcing specifically about William 

Thompson, but his remarks apply with equal force to Robins and 

all of the other financiers who were part of the Red Cross Mission 

in Russia. 

Thompson's motives were primarily financial and commercial. 

Specifically, Thompson was interested in the Russian market, and how 

this market could be influenced, diverted, and captured for postwar 

(exploitation by a Wall Street syndicate, or syndicates. Certainly 

Thompson viewed Germany as an enemy, but less a political enemy 

than an economic or a commercial enemy. German industry and 

German banking were the real enemy. To outwit Germany, Thompson 

was willing to place seed money on any political power vehicle that 

would achieve his objective. In other words, Thompson was an 

American imperialist fighting against German imperialism, and this 

struggle was shrewdly recognized and exploited by Lenin and 

Trotsky.. . 

Thompson was not a Bolshevik; he was not even pro-Bolshevik. 

Neither was he pro-Kerensky. Nor was he even pro-American. The 

overriding motivation was the capturing of the postwar Russian market. This 

was a commercial objective. Ideology could sway revolutionary 

operators like Kerensky, Trotsky, Lenin et al., but not financiers. 

Did the wolves of the Round Table actually succeed in their 

goal? Did they, in fact, capture the surplus resources of Russia? The 

answer to that question will not be found in our history books. It 

must be tracked down along the trail of subsequent events, and 

what we must look for is this. If the plan had not been successful, 

we would expect to find a decline of interest on the part of high 

finance, if not outright hostility. On the other hand, if it did succeed, 

we would expect to see, not only continued support, but some 

I evidence of profit taking by the investors, a payback for their 

efforts and their risk. With those footprints as our guide, let us turn 

«r\ow to an overview of what has actually happened since the 

Bolsheviks were assisted to power by the Round Table network. 

1 George F. Kennan, The Decision to Intervene: Soviet-American Relations, 1917-1920 

(Princeton, New Jersey: Princeton University Press, 1958), pp. 190, 235. 

2. Bullard ms., U.S. State Dept. Decimal File, 316-11-1265, March 19, 1918. 

1 U.S. Cong., Senate, Bolshevik Propaganda, Subcommittee of the Committee on the 

Judiciary, 65th Cong., 1919, p. 802. 

% Sutton, Revolution, pp. 97-98.


ITEM: After the October Revolution, all the banks in Russia 

were taken over and "nationalized" by the Bolsheviks—except one: 

the Petrograd branch of Rockefeller's National City Bank. 

ITEM: Heavy industry in Russia was also nationalized— except 

the Westinghouse plant, which had been established by Charles 

Crane, one of the dignitaries aboard the S.S. Kristianiafjord who had 

traveled to Russia with Trotsky to witness the re-revolution. 

ITEM: In 1922, the Soviets formed their first international bank. 

It was not owned and run by the state as would be dictated by 

Communist theory, but was put together by a syndicate of private 

bankers. These included, not only former Tsarist bankers, but 

representatives of German, Swedish, and American banks. Most of 

the foreign capital came from England, including the British 

government itself. The man appointed as Director of the Foreign 

Division of the new bank was Max May, Vice President of 

Morgan's Guaranty Trust Company in New York. 

ITEM: In the years immediately following the October Revolution, 

there was a steady stream of large and lucrative (read 

non-competitive) contracts issued by the Soviets to British and 

American businesses which were directly or indirectly run by the 

Round Table network. The largest of these, for example, was a 

contract for fifty million pounds of food products to Morris & 

Company, Chicago meat packers. Helen Swift was married to 

Edward Morris who was the brother of Harold Swift Harold Swift 

had been a "Major" at the Red Cross Mission in Russia. 

ITEM: In payment for these contracts and to return the "loans" 

of the financiers, the Bolsheviks all but drained their country of its 

gold—which included the Tsarist government's sizable reserve— 

and shipped it primarily to American and British banks. In 1920 

alone, one shipment came to the U.S. through Stockholm valued at 

39,000,000 Swedish kroner; three shipments came direct involving 

540 boxes of gold valued at 97,200,000 gold roubles; plus at least 

one other direct shipment bringing the total to about $20 million. 

(Remember, these are 1 920 values!) The arrival of these shipments 

was coordinated by Jacob Schiff's Kuhn, Loeb & Company and 

deposited by Morgan's Guaranty Trust. 

1. U.S. State Dept. Decimal File, 861.516/129, August 28, 1922. 

2. U.S. State Dept., Decimal File, 861 .51 /815, 836, 837, October, 1920. Also Sutton, 

Revolution, pp. 159-60, 165. 


ITEM: It was at about this time that the Wilson Administration 

sent 700,000 tons of food to the Soviet Union which, not only saved 

the regime from certain collapse, but gave Lenin the power to 

consolidate his control over all of Russia. The U.S. Food Administration, 

which handled this giant operation, was handsomely 

profitable for those commercial enterprises that participated. It was 

headed by Herbert Hoover and directed by Lewis Lichtenstein 

Strauss, married to Alice Hanauer, daughter of one of the partners 

of Kuhn, Loeb & Company. 

ITEM: U.S., British, and German wolves soon found a bonanza 

of profit in selling to the new Soviet regime. Standard Oil and 

supplied $37 million worth of machinery from 

General Electric 

1921 to 1925, and that was just the beginning. Junkers Aircraft in 

Germany literally created Soviet air power. At least three million 

slave laborers perished in the icy mines of Siberia digging ore for 

Britain's Lena Goldfields, Ltd. W. Averell Harriman—a railroad 

magnate and banker from the United States who later was to 

become Ambassador to Russia—acquired a twenty-year monopoly 

over all 

personal 

Soviet manganese production. Armand Hammer—close 

friend of Lenin—made one of the world's greatest fortunes 

by mining Russian asbestos. 

ADDITIONAL BACKGROUND: THE DEAF MUTE 

BLINDMEN 

In those early years, the Bolsheviks were desperate for foreign 

goods, services, and capital investment. They knew that they 

would be gouged by their "capitalist" associates, but what of it? It 

wasn't their money. All they cared about was staying in power. 

And that was not as easy as it may have seemed. Even after the coup 

d'etat 

in which they seized control of the mechanism of government, 

they still did not control the country at large. In fact, in 1919, 

Lenin had almost given up hope of expanding beyond Petrograd 

and a part of Moscow. Except for Odessa, all of Southern Russia 

and the Crimea were in the hands of General Deniken who was 

strongly anti-Communist. Speaking before the Tenth Congress of 

the Russian Communist Party, Lenin laid it out plainly: 

1 See George F. Kennan, Russia and the West under Lenin and Stalin (Boston: Little, 

Brown and Company, 1961), p. 180.


Without the assistance of capital it 

will be impossible for us to 

retain proletarian power in an incredibly ruined country in which the 

peasantry, also ruined, constitutes the overwhelming majority—and, 

of course, for this assistance capital will squeeze hundreds per cent out 

of us. This is what we have to understand. Hence, either this type of 

economic relations or nothing.. . 

On another occasion Lenin further explained his rationale for 

accepting Wall Street's terms. He said: 

The Capitalists of the world and their governments, in pursuit of 

conquest of the Soviet market, will close their eyes to the indicated 

higher reality and thus will turn into deaf mute blindmen. They will 

extend credits, which will strengthen for us the Communist Party in 

their countries; and giving us the materials and technology we lack, 

they will restore our military industry, indispensable for our future 

victorious attack on our suppliers. In other words, they will labor for 

the preparation of their own suicide. 

Arthur Bullard, mentioned previously as the representative in 

Russia of the U.S. Committee on Public Information, apparently 

understood the Bolshevik strategy well. Even as early as March of 

1918, he sent a cablegram to Washington warning that, while it is 

true we ought to be ready to help any honest government in need, 

nevertheless, he said, "men or money sent to the present rulers of 

Russia will be used against Russians at least as much as against 

Germans.... I 

strongly advise against giving material help to the 

present Russian government. Sinister elements in Soviets seem to 

be gaining control/' 

Unfortunately, Mr. Bullard was a minor player in this game, 

and his opinion was filtered by others along the way. This 

cablegram was sent to his superior, none other than Col. Edward 

Mandell House, in hopes that it would be relayed to the President. 

The message did not get through. 

A SIDE TRIP THROUGH WORLD WAR II 

Returning to the trail of actual events since that time, let us 

pause briefly to take a short side trip through World War II. 

1. V.I. Lenin, Report to the Tenth Congress of the Russian Communist Party, 

March 15, 1921. Quoted by Sutton, Revolution, p. 157. 

2. Quoted by Joseph Finder, Red Carpet (New York: Holt, Rinehart and Winston, 

1983), p. 8. 

3. Arthur Bullard papers, Princeton University, cited by Sutton, Revolution, p. 46. 

Financing and profiting from both sides in a conflict has never been 

more blatant. 

ITEM: From the beginning of Hitler's rise to power, German 

industry was heavily financed by American and British bankers. 

Most of the largest U.S. Corporations were knowingly invested in 

war industries. I.G. Farben was the largest of the industrial cartels 

and was a primary source of political funding for Hitler. It was 

Farben that staffed and directed Hitler's intelligence section and 

ran the Nazi slave labor camps as a supplemental source of 

manpower for Germany's factories. Farben even hired the New 

York public relations firm of Ivy Lee, who was John D. Rockefeller's 

PR specialist, to help improve Hitler's public image in 

America. Lee, incidentally, had also been used to help sell the 

Soviet regime to the American public in the late 1920s. 

ITEM: Much of the capital for the expansion of I.G. Farben 

came from Wall Street, primarily Rockefeller's National City Bank; 

Dillon, Read & Company, also a Rockefeller firm; Morgan's Equitable 

Trust Company; Harris Forbes & Company; and, yes, the 

predominantly Jewish firm of Kuhn, Loeb & Company. 

ITEM: During the Allied bombing raids over Germany, the 

factories and administrative buildings of I.G. Farben were spared 

upon instructions from the U.S. War Department. The War Department 

was liberally staffed with men, who in civilian life, had been 

associates of the investment firms previously mentioned. For 

example, the Secretary of War at that time was Robert P. Patterson. 

James Forrestal was Secretary of the Navy and later became 

Secretary of Defense. Both men had come from Dillon Read and, in 

fact, Forrestal had been president of that firm. 

ITEM: During World War II, under the Lend-Lease program, 

the United States sent to the Soviets more than $11 billion in aid, 

including 14,000 aircraft, nearly half a million tanks and other 

military vehicles, more than 400 combat ships, and even half of the 

entire U.S. supply of uranium which then was critically needed for 

the development of the atomic bomb. But fully one-third of all the 

Lend-Lease shipments during this period comprised industrial 

equipment and supplies to be used for the development of the 

3- Anthony Sutton, Wall Street and the Rise of Hitler (Seal Beach, California: '76 

Press, 1976),. 15-18, 33^3, 67-97, 99-113. Also Revolution, p. 174. 

2. Sutton, Hitler, pp. 23-61.


Russian economy after the war. And when the war did end, the 

Lend-Lease program continued to flow into the Soviet Union for 

over a year. As late as the end of 1946, Russia was still 

receiving 

twenty-year credit terms at 2 3 /g per cent interest, a far lower rate 

than returning GIs could obtain. 

THE TRANSFUSION MECHANISM 

With the termination of the Lend-Lease program, it was necessary 

to invent new mechanisms for the support of Soviet Russia 

and her satellites. One of these was the sale of much-needed 

commodities at prices below the world market and, in fact, below 

the prices that Americans themselves had to pay for the same 

items. This meant, of course—as it did in the case of Lend 

Lease—that the American taxpayer had to make up the difference. 

The Soviets were not even required to have the money to buy these 

goods. American financial institutions, the federal government, and 

international agencies which are largely funded by the federal 

government, such as the International Monetary Fund and the 

World Bank lent the money to them. Furthermore, the interest 

rates on these loans also are below the market requiring still 

additional subsidy by American citizens. And that is not all. Almost 

all of these loans have been guaranteed by the United States 

government, which means that if—no, make that when—these 

countries default in their payments, the gullible American public is 

once again called upon to make them good. In other words, the 

new mechanism, innocently and deceptively referred to as "trade," 

is 

little more than a thinly disguised means by which members of 

the Round Table who direct our national policies have bled billions 

of dollars from American citizens for an ongoing economic transfusion 

into the Soviet bloc—and continue to do so now that the word 

Soviet has been changed to the less offensive Democratic Socialism. 

This enables those regimes to enter into contracts with American 

businessmen to provide essential services. And the circle is complete: 

From tlte American taxpayer to the American government to the 

"socialist" regime to the American businessman and, ultimately, to tlte 

American financier who funded the project and provided the political 

influence to make it all possible. 

1. Anthony C. Sutton, National Suicide: Military Aid to the Soviet Union (New 

Rochelle. New York: Arlington House, 1973), p: 24. 

kcan 

This is the key to understanding the transfusion mechanism. 

Many Americans have looked at this process and have jumped to 

the conclusion that there must be a nest of Communist agents 

within our government. In an exam on reality politics, they would 

receive half credit for that answer. Yes, there undoubtedly have 

been, and continue to be, Red agents and sympathizers burrowed 

deep into our government woodwork, and they are all too happy to 

help the process along. But the main motive force has always come 

from the non-Communist, non-Democratic Socialist, non- 

American, non-anything members of the Round Table network 

who, as Lenin said, in the pursuit of profit are laboring for the 

preparation of their own suicide. 

These men are incapable of genuine patriotism. They think of 

themselves, not as citizens of any particular country, but as citizens 

of the world. They can do business just as easily with bloodthirsty 

dictatorships as with any other government—especially since they 

are assured by the transfer mechanism that the American taxpayer 

is going to make good on the deal. 

When David Rockefeller was asked about the propriety of 

providing funding for Marxist and Communist countries which are 

openly hostile to the United States, he responded: "I don't think an 

international bank such as ours ought to try to set itself as a judge 

about what kind of government a country wishes to have." 

Wishes to have? He was talking about Angola where the 

Marxist dictatorship was forced upon the people with Cuban 

soldiers and Soviet weapons! 

Thomas Theobald, Vice President of Citicorp, was asked in 1981 

about his bank's loans to Poland. Was he embarrassed by making 

loans to a Communist country, especially following the regime's 

brutal repression of free-trade unions? Not at all. "Who knows 

which political system works?" he replied. "The only test we care 

about is, 

can they pay their bills." What he meant, of course, was 

the American taxpayer pay Poland's bills. 

ITEM: The following item, taken directly from the Los Angeles 

Times just a few months after Theobald's statement, tells the story: 

WASHINGTON—For months, the Reagan Administration has 

been using federal funds to repay Polish loans owed to U.S. banks, and 

the bill for this fiscal year may amount to $400 million, Deputy 

Secretary of Agriculture Richard E. Lyng said Monday.... "They (the 

Polish authorities) have not been making payments for at least the last


half of the last year/' Lyng said. "When they don't make a payment, 

the U.S. Department of Agriculture makes a payment."... 

Lyng said the U.S. Government paid $60 million to $70 million a 

month on guaranteed Polish loans in October, November, December, 

and January—and "we will continue to pay them." 

This, remember, was precisely at the time the Polish government 

had declared martial law and was using military force to 

crush workers' demonstrations for political reform. The Polish 

default on this $1.6 billion loan was by no means an isolated event. 

Communist Rumania and a multitude of Latin American countries 

were soon to follow. 

The hard fact is that American taxpayers unknowingly have 

been making monthly bank payments on behalf of Communist, 

socialist, and so-called Third-World countries for many years. And, 

with the more recent staging of apparent reform within the former 

Soviet bloc, Congress has tripped all over itself to greatly accelerate 

that trend. 

Americans, of course, want to believe that the Evil Empire is 

crumbling, and the Soviets-turned-Democrats play directly to that 

desire. Since the end of World War II, their primary objectives have 

been (1) to disarm us and (2) to get our money. The facade of 

Perestroika and Glasnost has been merely a ploy to accomplish both 

objectives at once. All they have had to do is get rid of a few of the 

old hard-liners, replace them with less well-known personalities 

who are essentially the same (all of the new leaders come from the 

ranks of the old leadership), change their labels from "Communists" 

to "Social Democrats," and then sit back while we happily 

tear down our military defenses and rush billions of dollars to their 

failing economies. There undoubtedly will be some progress 

allowed in 

the area of free speech, but the military and security 

organizations continue in full 

readiness. The iron fist beneath the 

velvet glove remains ready to strike when the time comes that the 

facade is no longer necessary. 

Even if the entire ploy were genuine, there is no reason to 

believe that these Social Democracies will ever become better 

investment risks. The primary thing that has held them back 

economically in the past is their socialist system, and that most 

1. "U.S. Repaying Loans Owed by Poland to American Banks/' by William J. 

Eaton, Los Angeles Times, February 2, 1982. 

. 

If 


definitely will not be changed. All of the new "anti-Communist 

Social Democrats" have pledged their loyalty to the principles of 

Marx and have said in plain language that they will use our money 

to develop, not abandon socialism. These countries will continue to 

be unproductive and will continue to be unable to pay their loans. 

The American taxpayers will continue to be forced by the Cabal to 

pay the bill. 

ITEM: Before the Bolshevik coup d'etat, Russia was one of the 

most productive agricultural nations in the world. The great wheat 

fields in Ukraine justly earned her the title of the Bread Basket of 

Europe. But when the people's Utopia arrived, agriculture came to 

a standstill, and famine stalked the land. Even after Stalin, when the 

regime is said to have adopted more humane and productive 

policies, Russia never produced enough food for itself. A nation that 

cannot feed its citizens cannot develop its industry and it certainly 

cannot build a potent military force. It is not surprising, therefore, 

that for decades, the United States has annually "sold" tens of 

millions of tons of wheat—and other food stuffs—to Russia. The 

quote marks are to emphasize the underlying transfusion mechanism 

previously described. 

ITEM: The American government-industrial complex provided 

the Soviets with the money, technology, and the actual construction 

of two of the world's largest and most modern truck plants. The 

Kama River plant and the Zil plant produce over 150,000 heavyduty 

trucks per year—including armored personnel carriers and 

missile launchers — plus 250,000 diesel engines, many of which are 

used to power Soviet tanks. Forty-five per cent of the cost of this 

project came from the U.S. Export-Import Bank, an agency of the 

federal government, and an equal amount from David 

Rockefeller's Chase Manhattan Bank. The Soviets put up only ten 

per cent. The loan, of course, was taxpayer-guaranteed by the U.S. 

Export-Import Bank which, at the time, was under the direction of 

William Casey. Casey later was appointed as head of the CIA. to 

protect America from global Communism. (Are you beginning to 

get the picture?) 

ITEM: Almost every important facet of Eastern-Bloc heavy 

industry could well be stamped "Made in the USA." With the 

1- "U.S. Builds Soviet War Machine/' Industrial Research & Development, July, 1980, 

Pp. 51-54.


specific approval of each successive president, we have provided 

the latest oil-drilling equipment, chemical processing plants, airtraffic 

radar systems, equipment to produce precision bearings, 

large-craft helicopter engines, laser technology, highly advanced 

computer systems, and nuclear power plants. We have trained 

hundreds of their technicians in American institutions and factories 

and have provided their astronauts with the space suits developed 

by NASA. We have even trained their pilots at U.S. Air Force bases 

and paid for their military officers to attend our War College. All of 

this has been used by the Russian government—as Lenin predicted 

it would—to build their military industry in preparation for an 

attack on their suppliers. The great pretense of crumbling Communism, 

has not altered that strategy. It may even be the implementation 

of it. 

ITEM: When Boris Yeltsin seized control of the former Soviet 

government, one of his first official acts was to decree that foreign 

businesses had the right to take their profits out of the country. 

From a purely business perspective, that was a sound move 

because it would provide incentive for foreign investment. But 

there was more to it than that Recall from a previous chapter that 

the lion's share of that investment was to be funded by American 

taxpayers in the form of direct aid, bank-loan bailouts, and 

government insurance through the Overseas Private Investment 

Corporation. Jane Ingraham provides the details: 

During 1992 Yeltsin wheeled and dealed with Royal Dutch/Shell, 

British Petroleum, Amoco, Texaco, and Exxon. The Chevron joint 

venture to develop the Tengiz oil field was signed. McDermott 

International, Marathon Oil, and Mitsui signed a contract with the 

Russian government to develop oil and natural gas off Sakhalin Island. 

Chevron and Oman formed a consortium to build a huge pipeline to 

carry crude oil from Kazakhstan to the Black Sea, Mediterranean, and 

Persian Gulf. Occidental Petroleum signed a joint venture with Russia 

to modernize two oil fields in Siberia.... Newmont mining signed a 

joint venture to extract gold in Uzbekistan. Merrill Lynch's chairman, 

William Schreyer (CFR), signed up as financial adviser to "aid in 

privatizing" the Ukrainian State Property Fund. AT&T CEO Robert 

Allen (CFR, TC ) signed a huge contract to supply switching systems 

for all of Kazakhstan.. 

. 

1 . 

Trila tera 1 Commission. 

US West joined with the Hungarian government to own and 

operate a national cellular telephone system; GM Vice President 

Marina Whitman (CFR, TC) joined the governments of Hungary and 

Yugoslavia to make cars; GE CEO John Welch (CFR) and vice 

chairman of the board, Lawrence Bossidy (TC), bought a majority 

stake in Hungary's lighting industry; Ralston-Purina, Dow Chemical, 

Eastman Kodak, SC Johnson & Son, Xerox, American Express, Procter 

& Gamble, Woolworth, Philip Morris, Ford, Compaq 

Computer—hardly a single American brand name was missing. 

ITEM: In February of 1996, the Clinton Administration made a 

$1 billion loan of US taxpayers' money to Russia's state-controlled 

Aeroflot company so it could more effectively compete with 

American companies such as Boeing in the building of jumbo jets. 

By the end of that year, the former Soviet Bloc countries had 

received transfusions from the World Bank of over $3 billion. 

ITEM: Now the action has spread to China. American banks 

and businessmen—with taxpayers standing by with guarantees 

have provided power-generating equipment, modern steel mills, 

and military hardware including artillery shells, anti-submarine 

torpedoes, and high-tech electronic gear to update Russian-made 

jet fighters. All of this is explained as a means of weaning the Red 

Chinese away from mother Russia and encouraging them to move 

closer to free-enterprise capitalism. Yet, in 1985, at the height of the 

frenzy over building trade bridges to China, the regime signed a 

$14 billion trade pact with Russia and, in 1986, sent a $20 million 

interest-free loan to the Communist Sandinistas in Nicaragua. Even 

after the 1989 Tiananmen Square massacre in Beijing, when U.S. 

officials were publicly condemning China for human-rights violations, 

business quietly continued as usual. "The United States 

cannot condone the violent attacks and cannot ignore the consequence 

for our relationship with China," said President Bush. Yet, 

within only a few weeks of the bloodshed, and at the very time that 

student leaders were being executed, the Administration approved 

a $200 million, low-interest loan for delivery of four of Boeing's 

newest jumbo-jet aircraft. In 1993, forty-seven more jetliners were 

sold with a projected sale of 800 more over the next fifteen years. 

Amoco is spending $1.5 billion to develop oil fields in the China 

Sea. A joint venture between the Chinese government and Chrysler 

ft "The Payoff/' by Jane H. Ingraham, The New American, June 28, 1993, pp. 25-6.


is building military jeeps. A similar joint project is being used to 

upgrade their F-8 fighter planes. Three communications satellites 

were cleared for delivery. AT&T contracted a $30 million cellular 

communications network. Even the President's brother, Prescott 

Bush, resumed his plan to set up a satellite-linked computer 

network and to build a golf course near Shanghai. 

China's interest in military technology is revealing. In addition 

to the advanced hardware purchased from the United States, the 

Chinese have bought MIG-31 and SU-27 jet fighters from Russia 

and an aircraft carrier constructed in Ukraine. In May of 1992, 

China set off its biggest underground nuclear blast In 1997, the 

purchase list was extended to include self-propelled gun-mortar 

systems and Russia's most advanced diesel-electric submarines. 

Although it is known that China maintains a slave-labor work 

force in excess of a million people—they call them "convicts"—and 

although the Tariff Act of 1930 prohibits the United States from 

importing any goods made even in part by convicts or other forced 

labor, every administration starting with Nixon has renewed the 

"most-favored-nation" trade status for China. 

How is China expected to pay for all this "trade"? Very simple. 

By 1996, China had become the largest single recipient of guaranteed 

loans and subsidies from the World Bank. 

ITEM: In addition to these decades of global trade, credit, and 

taxpayer guarantees, the United States government has transferred 

tens of billions of dollars in direct foreign-aid grants with no pretense 

at all regarding expectation of repayment. 

The trail leads to Wall Street, and the tracks are fresh. The 

Round Table network did succeed in exploiting the markets of 

Eastern Europe and continues to do so today. The cast of characters 

has changed, but the play remains the same. In the beginning, the 

Council on Foreign Relations was dominated by J.P. Morgan. It is 

still controlled by international financiers. The Morgan group 

gradually has been replaced by the Rockefeller consortium, and the 

roll call of participating businesses now reads like the Fortune 500. 

The operation no longer pretends to be a Red Cross mission; it now 

masquerades under the cover of "East-West Trade." 

Politicians are fond of talking about the necessity of preserving 

world peace, and trade, we are told, is one of the best ways to do it. 

The implication is that this is a time of peace. In truth, we live in 

one of the most war-torn eras the world has ever seen. No continent 

today, except Antarctica, is free from war. There are from 25 to 40 

military struggles going on somewhere every day of the year. 

There have been more than 150 armed conflicts since the end of 

World War II with the death count already in excess of 20 million 

We cannot help noticing that this also has been a period 

and rising. 

of rising government debt and the global creation of fiat money. 

THE NEW ALCHEMY 

The alchemists of ancient times vainly sought the philosophers' 

stone which they believed would turn lead into gold. Is it possible 

that such a stone actually has been found? Can it be that the money 

alchemists of our own time have learned how to transmute war 

into debt, and debt into war, and both into gold for themselves? 

In a previous section, we theorized a strategy, dubbed the 

Rothschild Formula, in which the world's money cabal deliberately 

encourages war as a means of stimulating the profitable production 

of armaments and of keeping nations perpetually in debt. This is 

not profit seeking, it is genocide. It is not a trivial matter, therefore, 

to inquire into the possibility that our elected and non-elected 

leaders are, in fact, implementing the Rothschild Formula today. 

ITEM: In his address to the graduating class at Annapolis in 

1983, Secretary of the Navy, John Lehman, said: "Within weeks, 

many of you will be looking across just hundreds of feet of water at 

some of the most modern technology ever invented in America. 

Unfortunately, it is on Soviet ships/' 

As Professor Sutton observed in his book, The Best Enemy Money 

Can Buy, the guns, the ammunition, the weapons, and the transportation 

systems that killed Americans in Korea and Vietnam came 

from the American-subsidized economy of the Soviet Union. The 

trucks that carried these weapons down the Ho Chi Minh Trail 

were manufactured in American-built plants. The ships that carried 

the supplies to Sihanoukville and Haiphong and later to Angola 

and Nicaragua came from NATO allies and used propulsion 

systems that our State Department could have kept out of Soviet 

hands. Sutton concludes: "The technical capability to wage the 

1- These figures are taken from United Nations publication E/CN5/1985/Rev.l, 

1985 Report on the World Social Situation (New York: United Nations, 1985), p. 14. The 

January 1993 revision of that document does not give cumulative figures but shows 

that the number of conflicts has been accelerating. So the current numbers, whatever 

they may be, are even worse.


Korean and Vietnamese wars originated on both sides in Western, 

mainly American, technology, and the political illusion of "peaceful 

trade" promoted by the deaf mute blindmen was the carrier for 

this war-making technology." 

ITEM: That leads us to the more recent wars in the Middle East 

and the rise of "Islamic Fundamentalism." Iran, Iraq, Syria, Algeria, 

the PLO, the Muslim Brotherhood, and similar anti-American 

groupings have all 

received weapons, funding, and clandestine 

support from the U.S. government. In the Gulf War, every effort 

was made to insure that Hussein's regime was contained but not 

destroyed (shades of the Korean and Vietnam wars). Most of his 

bacterial-weapons factories were spared. After the cease fire, 

was allowed to keep his fleet of helicopter gunships, which he 

promptly used to put down a large-scale internal revolt. 

The big pill to swallow is that Saddam Hussein has been an 

asset to the global planners in the West, and they have done 

everything possible to keep him in power. This strategy has lately 

become so obvious that there is no longer any serious attempt to 

conceal it. 

The task now is how to explain it to the gullible public so 

as to make it sound like a good idea. 

As mentioned previously, the think-tank and talent pool for the 

implementation of this strategy has been the Council on Foreign 

Relations. In 1996, the Managing Editor of the CFR's monthly 

journal, Foreign Affairs, was Fareed Zakaria, who offered the 

following rationalization: 

Yes, it's tempting to get rid of Saddam. But his bad behavior 

actually serves America's purposes in the region.... If Saddam 

Hussein did not exist, we would have to invent him.... The end of 

Saddam Hussein would be the end of the anti-Saddam coalition. 

Nothing destroys an alliance like the disappearance of the enemy.... 

Maintaining a long-term American presence in the gulf would be 

difficult in the absence of a regional threat. 

That is about as clear a statement of the Rothschild Formula as 

one is apt to find. Yet, many people cannot believe it is real, even 

Congressmen. For example, Representative James Traficant from 

Ohio, speaking before the House on April 29, 1997, exclaimed: 

1. Anthony Sutton, The Best Enemy Money Can Buy (Billings, Montana: Liberty 

House Press, 1986), p. 191. 

2. "Thank Goodness for a Villain," Newsweek, Sept. 16, 1996, p. 43. 

he 

America gives billions to Russia. With American cash, Russia 

builds missiles. Russia then sells those missiles to China. And China, 

who gets about $45 billion in trade giveaways from Uncle Sam, then 

sells those Russian-made missiles to Iran. 

Now Iran, with those Russian-made missiles sold to them by 

China, threatens the Mideast. So Uncle Sam, who is concerned about 

about Iran threatening the Mideast because of those Russian-made 

missiles sold to them by China that we financed by American cash 

sends more troops and sends more dollars.... Mr. Speaker, this is not 

foreign policy. This is foreign stupidity. 

Traficant is 

on target with his analysis of the problem, but he 

missed the bull's eye regarding the cause. American leaders are not 

stupid. They merely are implementing the Rothschild Formula. To 

justify world government, it is necessary to have wars and the 

threat of wars. Wars require enemies with frightful weapons. 

Saddam Hussein is one of the best enemies money can buy. 

If it is true that Western leaders are deliberately funding their 

own enemies, we must assume they have considered Lenin's 

prediction that, by so doing, they are preparing their own suicide 

ours, also, by the way. We must also conclude that they are 

confident of avoiding that destiny. Whether they are right or wrong 

is not the issue here. The point is they believe they are correct and, 

further, they are building a world order which they are confident of 

being able to control. How they plan to bring that to pass is 

subject of a later section, but perpetual war is an important part of 

it Unless we are able to break the grip of these strategists, 

Rothschild Formula will continue to play a major role in our future. 

FIFTH REASON TO ABOLISH THE SYSTEM 

There are few historians who would challenge the fact that the 

funding of World War I, World War II, the Korean War, and the 

Vietnam War was accomplished by the Mandrake Mechanism 

through the Federal Reserve System. An overview of all wars since 

the establishment of the Bank of England in 1694 suggests that most 

of them would have been greatly reduced in severity, or perhaps 

not even fought at all, without fiat money. It is the ability of 

governments to acquire money without direct taxation that makes 

Modern warfare possible, and a central bank has become the 

preferred method of accomplishing that. 

Congressional Record, April 29, 1997. 

the 

the


One can argue the necessity, or at least the inevitability, of fiat 

money in time of war as a means of raw survival. That is the primal 

instinct of both individuals and governments, all other considerations 

aside. We shall leave that for the philosophers. But there can 

be no debate over the fact that fiat money in time of peace has no 

such justification. Furthermore, the ability of governments and 

banking institutions to use fiat money to fund the wars of other 

nations is a powerful temptation for them to become embroiled in 

those wars for personal profit, political advancement, or other 

reasons which fall far short of a moral justification for bloodshed. 

The Federal Reserve System has always served that function. 

The on-going strategy of building up the military capabilities of 

America's potential enemies leaves us no reason to believe we have 

seen the last of war. Therefore, it is not an exaggeration to say that 

the Federal Reserve System encourages war. There can be no better 

reason for the Creature to be put to sleep. 

SUMMARY 

The Bolshevik Revolution was a coup d'etat in which a radical 

minority captured the Russian government from the moderate 

revolutionary majority. They accomplished this through deception, 

organization, discipline, and surprise. The Red Cross Mission of 

New York financiers threw support to the Bolsheviks and, in 

return, received economic rewards in the form of rights to Russia's 

natural resources plus contracts for construction and supplies. The 

continued participation in the economic development of Russia 

and Eastern Europe since that time indicates that this relationship 

has survived to the present day. These financiers are not pro- 

Communist nor pro-anything else. Their motivation is 

profit and 

power. They are now working to bring both Russia and the United 

States into a world government which they expect to control. War 

and threats of war are tools to prod the masses toward the 

acceptance of that goal. It is essential, therefore, that the United 

States and the industrialized nations of the world have credible 

enemies. As these words are being written, Russia is wearing the 

mask of peace and cooperation. But we have seen that before. We 

may yet see a return of the Evil Empire when the timing is right. 

U.S. government and megabank funding, first of Russian, and now 

of Chinese and Middle-East military capabilities, cannot be understood 

without this insight. 

Section IV 

A TALE OF THREE 

BANKS 

It has been said that those who are ignorant of 

history are doomed to repeat its mistakes. It may 

come as a surprise to learn that the Federal 

Reserve System is America's fourth central bank, 

not its first. We have been through all this before 

and, each time, the result has been the same. 

Interested in what happened? Then let's set the 

coordinates of our time machine to the colony of 

Massachusetts and the year 1690. To activate, turn 

the page.

Chapter Fifteen 

THE LOST 

TREASURE MAP 

The bitter 

experience of the American colonies 

with fiat money; the resolve of the founding 

fathers to prohibit the new nation from resorting 

to paper money without backing; the drafting of 

the Constitution to that end; the creation ofa true 

American dollar; the prosperity that followed. 

In the golden days of radio, on the Edgar Bergen Show, the 

ventriloquist would ask his dummy, Mortimer Snerd, "How can 

you be so stupid?" And the answer was always the same. After a 

moment of deep thought on the part of Mortimer, he would drawl 

his reply, "Well, it ain't easy!" 

When we look at the monetary chaos around us today—the 

evaporating value of the dollar and the collapsing financial institutions—we 

are compelled to ask: How did we get into this fix? And, 

unfortunately, Mortimer's response would be quite appropriate. 

To find out how we got to where we are, it will be necessary to 

know where we started, and a good place to begin that inquiry is 

with the Constitution of the United States. Article I, Sections 8 and 

10 say: 

Congress shall have the power — 

To borrow money ... to coin money, regulate the value thereof, 

and of foreign coin, and fix the standard of weights and measures;... 

[and] to provide for the punishrnent of counterfeiting.... 

No state shall ... coin money; emit bills of credit; [or] make 

anything but gold and silver coin a tender in payment of debts. 

The delegates were precise in their use of these words. 

Congress was given the power to "coin money," not to print it. 

Thomas M. Cooley's Principles of Constitutional Law explains that 

'to coin money is to stamp pieces of metal for use as a medium of 

exchange in commerce according to fixed standards of value."


What was prohibited was to "emit bills of credit" which, according 

to the speeches and writings of those who drafted the document, 

meant the printing of paper IOUs which were intended to be 

circulated as money—in other words, the printing of fiat money 

not backed by gold or silver. 

At first, it would seem that nothing could be more clear. Yet, 

these two simple clauses have become the basis for literally 

thousands of pages of conflicting interpretation. The crux of the 

problem is that, while the Constitution clearly prohibits the states 

from issuing fiat money, it does not specifically prevent the federal 

government from doing so. That was truly an unfortunate oversight 

on the part of the document's framers, but they probably 

never dreamed in their wildest nightmares that their descendants 

"could be so stupid" as to not understand their intent. 

Furthermore, "it ain't easy 7 ' 

to miss their intent. All one has to 

do is look at the monetary history that led up to the Constitutional 

Convention and to read the published letters and debates of the 

men who affixed their signatures to that founding document. 

As one reads through the debates on the floor of the convention, 

one is struck by the passion that these delegates held on the 

subject of money. Every one of them could remember from his 

personal experience the utter chaos in the colonies caused by the 

issuance of fiat money. They spoke out against it in no uncertain 

terms, and they were adamant that it 

again in America—at either the state or federal level. 

should never be tolerated 

PAPER MONEY IN THE COLONIES 

The first colonial experience with fiat money was in the period 

from 1690 to 1764. Massachusetts was the first to use it as a means 

of financing its military raids against the French colony in Quebec. 

The other colonies were quick to follow suit and, within a few 

years, were engaging in a virtual orgy of printing "bills of credit." 

There was no central bank involved. The process was simple and 

direct, as was the reasoning behind it. As one colonial legislator 

explained it: 

Do you think, gentlemen, that I will consent to load my 

constituents with taxes when we can send to our printer and get a 

wagon load of money, one quire of which will pay for the whole? 

1. See William ML Gouge, A Short History of Paper Money and Banking in the United 

States (Philadelphia: T.W. Ustick, 1833), Part II, p. 27. 

THE LOST TREASURE MAP 311 

The consequences of this enlightened statesmanship were classic. 

Prices skyrocketed, legal tender laws were enacted to force the 

colonists to accept the worthless paper, and the common man 

endured great personal losses and hardship. By the late 1750s, 

Connecticut had price inflated by 800%, the Carolinas had inflated 

900%, Massachusetts 1000%, Rhode Island 2300%. 1 

The situation was so out of hand that, beginning in 1751, the 

British Parliament stepped in and, in one of those rare instances 

where interference from the mother country actually benefited the 

colonies, it forced them to cease the production of fiat money. 

Henceforth, the Bank of England would be the only source. 

What followed was unforeseen by the promoters of fiat money. 

Amid great gloom about "insufficient money/ 7 

a miracle boom of 

prosperity occurred. The forced use of fiat money had compelled 

everyone to hoard their real money and use the worthless paper 

instead. Now that the paper was in disgrace, the colonists began to 

use their English and French and Dutch gold coins once again, 

prices rapidly adjusted to reality, and commerce returned to a solid 

footing. It remained so even during the economic strain of the 

Seven-Years War (1756-1763) and during the period immediately 

prior to the Revolution. Here was a perfect example of how an 

economic system in distress can recover if government does not 

interfere with the healing process. 

WARTIME INFLATION 

But all of this came to a halt with the onset of colonial rebellion. 

Not only did open hostilities throw England deeper into the cogs 

and wheels of the central-bank mechanism, it also was the compelling 

motive for the colonies to return to their printing presses. The 

following figures speak eloquently for themselves: 

m 

• At the beginning of the war in 1775, the total money supply for 

the federated colonies stood at $12 million. 

In June of that year, the Continental Congress issued another 

$2 million. Before the notes were printed, another $1 million 

was authorized. 

By the end of the year, another $3 million. 

1- Paul and Lehrman, p. 23. 

2 - 

Roger W. Weiss, "The Colonial Monetary Standard of Massachusetts/ 

History Review 27 (November 1974), p. 589. 

Economic

312 THE CREATURE FROM JEKYLL ISLAND THE LOST TREASURE MAP 313 

• $19 million in 1776. 

• $13 million in 1777. 

• $64 million in 1778. 

• $125 million in 1779. 

• A total of $227 million in five years on top of a base of 

$12 million is an increase of about 2000%. 

• On top of this "federal" money, the states were doing the same 

in an approximately equal amount. 

• And still more: the Continental Army, unable to get enough 

money from Congress, issued "certificates" for the purchase of 

supplies totalling $200 million. 

• $650 million created in five years on top of a base of $12 million 

is an expansion of the money supply of over SOOOô. 1 

Although the economy was devastated by this flood of fiat 

money, most victims were totally unaware of the cause. In 1777, the 

sentiment of a large segment of the population was expressed by 

the words of one patriotic old lady who said: "What a shame it is 

that Congress should let the poor soldiers suffer when they have 

power to make just as much money as they choose." 2 

The immediate result of this money infusion was the appearance 

of prosperity. After all, everyone had more money and that was 

perceived as a very good thing. But this was quickly followed by 

inflation as the self-destruct mechanism began to roll. In 1775, the 

colonial monetary unit, called the Continental, was valued at 

one-dollar in gold. In 1778, it was exchanged for twenty-five cents. 

By 1779, just four years from its issue, it was worth less than a 

penny and ceased to circulate as money at all. It was in that year 

that George Washington wrote: "A wagon-load of money will 

scarcely purchase a wagon-load of provisions." 3 

The saying "Not worth a Continental" has its 

gloomy period. 

origin in this 

The true nature of the inflation effect has never been more 

accurately perceived or more vividly described than it was by 

Thomas Jefferson: 

It 

will be asked how will the two masses of Continental and of 

State money have cost the people of the United States seventy-two 

millions of dollars, when they are to be redeemed now with about six 

million? I answer that the difference, being sixty-six millions, has been 

lost on the paper bills separately by the successive holders of them. 

Every one, through whose hands a bill passed, lost on that bill what it 

lost in value during the time it was in his hands. This was a real tax on 

him; and in this way the people of the United States actually 

contributed those sixty-six millions of dollars during the war, and by a 

mode of taxation the most oppressive of all because the most unequal 

of all. 1 

PRICE CONTROLS AND LEGAL-TENDER LAWS 

It was natural that people struggled to find ways to escape the 

destruction of their savings, and the two most obvious methods 

were (1) to regularly adjust prices upward as the value of the 

money went downward or (2) exchange their goods and services 

only for gold coins. In response, the colonial legislatures and the 

Continental Congress did what governments always do to prevent 

it They resorted to wage and price controls and to legal-tender 

laws with harsh penalties for non-compliance. Under one such law, 

those who refused to accept worthless money were even described 

as traitors. It declared: 

If any person shall hereafter be so lost to all virtue and regard for 

his Country as to refuse to accept its notes, such person shall be 

deemed an enemy of his Country. 

Rhode Island not only leveled a substantial fine for nonacceptance 

of its notes but, upon a second offense, an individual 

lost his citizenship. When this was declared unlawful by a panel of 

judges, the legislature reacted by dismissing the judges from 

office. 3 

1. For an overview of expenditures, see Paul and Lehrman, pp. 26-27. 

2. Gouge, p. 28. The naivite of this lady may be humorous, but are Americans any 

more enlightened today? Would she not feel at home among our modern-day 

electorate who clamor for legislation to pump Federal-Reserve fiat money into 

projects to alleviate hardship among the poor and unemployed? 

3. QuotedbyBolles,Vol.i,p.l32. 

P Thomas Jefferson, Observations on the Article Etats-Unis Prepared for the 

Encyclopedia, June 22, 1786, Writings, Vol. IV, p. 165. 

2- F- Tupper Saussy, The Miracle on Mainstreet (Sewanee, Tennessee Spencer Judd, 

9fi 0), p. 12. Also see Anthony Sutton, The War on Gold (Seal Beach, Calif.: 76 Press, 

1 W), pp. 47, 48. 

3 - 

Jensen, p. 324.


Then, as now, those who suffered the most from fiat money 

were those who held the most trust in government. In 1777 these 

were mostly the Whigs, for it was they who patriotically held paper 

money and, as a result, lost their livelihoods and their life savings. 

The Tories, on the other hand, mistrusting both government and its 

paper money, passed the bills as quickly as possible in trade for 

real assets, especially gold. Consequently, as a group, they weathered 

the storm fairly well. But they often were derided by their less 

prudent neighbors as "Torie speculators," "hoarders," and even 

"traitors." 

All of this was painfully fresh in the memories of the delegates 

to the Constitutional Convention and, as the opening session 

convened in Philadelphia in 1787, there were angry mobs in the 

streets threatening the legislators. Looting was rampant. Businesses 

were bankrupt, Drunkenness and lawlessness were everywhere to 

be seen. The fruit of fiat money had ripened, and the delegates did 

not enjoy its taste. 

In October of 1785, George Washington wrote: "The wheels of 

government are clogged, and . . . we are descending into the vale of 

confusion and darkness." A year later, in a letter to James 

Madison, he said: "No day was ever more clouded than the 

present. We are fast verging to anarchy." 

In February of 1787, Washington wrote to Henry Knox: "If any 

person had told me that there would have been such formidable 

rebellion as exists, I would have thought him fit for a madhouse." 

Just three months prior to the opening of the convention, 

Washington voiced his reasons for rejecting the notion of fiat 

money. In answer to the complaint that there was not enough gold 

coin (specie) to satisfy the needs of commerce, he replied: 

The necessity arising from a want of specie is represented as 

greater than it really is. I contend that it is by the substance, not the 

shadow of a thing, we are to be benefited. The wisdom of man, in my 

humble opinion, cannot at this time devise a plan by which the credit 

of paper money would be long supported; consequently, depreciation 

keeps pace with the quantity of the emission, and articles for which it 

is exchanged rise in a greater ratio than the sinking value of the 

money. Wherein, then, is the farmer, the planter, the artisan benefited? 

1. Quoted by Atwood, p. 3. 

2. Ibid., p. 4. 

3. Ibid., p. 4. 

An evil equally great is the door it immediately opens for speculation, 

by which the least designing and perhaps most valuable part of the 

community are preyed upon by the more knowing and crafty 

speculators. 

THE CONSTITUTIONAL CONVENTION 

This was the prevailing view held by the great majority of 

delegates to the Convention. They were adamant in their resolve to 

create a constitution which would prevent any state, and especially 

the federal government itself, from ever again issuing fiat money. 

And they said so in unmistakable terms. 

Oliver Ellsworth from Connecticut, who later was to become 

our third Chief Justice of the Supreme Court, said: 

This is a favorable moment to shut and bar the door against paper 

money. The mischief of the various experiments which have been 

made are now fresh in the public mind and have excited the disgust of 

all the respectable parts of America. 

George Mason from Virginia told the delegates he had a 

"mortal hatred to paper money." Previously he had written to 

George Washington: "They may pass a law to issue paper money, 

but twenty laws will not make the people receive it. Paper money is 

founded upon fraud and knavery." 

James Wilson from Pennsylvania said: "It will have the most 

salutary influence on the credit of the United States to remove the 

possibility of paper money/' 

John Langdon from New Hampshire warned that he would 

rather reject the whole plan of federation than to grant the new 

gpvernment the right to issue fiat money. 

George Reed from Delaware declared that a provision in the 

Constitution granting the new government the right to issue fiat 

money "would be as alarming as the mark of the beast in 

Revelation/' 

Thomas Paine, although not a delegate to the Convention, had 

written the previous year that he was strongly opposed to fiat 

money, which he called counterfeiting by the state, and he especially 

abhorred legal tender laws which force people to accept the 

1. Washington to Stone, 16 February, 1787. Quoted by Bancroft, pp. 231-32. 

2 " 

2- For the context of this and the following statements expressing a similar 

ser sentiment, see Bancroft, pp. 30, 43-44, 82; also Paul and Lehrman, p. 168.


counterfeit. He said: 

"The punishment of a member [of a legislature] 

who should move for such a law ought to be death/' 

An interesting thought. 

If any further evidence is needed that the Founding Fathers 

intended to prohibit the federal government from issuing "bills of 

credit/' consider this. The first draft of the Constitution was copied 

in large measure from the original Articles of Confederation. When 

it was taken up for consideration by the delegates, therefore, it 

contained the old provision that had caused so much chaos. 

stated: "The legislature of the United States shall have the power to 

borrow money and emit bills of credit." But, after a lively discussion 

on the matter, the offending provision was voted to be removed 

from the Constitution by an overwhelming margin. 1 

It 

Voicing the 

sentiment of the majority of the delegates, Alexander Hamilton 

said: "To emit an unfunded paper as the sign of value ought not to 

continue a formal part of the Constitution, nor ever hereafter to be 

employed; being, in its nature, repugnant with abuses and liable to 

be made the engine of imposition and fraud." 2 

The journal of the Convention for August 16 contains this 

notation: 

It was moved and seconded to strike out the words "and emit bills 

of credit/' and the motion ... passed in the affirmative. [The vote 

cleared by a margin of better than four to one.] 3 

The Tenth Amendment 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 

power to issue bills of credit is definitely not delegated to the 

United States, and it is specifically prohibited to the States. Therefore, 

if any power to issue fiat money legally exists at all, it is 

reserved for the people. In other words, individuals and private 

institutions, such as banks, have the right to issue lOUs and hope 

that the public will use them as money, but government, at any level 

is clearly prohibited by the Constitution from doing so. 

1. For an excellent summary of the interplay of ideas between the delegates, see 

Edwin Vieira, Jr., Pieces of Eight: The Monetary Pozvers and Disabilities of the United 

States Constitution (New Jersey: Sound Dollar Committee, 1983), pp. 71-76. 

2. Alexander Hamilton, Works, Part II, p. 271, as cited by Bancroft, p. 26. 

3. Quoted by Bancroft, pp. 39, 40. 

» 

Ltant 


A SUGGESTION FOR YOUR CONGRESSMAN 

Incidentally, the Constitution has never been amended on this 

point, nor has the provision that only silver and gold can be used as 

lawful money. It would be interesting if each reader of this book 

would send copies to his or her elected representatives in Washington, 

or at least a photocopy of this section. Every member of 

Congress has sworn to uphold the Constitution, and you might 

attach a short note asking them when they intend to begin. 

Do not be disappointed if your reply is less than satisfactory. 

Politicians have a similar problem to that which judges have. It is 

permissible to rock the boat from time to time, but they are not 

supposed to sink it. 

Suits against the government challenging the 

constitutionality of our monetary system seldom get to court. It is 

safer for the justices to decline to accept these cases or to dismiss 

them as supposedly "frivolous." Otherwise they would face a 

difficult choice. Either they would have to mutilate logic in order to 

uphold the present inconsistencies—thus, opening themselves to 

possible ridicule—or they would have to declare in favor of the 

Constitution and literally cause the collapse of the entire deficit- 

spending, central-bank mechanism. Such an act would take a 

considerable amount of courage. Not only would they suffer the 

wrath of the Establishment that is nourished by that mechanism, 

they also would have to face a bewildered public which, because of 

lack of knowledge about the Constitution or the nature of money, 

could easily be convinced that the judges had lost their minds. 

Likewise, it is safer for politicians to respond to inquiries of this 

kind merely by quoting some self-serving government document 

which makes our fiat monetary system sound quite legal and 

marvelously constitutional. 

Unfortunately, that is reality. Until the public becomes considerably 

better informed than it is at present, we cannot expect too 

much from the courts or from Congress. Bringing this matter to the 

attention of your elected representatives, however, is still well 

worth the effort, because the process of education has to start 

somewhere, and Washington is an excellent place to begin. 

Returning to the point of this digression, however, it is impor- 

to know that the federal government was given a precisely 

limited monetary function: "to coin money" and to "regulate the


specifically defined as the only kind of money to be allowed, there 

can be no doubt of what was meant by the first half of that power. 

To coin money meant to mint precious-metal coins. Period. 

The second half is equally clear. Both in the Constitution and in 

the discussions among the delegates, the power to regulate the 

value of gold and silver coin was closely tied to the power to 

determine weights and measures. They are, in fact, one and the 

same. To regulate the value of coin is exactly the same as to set the 

nationally accepted value of a mile or a pound or a quart. It is to 

create a standard against which a thing may be measured. The 

wording of this section of the Constitution can be traced to the 

original Articles of Confederation which further clarifies the meaning 

that was generally understood at that time: 

The United States in congress assembled shall . . . have the sole and 

exclusive right and power of regulating the alloy and value of coin 

struck by their own authority, or by that of the respective 

states—fixing the Standard of Weights and Measures throughout the 


The intent, therefore, was simply for Congress to determine the 

exact weight of a precious metal that would constitute the national 

monetary unit. 

THE ORIGIN OF THE DOLLAR 

At the time of these deliberations, Spanish silver coins, called 

pieces of eight, had already become the de facto monetary unit. An 

official commission had been established by the Continental Congress 

to sample the circulating coins in the country and determine 

their average value by weight and purity. Charts were published, 

and all 

coins of various origin were listed by comparative value. 

Congress was already "regulating the value of" the nation's money 

by the time the Constitution was drafted. How these coins became 

dollars is an interesting story. Edwin Vieira tells us: 

Monetary historians generally first associate the dollar with one 

Count Schlick, who began striking such silver coins in 1519 in 

Joachim's Thai, Bavaria. Then called " Schlicktenthalers" or 

"joachimsthalers," the coins became known simply as "thalers," which 

transliterated into "dollars." Interestingly, the American colonies did 

not adopt the dollar from England, but from Spain. Under that 

country's monetary reform of 1497, the silver real became the Spanish 

money -unit, or unit of account. A new coin consisting of eight teaks 

also appeared. Variously known as pesos, duros, piezas de ocho ("pieces 


of eight"), or Spanish dollars (because of their similarity in weight and 

fineness to the thaler), the coins quickly achieved predominance in 

financial markets of the New World because of Spain's then-important 

commercial and political position. 

In 1785, Thomas Jefferson urged the adoption of the Spanish 

silver dollar as the nation's official monetary unit. In a pamphlet 

submitted to the delegates of the Continental Congress, he said: 

Taking into our view all money transactions, great and small, I 

question if a common measure, of more convenient size than the 

dollar, could be proposed.... The unit or dollar is a known coin, and 

the most familiar of all to the minds of people. It is already adopted 

from south to north; has identified our currency, and therefore happily 

offers itself as an unit already introduced. 

On July 6, 1785, Congress unanimously voted to adopt the 

Spanish dollar as the official monetary unit of the United States. 

Jefferson realized, however, that this was not sufficient. Although 

the coin had been one of the most dependable in terms of weight 

and quality, it still varied in content between issues, and a way had 

to be found to rate one coin in value against another. That was, 

after all, the service that Congress was required to render when it 

was given the power to "regulate the value" of money. Jefferson 

came directly to the point when he said: "If we determine that a 

dollar shall be our unit, we must then say with precision what a 

dollar is. This coin as struck at different times, of different weight 

and fineness, is of different values." 

The logic voiced by Jefferson could not be ignored. Two years 

later, after carefully examining the actual weight and fineness of 

the Spanish dollars currently in circulation, Congress defined the 

dollar. After ratification of the Constitution, a dollar would contain 

371.25 grains of fine silver, and all items in commerce, including 

other coins, were to be measured in value against that standard. 

As the Spaniards continued to reduce the silver content of their 

coins, the pressure for the minting of an American dollar of 

predictable value began to mount. Secretary of the Treasury, 

Alexander Hamilton, in his 1791 report to Congress, urged the 

1- Vieira, p. 66. 

2. Propositions Respecting the Coinage of Gold, Silver, and Copper (printed pamphlet 

Presented to the Continental Congress on May 13, 1785), pp. 9-10. Cited by Vieira, 

P- 68. 

3 - Ihid., p. 11.


establishment of a federal mint and also presented a powerful case 

for maintaining an inviolable standard for the coins to be produced 

by that mint. He said: 

The dollar originally contemplated in the money transactions of 

this country, by successive diminutions of its weight and fineness, has 

sustained a depreciation of five per cent, and yet the new dollar has a 

currency in all payments in place of the old, with scarcely any 

attention to the difference between them. The operation of this in 

depredating the value of property depending upon past contracts, 

and ... 

of all other property is apparent. Nor can it require argument to 

prove that a nation ought not to suffer the value of the property of its 

citizens to fluctuate with the fluctuations of a foreign mint, or to 

change with the changes in the regulations of a foreign sovereign.. . 

The quantity of gold and silver in the national coins, 

corresponding with a given sum, cannot be made less than heretofore 

without disturbing the balance of intrinsic value, and making every 

acre of land, as well as every bushel of wheat, of less actual worth than 

in time past.... [This] could not fail to distract the ideas of the 

community, and would be apt to breed discontent as well among those 

who live on the income of their money as among the poorer classes of 

the people to whom the necessities of life would . . . become dearer. 1 

BIMETALLISM 

Note in the preceding quotation that Hamilton referred to both 

gold and silver coins, not merely silver. That is because it was 

precisely at this time that Congress began to consider a bimetallic 

coinage. In retrospect, this was a mistake for, throughout history, 

bimetallism has never worked well very long. It always has led to 

confusion and, ultimately, the disappearance as money of one of the 

metals. This is because there is always a subtle shifting of the 

relative values between gold and silver—or any other two metals 

for that matter—depending on constantly changing supply and 

demand. We may set a value ratio of one to the other that is quite 

acceptable today but, eventually, that ratio will no longer reflect 

reality. The metal which grows in value over the other will be 

hoarded or possibly even melted down because it will bring a 

higher price as metal than it will as money. 

That is precisely what happened in the early days of our 

Republic. It was determined after careful analysis of the free- 

1. Vie Debates and Proceedings in the Congress of the United States (J. Gales, compil. 

1834), Appendix, pp. 2059, 2071-73. Cited by Vieira, pp. 95, 97. 

• 

market that the value of gold at that time was approximately fifteen 

times the value of silver. The Coinage Act of 1792 accordingly set 

the relative value of gold-to-silver at fifteen-to-one. It then authorized 

the federal government to mint gold coins called Eagles, and it 

specified that their value was ten dollars. In other words, the gold 

courts would be equal in value to ten silver coins. Ten silver coins, 

each of 371.25 grains of fine silver, would contain a total of 3,712.5 

grains. The content of the Eagle, therefore, was one-fifteenth that 

amount, or 247.5 grains of fine gold. 

Contrary to popular misconception/ Congress did not create a 

"gold dollar." (It didn't do that until fifty-seven years later in The 

Coinage Act of 1849.) In fact it reaffirmed that "the money of 

account of the United States shall be expressed in dollars or units" 

and again defined those units as coins containing 371.25 grains of 

pure silver. What Congress did do was authorize the minting of a 

gpld coin and arbitrarily fix 

the value of the gold in that coin at 

fifteen times the value of the dollar. And it also stated that all silver 

and gold coins produced in the federal mint were to be legal tender 

in accordance with their value, based on weight and purity, relative 

to the standard of the silver dollar. 

Oh yes, another thing. It set the death penalty for anyone who 

debases the nation's coinage; a law which, if enforced today, would 

wipe out the House of Representatives, the Senate, the managerial 

level of the Treasury Department, and the Presidency as well. 

FREE COINAGE 

Perhaps the most important provision of this Act, however, was 

the establishment of what is called free coinage. Under free coinage, 

any citizen may take raw silver or gold to the mint and, for a 

nominal fee, have it converted into coins for personal use. The 

government merely performs a technical function of creating the 

coin and stamping it with its insignia to certify the correct weight 

and purity. The state's role in this is exactly the same as inspecting 

the scales in a grocery store or the meter on a gasoline pump. It is 

merely fulfilling 

the Constitutional requirement to set standards 

and verify the accuracy of weights and measures. 

Free coinage was to become an important part of the American 

success story, and it lasted until the Gold Reserve Act of 1934 

which, not only terminated it, but even made it illegal for citizens to 

possess gold. We shall take a closer look at that dismal period in a


later section but, for now, it is important to recall the greatness of 

our monetary system as it once was. Elgin Groseclose explains: 

The principle of free coinage has proved its practical worth as a 

deterrent to debasement and depreciation. Where coinage is on 

private account there is no profit to the state in tampering with the 

standard, and there is no opportunity for such practice by the 

individual. The circulation of coins of similar appearance and 

denomination but of uncertain standard, the arbitrary and 

unpredictable modifications in the standard by autocratic 

government, the temptations to profit which were constantly dangled 

before despotic rulers—these were evils which had perplexed and 

harassed society and hindered the natural growth of economy since 

the days when coined money first appeared. By a stroke they were 

swept away. At the same time, the institution of free coinage, by giving 

stability and character to one of the chief instruments of organized 

economy, made possible a more vigorous and healthy commercial life 

and gave prestige and increased substance to the government 

adopting it. 

SOUND MONEY AND ECONOMIC PROSPERITY 

This was, indeed, an auspicious beginning for the new nation, 

and the result was immediately observable in an upsurge in 

prosperity. The December 16, 1789 edition of the Pennsylvania 

Gazette declared: "Since the federal constitution has removed all 

danger of our having a paper tender, our trade is advanced fifty per 

cent." But that was just the beginning. Historian Douglass North 

says that "the years 1793-1808, were years of unparalleled prosperity/ 

Louis Hacker describes the period as one "of unexampled 

business expansion, one of the greatest, in fact, the United States 

has had.... The exports of the country mounted from $19 millions 

in 1791 to $93 millions in 1801. 

4 Furthermore, the federal deficit, 

which amounted to twenty-eight per cent of expenditures in 1792, 

dropped to twenty-one per cent in 1795. By 1802, the deficit had 

disappeared altogether and had been replaced by a surplus that 

was almost as large as the governments, total spending. 

George Washington watched this economic miracle with great 

satisfaction and, in correspondence to his friend, LaFayette, the 

1 Groseclose, Money and Man, p. 1 67. 

2. Quoted by Saussy, p. 36. 

3. Douglass C. North, The Economic Growth of the United States (New York: W.W- 

Norton, 1966), p. 53. 

4. Louis M. Hacker, American Capitalism (New York: Anvil, 1957), p. 39. 


French statesman and former General in the Continental Army, 

Washington commented: "Our country, my dear sir,... is fast 

progressing in its political importance and social happiness." In a 

letter to Catherine Macaulay Graham, he said: "The United States 

enjoys a sense of prosperity and tranquility under the new government 

that could hardly have been hoped for." And in a letter to the 

American poet and diplomat, David Humphreys, Washington 

exclaimed: "Our public credit stands on that high ground which 

three years ago it would have been considered as a species of 

madness to have foretold/' 

On the specific subject of paper money without backing by gold 

or silver, Washington wrote: 

We may one day become a great commercial and flourishing 

nation. But if in the pursuit of the means we should unfortunately 

stumble again on unfunded paper money or any similar species of 

fraud, we shall assuredly give a fatal stab to our national credit in its 

infancy. 

This, then, was the monetary blueprint laid down by the men 

who drafted our Constitution. In retrospect, about the only flaw 

one can find was the attempt to set a fixed ratio between the value 

of gold and silver. Rather than placing a dollar value on a gold coin, 

the mint should have imprinted the gold value in terms of weight 

and fineness. The free market then would have assigned it an 

exchange value in terms of goods and services, and that automatically 

would have determined its correct monetary value as a ratio to 

the silver dollars which were bidding for the purchase of the same 

items. It was inevitable, therefore, that soon after the "ten-dollar" 

Eagle was created, the value of gold over silver began to climb 

higher than the prescribed 

ratio of fifteen-to-one, and the Eagles 

ceased to circulate. In later years, with the discovery of the great 

gold fields in California and Australia, the process reversed itself, 

and silver dollars disappeared from commerce. But, even though 

this bimetallism led to a discrepancy between the actual conversion 

ratio and that which the government had prescribed, nevertheless, 

it took place in the open market and no one was greatly injured by 

the inconvenience. Throughout it all, there was just one standard: 

1- These letters were written in 1790 and 1791, quoted by Atwood, pp. 5-6. 

2 - 

Written in 1 789, quoted by Louis Basso, A Treatise on Monetary Reform (St. Louis, 

Missouri: Monetary Realist Society, 1982), p. 5.


the defined silver content of a dollar. Furthermore, both the silver 

and gold coins were of intrinsic value and totally honest in their 

measure. No nation could do more for the prosperity of its citizens 

than that. 

SUMMARY 

The Constitution prohibits both the states and the federal 

government from issuing fiat money. This was the deliberate intent 

of the Founding Fathers who had bitter experience with fiat money 

before and especially during the Revolutionary War. In response to 

the need to have a precisely defined national monetary unit, 

Congress adopted the Spanish dollar then currently in use and 

defined the content of that dollar to be 371.25 grains of pure silver. 

With the establishment of a federal mint, American silver dollars 

were issued in accordance with that standard, and gold Eagles also 

were produced which were then equal in value to ten silver dollars. 

Most importantly, free coinage was established wherein Americans 

were able to convert their raw silver and gold into national coins 

officially certified by the government as to their intrinsic value. The 

product of these measures was a period of sound money and great 

economic prosperity, a period that would come to an end only 

when the next generation of Americans forgot to read their history 

and returned to the use of paper money and "bills of credit." 

The monetary plan laid down by the Founding Fathers was the 

product of collective genius. Nowhere in history can one find so 

many men in one legislative body who understood the fraud 

inherent in fiat money and the hidden-taxation nature of inflation. 

There was never such an assembly of scholars and statesmen 

determined to set a safe course for the nation of their own creation. 

Literally, they handed us a treasure map. All we had to do was 

follow it to economic security and national prosperity. But, as we 

shall see in the following sections, that map was discarded when 

the lessons of history died out with tiV/se who had lived it. 

Chapter Sixteen 

THE CREATURE 

COMES TO AMERICA 

The story of the Bank of North America, the 

nation's first central bank, which wasformed even 

before the Constitution was drafted; the story of 

the First Bank of the United States, the nation's 

second central bank, which was formed in 1791; 

the massive inflation caused by both banks; the 

causes of their demise. 

It is a surprising fact that the United States had its first central 

bank even before the Constitution was drafted. It was chartered by 

the Continental Congress in the Spring of 1781 and opened its 

doors the following year. There were great expectations at that time 

that the province of Canada would soon join the rebel colonies to 

form a union extending across the entire North American continent. 

In anticipation of that, the new financial institution was called 

the Bank of North America. 

The Bank was organized by Robert Morris, a member of 

Congress, who was a leader of a group of politicians and merchants 

who wanted the new nation to imitate the mercantilism of England. 

They wanted high taxes to support a powerful, centralized government, 

high tariffs to subsidize domestic industry, a large army and 

navy, and the acquisition of colonial outposts to expand into 

foreign lands and markets. He was a wealthy Philadelphia mer- 

chant who had profited greatly from war contracts during the 

Revolution. He had carefully studied the secret science of money 

Land, by 1781, was widely considered to be the financial wizard of 

Congress. 

The Bank of North America was modeled closely after the Bank 

°f England. Following the practice of fractional reserve, it was 

allowed to issue paper promissory notes in excess of actual 

deposits, but, since some gold and silver had to be held in the vault,

326 THE CREATURE FROM JEKYLL ISLAND THE CREATURE COMES TO AMERICA 327 

there were definite limits to how far that process could go. Bank 

notes were not forced on the people as legal tender for all 

debts, 

public and private, but the government did agree to accept them at 

theirface value in payment of all taxes and duties, which made them 

as good as gold for that specific purpose. Furthermore, unlike the 

central banks of today, the Bank of North America was not given 

the power to directly issue the nation's money. 

FUNCTIONED AS A CENTRAL BANK 

On the other hand, the Bank was given the right of monopoly in 

its 

field, which means there were no other bank notes allowed to 

circulate in competition. This, plus the fact that they were accepted 

at face value in payment of all federal and state taxes, plus the 

further fact that the federal government did not at that time have a 

functioning money of its own, made these bank notes attractive for 

use as a circulating medium of exchange. The intended result was 

that the Bank's paper would be accepted as money, which for a 

while, it was. Furthermore, the Bank was made the official depository 

for all federal funds and it almost immediately loaned 

$1.2 million to the government, much of which was created out of 

nothing for that purpose. So, in spite of the limitations placed upon 

the Bank, and in spite of the fact that it was essentially a private 

institution, it was intended to be and, in fact, did function as a 

central bank. 

The Bank of North America was fraudulent from the very start. 

The charter required that private investors provide $400,000 for the 

initial subscription. When Morris was unable to raise that money, 

he used his political influence to make up the shortfall out of 

government funds. In a maneuver that was nothing less than 

legalized embezzlement, he took the gold that had been loaned to 

the United States from France and had it 

deposited in the Bank. 

Then, using this as a fractional-reserve base, he simply created the 

money that was needed for the subscription and loaned it to 

himself and his associates. Such is the power of the secret science. 

It is hard to reconcile the fact that the same men who adopted 

the brilliant monetary restraints of the Constitution a few years 

later would have allowed the Bank of North America to exist. It 

must be remembered, however, that the war was still in progress 

1 . See Murray N- Rothbard, Conceived in Liberty: The Revolutionary War, 1 775-1 784 

(New Rochelle, New York: Arlington House, 1979), Vol. IV, p. 392. 

the charter was issued, and even the wisest of statesmen are 

often obliged to follow expediency in such times. One also must 

conclude that, while the founding fathers were wise on the nature 

Ivtfhen 

of 

not yet had extensive experience with the same mechanism hidden 

behind the obscurities of fractional-reserve banking. 

In any event, the Bank was not to have its charter renewed by 

Congress and it did not survive beyond the end of the war. Murray 

Rothbard details its demise: 

fiat money created by the government's printing press, they had 

Despite the monopoly privileges conferred upon the Bank of 

North America and its nominal redeemability in specie, the market's 

lack of confidence in the inflated notes led to their depreciation outside 

the Bank's home base in Philadelphia. The Bank even tried to bolster 

the value of its notes by hiring people to urge redeemers of its notes 

not to insist on specie—a move scarcely calculated to improve the 

long-run confidence in the Bank. 

After a year of operation, Morris's political power slipped, and he 

moved quickly to shift the Bank of North America from a central bank 

to a purely commercial bank chartered by the state of Pennsylvania. By 

the end of 1783,... the first experiment with a central bank in the United 

States had ended. 

A fitting epilogue to this story was written two hundred years 

later when, in 1980, the First Pennsylvania Bank of Philadelphia, 

the "oldest bank in the nation/ 7 was bailed out by the FDIC 

AN END RUN AROUND THE CONSTITUTION 

It will be recalled that, after the Bank of North America was 

tenninated and after the Constitutional Convention "closed the 

door on paper money/' the United States enjoyed a period of 

unparalleled economic growth and prosperity. But, while the door 

may have been closed, the window was still open. Congress was 

denied the power to print money, but it was not denied the power 

to borrow it. 

In the vocabulary of the common man, to borrow is to accept a 

loan of something that already exists. He is confused, therefore, 

when the banker issues money out of nothing and then says he is 

lending it. He appears to be lending but, in reality, he is creating. 

Then, as now, the mysteries of banking vocabulary were not 

revealed to the average man, and it was difficult to understand 

1- Rothbard, Mystery, pp. 194-95.


how privately-issued bank notes could serve precisely the same 

purpose as printing-press money—with precisely the same disastrous 

results. That being the case, the monetary and political 

scientists decided to end run the Constitution. Their plan was to 

establish a bank, to give that bank the power to create money, to 

lend most of that money to the government, and then to make sure 

the IOUs are accepted as money by the public. Congress, therefore, 

would not be emitting bills of credit. The bank would do that. 

Thus, the First Bank of the United States was conceived. 

The proposal was submitted to Congress in 1790 by Alexander 

Hamilton who, at that time, was Secretary of the Treasury. 

Hamilton, incidentally, was a former aide to Robert Morris, founder 

of the Bank of North America, so in that sense his role in this 

matter is not surprising. What is surprising is the fact that Hamilton 

had been a staunch supporter of a sound currency during the 

Constitutional Convention. This is hard to reconcile, and one must 

suspect that, even the most well intentioned of men can become 

corrupted by the temptations of wealth and power. It is possible 

that Hamilton, Morris, and other Federalist leaders had hoped to 

keep the government out of the money-making business, not 

because it was the constitutional thing to do, but because that 

would leave the field clear for a central-bank mechanism which, 

because it was further from public view and political control, could 

become their own private engine of profit. It would appear that the 

only other explanation is that these men were fickle in their views 

and did not really understand the implications of their acts. In view 

of their brilliance in all other matters, however, it is difficult to 

muster enthusiasm for that interpretation. 

THE HAMILTON-JEFFERSON CONFLICT 

Hamilton's proposal was strongly opposed by Thomas 

Jefferson, then Secretary of State, and this was the beginning of a 

heated political debate that would preoccupy Congress for many 

decades to come. In fact, it was one of the central issues that led to 

the creation of our first political parties. The Federalists gathered 

around the ideas of Hamilton. The anti-Federalists, later called the 

Republicans, were attracted to the ideas of Jefferson. 1 

1. Curiously, the present Democratic Party traces its origin to Jefferson's Republi- 

THE CREATURE COMES TO AMERICA 329 

Jefferson pointed out that the Constitution did not grant to 

Congress the power to create a bank or anything similar. That 

means such power is reserved to the states or to the people. In a 

rebuttal to Hamilton's proposal, he said: "To take a single step 

beyond the boundaries thus specially drawn around the powers of 

Congress, is to take possession of a boundless field of power, no 

Furthermore, he said, even if 

longer susceptible of any definition." 

the Constitution had granted such power, it would be an extremely 

unwise thing to do, because allowing banks to create money could 

only lead to national ruin. 

Hamilton, on the other hand, argued that debt was a good 

thing, if kept within reason, and that the nation needed more 

money in circulation to keep up with expanding commerce. Only 

the Bank, he said, would be able to provide that. Furthermore, 

while it is true the Constitution did not specifically grant the power 

to create such a bank, it was, nevertheless, an implied power, 

because it was needed to accomplish other functions which were 

granted in the Constitution. 

That was the end run. 

Nothing could be more polarized than the opposing ideas of 

these two men: 

JEFFERSON: "A private central bank issuing the public currency is a 

greater menace to the liberties of the people than a standing army." 

"We must not let our rulers load us with perpetual debt" 

HAMILTON: "No society could succeed which did not unite the 

interest and credit of rich individuals with those of the state." "A 

national debt, if it is not excessive, will be to us a national blessing." 

AMERICA'S SECOND CENTRAL BANK IS CREATED 

After a year of intense debate, Hamilton's views prevailed and, 

in 1791, Congress granted a twenty-year charter to the Bank of the 

: 

I- "Opinion of Thomas Jefferson, Secretary of State/' February 15, 1791, quoted by 

Krooss, pp. 147-48. 

2. The comparison between private banks and standing armies can be found in 

many of Jefferson's letters and public utterances. For example, see The Writings of 

Thomas Jefferson (New York: G.P. Putnam & Sons, 1899), Vol. X, p. 31. 

©. The Basic Writings of Thomas Jefferson (Willey Book Company, 1944), p. 749. 

|k Quoted by Arthur M. Schlesinger, Jr., The Age of Jackson (New York: Mentor 

Books, 1945), pp. 6-7. 

5. Written on April 30, 1781, to his mentor, Robert Morris. Quoted by John H. 

Makin, The Global Debt Crisis: America's Growing Involvement (New York: Basic 

Books, 1984), p. 246.


United States. It was modelled closely after the Bank of England, 

which means it was almost an exact replica of the previous Bank of 

North America. In fact, as evidence of continuity with the past, the 

president of the new bank was Thomas Willing, the same man who 

had been a partner of Robert Morris and president of the old bank. 

As before, the new Bank was given a monopoly in the issuance 

of bank notes. Once again, these notes were not forced on the 

people as legal tender for private debts and contracts, but they were 

legal tender at face value for all debts to the government in the form 

of taxes and duties, which made them attractive for use as common 

money. And once again, the Bank was made the official depository 

of all federal funds. 

The charter specified that the Bank was required at all times to 

redeem its notes in gold or silver specie upon demand by the 

depositor. That was an admirable provision but, since the Bank was 

not also required to keep specie in its vaults in the full amount of its 

note obligations, it was a mathematical impossibility to uphold. 

As with the old Bank of North America, the new Bank of the 

United States was to have eighty per cent of its capital provided by 

private investors with the federal government putting up only 

twenty per cent. That was a mere bookkeeping sleight-of-hand, 

however, because it had been prearranged for the Bank to immediately 

loan back to the federal government exactly that same 

amount. Reminiscent of the Morris scheme in capitalizing the Bank 

of North America, this federal ''investment" was essentially a 

means whereby federal funds could be used to make up the 

short-fall of the private investors. "Call it by what name you 

please/' said Jefferson, this was not a loan or an investment but an 

outright gift. And he was certainly right. The Bank was able to open 

its doors with less than nine per cent of the private capital required 

by its charter. The total capitalization was specified at $10 million, 

which means that $8 million was to come from private stockholders. 

However, as John Kenneth Galbraith wryly observed: "Numerous 

thrifty participants confined themselves to a modest down 

payment, and the bank began operations on around $675,000 in 

hard cash/' 2 

1 It is interesting to note that, as a member of the Continental Congress, Willing 

had been one of those who voted against the Declaration of Independence- 

2. Galbraith, p. 72 


THE CREATURE COMES FROM EUROPE 

Who were these private investors? Their names do not appear 

in the published literature, but we can be certain they included the 

Congressmen and Senators—and their associates—who engineered 

the charter. But there is an interesting line in Galbraith's text that 

hints at another dimension to the composition of this group. On 

page 72 of Money: Whence It Came, Where It Went, he states 

matter-of-factly: "Foreigners could own shares but not vote them/ 7 

What a story is hidden behind that innocuous statement. The 

blunt reality is that the Rothschild banking dynasty in Europe was 

Ithe dominant force, both financially and politically, in the formation 

of the Bank of the United States. 

explains: 

Biographer, Derek Wilson, 

Over the years since NJM [Rothschild], the Manchester textile 

manufacturer, had bought cotton from the Southern states, 

Rothschilds had developed heavy American commitments. Nathan . . 

had made loans to various states of the Union, had been, for a time, the 

official European banker for the US government and was a pledged 

supporter of the Bank of the United States. 

Gustavus Myers, in his History of the Great American Fortunes, is 

more pointed. He says: 

Under the surface, the Rothschilds long had a powerful influence 

in dictating American financial laws. The law records show that they 

were the power in the old Bank of the United States. 

The Rothschilds, therefore, were not merely investors nor just 

an important power. They were the power behind the Bank of the 

United States! The significance of the Rothschild power in American 

finance and politics was the subject of extensive comment in a 

previous section, so there is no need to cover that ground again. It 

is important here, however, to at least make a mental note of the 

fact that the Creature from Jekyll Island is descended from a species 

that is not native to this land. 

INFLATION ALL OVER AGAIN 

iFrom 

the beginning, the primary purpose of the Bank was to 

create money for the federal government. Money for the private 


2. Gustavus Myers, History of the Great American Fortunes (New York: Random 

House, 1936), p. 556.


sector was strictly secondary. That was made clear by the fact that 

the maximum rate of interest it was allowed to charge was six per 

cent That made it impractical to make loans to anyone except the 

federal government and a few large, prime-rate borrowers. And the 

government wasted no time putting its new central-bank mechanism 

to work. Having "invested" $2 million at the start, it converted 

that into $8.2 million borrowed within the next five years. 

Which means that $6.2 million was created specifically for its use. 

Anyone familiar with the history of money as outlined in the 

previous section could easily write the following paragraph. 

The creation of millions of new fractional-reserve dollars, 

which the government pushed into the economy through spending 

programs, caused an imbalance between the supply of money and 

the supply of goods and services. Prices appeared to go up as the 

relative value of the dollar went down. In that same five-year 

period, wholesale prices rose by 72%, which is 

another way of 

saying that 42% of everything people had saved in the form of 

money was quietly confiscated by the government through the 

hidden tax called inflation. 

The same inflation effect that previously had plagued the 

colonies now returned to plague the new generation. This time, 

instead of being caused by printing-press money, it was fractionalreserve 

money. The cog that linked the two mechanisms together 

and caused them to function as one was federal debt. It was federal 

debt that allowed the political and monetary scientists to violate the 

intent of the founding fathers, and it was this same federal debt that 

prompted Jefferson to exclaim: 

I wish it were possible to obtain a single amendment to our 

Constitution. I would be willing to depend on that alone for the 

reduction of the administration of our government to the general 

principle of the Constitution; I mean an additional article, taking from 

the federal government their power of borrowing. 

Like so many things in the real world, the Bank of the United 

States was a mixture of evil with some good. It certainly was not all 

bad. In colonial times, the state governments printed as much 

paper money as they pleased, and the loss of purchasing power 

was, in many cases, total. The Bank, on the other hand, was 

1. Letter to John Taylor, November 26, 1789. Quoted by Martin A. Larson, The 

Continuing Tax Rebellion (Old Greenwich, Connecticut: Devin-Adair, 1979), p. xii. 


required to maintain some gold and specie as a base for its pyramid 

of money. Even though it was an inverted pyramid with reserves 

being smaller than the quantity of bank notes, it still represented a 

boundary to just how far the money supply could be expanded. 

And that was good. 

Furthermore, it is apparent that the bank's directors were 

imbued with a certain amount of enlightened self interest in that 

they actually wanted to keep the creation of new money within 

some kind of control. They could profit from the central-bank 

mechanism only so long as the economy as a whole was productive 

enough to support it. They did not want to kill the goose that laid 

the golden egg. So, like their counterparts in the Federal Reserve 

System of our modern day, they spoke the language of restraint 

and, in a few instances, even acted with restraint as well. 

WILDCAT BANKS 

For example, it 

was during this period that "wildcat banks'' 

began to flourish. They were given that name not because they 

were untamed—although that would have been another good 

reason to do so—but because they were located in areas so remote 

in the frontier that it was said their only customers were wildcats. 

Wildcat banks were not noted for meticulous accounting or 

business practices. Like all banks at that time, they were required to 

keep a certain portion of their deposits on hand in the form of gold 

or silver coin. To engender public confidence in their faithfulness to 

that obligation, it was common practice to keep the vault door open 

so a keg or two of gold coins could be viewed during business 

hours—not altogether different from the modern practice of financial 

institutions advertising how many billions in assets they hold 

but never mentioning the size of their liabilities. The wildcatters, 

however, were not reluctant to sprinkle a few precious-metal coins 

over the top of nails and let that take care of public relations. In 

some cases, as state examiners went from bank to bank to check the 

reserves, the gold would arrive only a few minutes ahead of them, 

having been rushed from the vault of the bank previously audited. 

The point is that the Bank of the United States was able to place 

considerable restraint upon the practices of all banks, both wildcat 

and urban. It did this simply by refusing to accept the notes of any 

other bank unless it had a reputation for redeeming those notes in 

, 

specie on demand. The public reacted accordingly. If 

the notes


were not good enough for the Bank of the United States, they were 

not good enough for them either. This served as an indirect force of 

moderation that affected all banks of that time. And that too, was 

good. 

Some historians have said that the Bank was a positive force in 

yet another way. Galbraith, for example, writes admiringly: 

On occasion, the Bank of the United States came to the assistance 

of good state banks that were being besieged by their note holders or 

other creditors. So, besides enforcing restraint, it served also as the 

lender of last resort. Thus in its short span of life it went far to perceive 

and develop the basic regulatory functions of a central bank. 

One who is less enamored with the idea of a central bank 

would be tempted to ask: If those state banks were so "good/' why 

did they need assistance in keeping faith with their depositors? The 

whole idea of a "lender of last resort/ 7 

which is accepted as sacred 

dogma today, is based on the assumption that it is perfectly 

acceptable for the entire banking system to be fraudulent. It is 

assumed that any single bank or cluster of banks could at any time 

become "besieged by their note holders or other creditors." Therefore, 

it is prudent to have a central bank to take what meager 

reserves there are within the system and rush them from bank to 

bank, if not minutes before the examiner arrives, at least before the 

customers do. 

As for the much talked about restraint exercised over other 

is not unreasonable to think that this same effect would 

banks, it 

have developed even without the presence of a government bank. 

If the free market had been left to operate, it is certain that, before 

long, one or more banks would gain a deserved reputation for 

honesty and full faith with their depositors. They would become 

the most popular banks and, therefore, 

order to accomplish this, 

the most prosperous. In 

however, they would have to reject the 

worthless notes of other banks. The public would react as expected, 

and even the most unscrupulous banks would have to toe the line if 

they wanted to survive. Moderation would be forced on the entire 

banking system as a result of open competition within a free 

market. To assume that only a federally-chartered central bank 

could have brought moderation into the monetary system is 

1. Galbraith, p. 73. 

to 

)THE CREATURE COMES TO AMERICA 335 

believe that only politicians, bureaucrats, and agencies of government 

can act with integrity, a shaky notion at best. 

AN INSTRUMENT OF PLUTOCRACY 

In any event, there is no denying the fact that the Bank of the 

United States did provide some braking force to the runaway 

tendencies of many of the nation's private banks. So it could have 

been worse. The inflation that it caused by its own activities could 

have been enlarged even further by the activities of the other banks 

as well. But, that it could have been worse does not make it good. 

As it was, the Bank was the means by which the American people 

lost forty-two per cent of the value of all the money they earned or 

possessed during just those five years. We must not forget, either, 

that this confiscation of property was selective. It did not work 

against the wealthy classes which were able to ride the wave of 

inflation aboard the raft of tangible property which they owned. 

And it especially did not work against those elite few, the political 

and monetary scientists, who were making huge profits from the 

enterprise. The Bank had done precisely what Hamilton had 

advocated: "... unite the interest and credit of rich individuals with 

those of the state." 

The development of this plutocracy was well described by 

Governeur Morris, the former delegate from New York who had 

helped to draft the Constitution into its final form. He had been an 

assistant to Robert Morris (not related) and was a champion of the 

concept of a natural aristocracy. So he knew his subject well when 

he warned: 

The rich will strive to establish their dominion and enslave the 

rest. They always did. They always will.... They will have the same 

effect here as elsewhere, if we do not, by such a government, keep 

them within their proper spheres. We should remember that the 

people never act from reason alone. The rich will take advantage of 

their passions, and make these the instruments for oppressing them. 

The result of the contest will be a violent aristocracy, or a more violent 

despotism. 

The tide of political pressure against the Bank was steadily 

rising during these years. It is tempting for critics of the centralbank 

mechanism to attribute that to the awakening common sense 

1. Written on July 2, 1787, in a letter to James Madison. Quoted in "Prosperity 

Economics/' by W. Cleon Skousen, Freeman Digest, February, 1985, p. 9.



of the American public. Unfortunately, the picture is not that 

pleasing. It is true that the Jeffersonian Republicans were eloquently 

holding forth against the Creature's progenitor, and their 

influence was substantial. But there was another group that joined 

with them which had almost exactly opposite ideas and goals. The 

Jeffersonians opposed the Bank because they believed it was 

unconstitutional and because they wanted a monetary system 

based only upon gold and silver coin. The other group was made 

up of the wildcatters, the land speculators, and the empire-building 

industrialists. They opposed the Bank because they wanted a 

monetary system with no restraints at all, not even those associated 

with fractional reserve. They wanted every local bank to be free to 

create as much paper money as the public would swallow^ because 

they would then use that money for their own projects and profit. 

Indeed, politics does produce strange bedfellows. 

As the time approached for renewal of the Bank's charter, the 

battle lines inched toward each other. They were of equal force. The 

halls of Congress echoed with the cannon roar of angry debate. The 

vote was deadlocked. Another attack and counter attack. Again a 

deadlock. Into the night the forces clashed. 

When the smoke of battle lifted, the bill for charter renewal had 

been defeated by one vote in the House and one vote, cast by 

Vice-President George Clinton to break the tie, in the Senate. And 

so, on January 24, 1811, the Bank of the United States closed its 

doors. 

The battle may have been decided, but the war was far from 

over. The losers, bitter with defeat, merely regrouped their forces 

and began to prepare for the next encounter. Unfortunately, the 

events that followed were ideally suited for their plans. 

With the moderating effect of the Bank now removed from the 

scene, the nation's banking system passed wholly into the hands of 

the state-chartered corporations, many of which were imbued with 

the wildcat mentality. Their numbers grew rapidly, and so did the 

money supply which they created. Inflation followed in their 

footsteps. Public dissatisfaction began to rise. 

If the free market had been allowed to operate, it is likely that 

competition soon would have weeded out the wildcatters and 

restored balance to the system, but it was never given a chance. The 

War of 1812 saw to that 

ITHE WAR OF 1812 

The War of 1812 was one of the most senseless wars in history. 

The primary cause, we are told, was the British impressment into 

their navy of American sailors on the high seas to assist in the war 

against Napoleonic France. But the French had done exactly the 

same thing to assist in the war against England, yet their acts were 

ignored. Furthermore, the British had already rescinded their 

policy regarding American seamen before the war was underway, 

which means that the cause of the war had been removed, and 

peace could have been restored in honor if Congress had so 

wanted. One must conclude that the pro-banking interests in the 

United States actually wanted the conflict because of the profits that 

could be realized from it. As evidence of this is the fact that the 

New England states, which were home to the seamen who had 

been impressed into service, were firmly against the war, while the 

Western and inland Southern states, which were home to the 

myriad of wildcat banks, howled loudly for a clash of arms. 

In any event, the war was unpopular with the average citizen, 

and it was out of the question for Congress to obtain funding for 

armaments through an increase in taxes. So the government needed 

the state banks to create that money outside the tax structure and 

came to their rescue to protect them from the discipline of the free 

market. It was a classic case of the unholy alliance, the cabal, that 

always develops between political and monetary scientists. Professor 

Rothbard gives the details: 

The U.S. government encouraged an enormous expansion in the 

number of banks and in bank notes and deposits to purchase the 

growing war debt. These new and recklessly inflationary banks in the 

Middle Atlantic, Southern, and Western states, printed enormous 

quantities of new notes to purchase government bonds. The federal 

government then used these notes to purchase arms and 

manufactured goods in New England... 

By August 1814, it became clear that the banks of the nation apart 

from New England could not pay [in specie], that they were insolvent. 

Rather than allow the banks of the nation to fail, the governments, 

state and federal, decided in August 1814 to allow the banks to 

continue in business while refusing to redeem their obligations in 

specie. In other words, the banks were allowed to refuse to pay their 

solemn contractual obligations.... 

This general suspension was not only highly inflationary at the 

time; it set a precedent for all financial crises from then on. Whether


the U.S. had a central bank or not, the banks were assured that if they 

inflated together and then got in trouble, government would bail them 

out 1 

The state banks had created enough instant money for the 

federal government to raise the debt from $45 million to $127 

million, a staggering sum for the fledgling nation. Tripling the 

money supply, with no appreciable increase in goods, means the 

value of the dollar shrank to about one-third its former purchasing 

power. By 1814, when the depositors began to awake to the scam 

and demanded their gold instead of paper, the banks closed their 

doors and had to hire extra guards to protect officials and employees 

from the angry crowds. Once again, the monetary and political 

scientists had succeeded in fleecing the American public of 

approximately 66% of all the money they held during that period, 

and that was on top of the 42% fleecing they got a few years earlier 

by the Bank of the United States. 

JUGGLING TRICKS AND BANKING DREAMS 

Leaning against the storm of paper money all 

this time was 

Thomas Jefferson, by now, past-President of the United States. 

Trying to bring the nation to its senses, he never ceased speaking 

out against the evil of dishonest money and debt: 

Although all the nations of Europe have tried and trodden every 

path of force and folly in a fruitless quest of the same object, yet we still 

expect to find in juggling tricks and banking dreams, that money can 

be made out of nothing, and in sufficient quantity to meet the expense 

of heavy war. ... 

The toleration of banks of paper discount costs the United States 

one-half of their war taxes; or, in other words, doubles the expenses of 

every war. ... 

The crisis, then, of the abuses of banking is arrived. The banks 

have pronounced their own sentence of death. Between two and three 

hundred millions of dollars of their promissory notes are in the hands 

of the people, for solid produce and property sold, and they [the 

banks] formally declare that they will not pay them.... Paper was 

received on a belief that it was cash [gold], and such scenes are now to 

take place as will open the eyes of credulity and of insanity itself to the 

1. Rothbard, Mystery, pp. 198-99. 

2. Writings, Library Edition, Vol. XIV, p. 227. 

3. Writings, Library Edition, Vol. XIII, p. 364. 


dangers of a paper medium abandoned to the discretion of avarice and 

of swindlers. ... 

It is a wise rule never to borrow a dollar without laying a tax at the 

same instant for paying the interest annually and the principal within 

a given term. 2 ... We shall consider ourselves unauthorized to saddle 

posterity with our debts, and morally bound to pay them ourselves. 

... The earth belongs to the living, not the dead.... We may consider 

each generation as a distinct nation with a right to . . . 

bind themselves, 

but not the succeeding generation. ... 

The modern theory of the perpetuation of debt has drenched the 

earth with blood, and crushed its inhabitants under burdens ever 

accumulating. 

And still, Congress did not listen. 

SUMMARY 

America had its first central bank even before the Constitution 

was drafted. It was called the Bank of North America and was 

chartered by the Continental Congress in 1781. Modeled after the 

Bank of England, it was authorized to issue more paper promissory 

notes than it held in deposits. In the beginning, these notes were 

widely circulated and served as a national currency. Although the 

bank was essentially a private institution, it was designed for the 

purpose of creating money to lend to the federal government, 

which it did from the start. 

The Bank of North America was riddled with fraud, and it 

quickly fell into political disfavor. Its inflated bank notes eventually 

were rejected by ordinary citizens and ceased to circulate outside of 

the Bank's home city of Philadelphia. Its charter was allowed to 

expire and, in 1783, it was converted into a purely commercial bank 

chartered by the state of Pennsylvania. 

The advocates of fiat money did not give up. In 1791, the First 

Bank of the United States (America's second central bank) was 

created by Congress. The new bank was a replica of the first, 

including fraud. Private investors in the Bank were among the 

nation's most wealthy and influential citizens, including some 

Congressmen and Senators. But the largest investment and the 

I 

Letter to Dr. Thomas Cooper, Sept. 10, 1814, Writings, Library Edition, Vol. XIV, 

pp. 187-89. 

2. Writings, Library Edition, Vol. XIII, p. 269. 

3. Ibid, p. 358. 

4. Ibid., p. 270. 

5. Ibid., p. 272.


most powerful influence in the new Bank came from the 

Rothschilds in Europe. 

The Bank set about immediately to serve its function of creating 

money for the government. This led to a massive inflation of the 

money supply and rising prices. In the first five years, 42% of 

everything people had saved in the form of money was confiscated 

through the hidden tax called inflation. This was the same phenomenon 

that had plagued the colonies less than two decades 

earlier, but instead of being caused by printing-press money, it was 

now fueled by fractional-reserve bank notes created by a central 

bank. 

As the time for renewal of the Bank's charter approached, two 

groups with opposite intentions became strange political allies 

against it: 

the Jeffersonians who wanted sound money; and the 

frontier banks, called wildcatters, who wanted unlimited license to 

steal. On January 24, 1811, the charter was defeated by one vote in 

the Senate and one in the House. The central bank was gone, but 

the wildcatters were everywhere. 

The War of 1812 was not popular among the American public, 

and funding would have been impossible through taxes alone. The 

government chose to fund the war by encouraging wildcat banks to 

purchase its war-debt bonds and convert them into bank notes 

which the government then used to purchase war material. Within 

two years, the nation's money supply had tripled, and so had 

prices. Once again, the monetary and political scientists had 

succeeded in fleecing the American public of approximately 66% of 

all the money they held during that period. And that was on top of 

the 42% fleecing they got a few years earlier by the Bank of the 


Chapter Seventeen 

A DEN OF VIPERS 

The story of the Second Bank of the United States, 

the nation's third central bank; the election of 

Andrew Jackson on an anti-bank -platform; the 

battle between President Jackson and the head of 

the bank, Nicholas Biddle; the deliberate creation 

of a depression to frighten the public into keeping 

the bank; Jackson's ultimate victory. 

The monetary chaos that existed at the end of the War of 1812, 

outlined in the previous chapter, was caused by an almost universal 

fraud within the banking industry. Depositors in good faith 

placed their gold and silver into banks for safekeeping and for the 

convenience of using paper money in their everyday transactions. 

The banks, in turn, promised them they could exchange the paper 

for their coins whenever they wished. At the same time, however, 

through the mechanism of fractional-reserve banking, paper 

money was created far in excess of the value of the coins held in 

reserve. Since the new money had just as much claim to the coins as 

the old, the bankers knew that, if a sizable percentage of their 

customers were to request a withdrawal of their coins, that solemn 

promise simply could not be kept. This, in fact, is precisely what 

happened over and over again during that period. 

By 1814, Thomas Jefferson had retired to Monticello and had 

bitterly resigned himself to defeat on the issue of money. In a letter 

to John Adams he said: 

I have ever been the enemy of banks; not of those discounting for 

cash [that is, charging interest on loans of real money], but of those 

foisting their own paper into circulation, and thus banishing our cash. 

My zeal against those institutions was so warm and open at the 

establishment of the bank of the U.S. that I was derided as a Maniac by 

the tribe of bank-mongers, who were seeking to filch from the public 

their swindling and barren gains.... Shall we build an altar to the old 

paper money of the revolution, which ruined individuals but saved 

the republic, and burn on that all the bank charters present and future,

342 THE CREATURE FROM JEKYLL ISLAND A DEN OF VIPERS 343 

and their notes with them? For these are to ruin both republic and 

the Second Bank of the United States was rooted as deeply in 

individuals. This cannot be done. The Mania is too strong. It has seized 

by 

pritain as it was in America. 

its delusions and corruptions all the members of our governments 

general, special, and The nation's third central bank ran into deep trouble from the 

individual. 1 

start. It had promised to continue the tradition of moderating the 

Jefferson was right. Congress had neither the wisdom nor the 

other banks by refusing to accept any of their notes unless they 

courage to let the free market clean up the mess that remained after 

were redeemable in specie on demand. But when the other banks 

the demise of the first bank of the U.S. If it had, the fraud soon 

returned the gesture and required that the new Bank also pay out 

would have become understood by the public, the dishonest banks 

specie on their demand, it frequently lost its resolve. There was also 

would have folded, the losses would have been taken, and the 

the tiny matter of corruption. As the Bank's major historian writes: 

suffering would have been ended, perhaps forever. Instead, Congress 

moved to protect the banks, to organize the fraud, and to 

stockholders that it was not advisable to give offense by demand- 

"So many influential people were interested [in the state banks] as 

perpetuate the losses. All of this was accomplished in 1816 when a 

ing payment in specie, and borrowers were anxious to keep the 

twenty-year charter was given to the Second Bank of the United 

banks in the humor to lend." 

States. 

In economics, every policy carries a consequence, and the 

THE SECOND BANK OF THE UNITED STATES 

consequence of the loose monetary policy of the Second Bank of the 

In every respect the new bank was a carbon copy of the old, 

United States was that America was introduced to her first experience 

with what now is called the "boom-bust" cycle. Galbraith tells 

with one minor exception. Congress unashamedly extracted from 

the private investors what amounted to nothing less than a bribe in 

us: "In 1816, the postwar boom was full on; there was especially 

the form of $1.5 million "in consideration of the exclusive privileges 

active speculation in western lands. The new Bank joyously participated. 

and benefits conferred by this Act." 2 The bankers were glad to pay 

the fee, not only because it was a modest price for such a profitable 

The Bank had the advantage over its competitors of a federal 

enterprise, but also because, as before, they received an immediate 

charter plus the government's agreement to accept its notes in the 

government deposit of one-fifth the total capitalization which then 

payment of taxes. But the state banks were by no means left out of 

was used as the base for manufacturing much of the remaining 

the game. It was still within their power to create money through 

startup capital. The charter required the Bank to raise a minimum 

fractional-reserve banking and, thus, to further inflate the amount 

of $7 million in specie, but even in its second year of operation, its 

of the nation's circulating currency. Anxious to get in on this action, 

specie never rose above $2.5 million. 3 Once again, the monetary 

Pennsylvania chartered thirty-seven new banks in 1817. That same 

and political scientists had carved out their profitable niches, and 

year, Kentucky followed suit with forty new charters. The total 

the gullible taxpayer, his head filled with sweet visions of "banking number of banks grew by 46% in just the first two years after the 

reform," was left to pick up the tab. 

central bank was created. Any spot along the road that had "a 

Another important continuity between the old and the new 

church, a tavern, or a blacksmith shop was deemed a suitable place 

Bank was the concentration of foreign investment. In fact, the 

for setting up a bank." In that same time frame, the money supply 

largest single block of stock in the new Bank, about one-third in all, was expanded by an additional $27.4 million; another taxpayer 

was held by this group. It is certainly no exaggeration to say that 

fleecing of over forty per cent 

L 

I u T P^ e \L^Fr ed 7 The Adams -fflerson Letters (New York: Simon and 1 Ralph C.H. Catterall, The Second Bankofthe United States (Chicago: University of 

Schuster, 1971), Vol. II, p. 424. 

Chicago Press, 1902), p. 36. 

2. Act of 1816, Section 20, 3 Stat, at 191. 


3. Rothbard, Mystery, p. 203. 

3. Norman Angell, The Story 

4. Krooss, p. 25. 

ofMoney (New York: Frederick A. Stokes Co., 1929), 

1 279.


THE FIRST BOOM-BUST CYCLE 

In the past, the effect of this inflationary process always had 

been the gradual evaporation of purchasing power and the continuous 

transfer of property from those who produced it to those 

who controlled the government and ran the banks. This time, 

however, the process took on a new twist Gradualism was 

replaced by catastrophism. The monetary scientists, with their 

hands firmly on the controls of the money machine, now began to 

throw the levers, first one way, and then the other. The expansion 

and then deliberate contraction of the money supply literally threw 

the nation into economic convulsions. Why wait for the apples to 

fall when the harvest can be hastened simply by shaking the tree? 

In 1818, the Bank suddenly began to tighten its 

requirements 

for new loans and to call in as many of the old loans as possible. 

This contraction of the money supply was justified 

to the public 

then exactly as it is justified today. It was necessary, they said, to 

put the brakes on inflation. The fact that this was the same inflation 

the Bank had helped to create in the first place, seems to have gone 

unnoticed. 

There is no doubt that many bankers and politicians act in good 

faith in their attempt to bring under control the inflation they 

themselves have caused. Not everyone who benefits from the 

central-bank mechanism fully understands it. 

Like Frankenstein, 

they create a monster without realizing they cannot control it. Their 

crime is one of stupidity, not malice. But stupidity is not a 

characteristic of the average banker, especially a central banker, and 

we must conclude that many of the monetary scientists are well 

aware of the monster's power for destruction. At best, they just 

don't care as long as they are safe. And at worst, they perceive that 

they are in the apple-harvesting business. They deliberately tease 

and prod the monster in anticipation of his rampage through the 

village orchards. In the final analysis, of course, it is of little 

importance whether the shaking of the trees is out of innocence or 

malice. The end result is the same. My, how the apples do fall. 

The country's first experience with a deliberately created monetary 

contraction began in 1818 when the Bank became concerned 

about its own ability to survive. Professor Rothbard says: 

Starting in July 1818, the government and the BUS [Bank of the 

United States] began to see what dire straits they were in; the 

enormous inflation of money and credit, aggravated by the massive 

fraud, had put the BUS in danger of going under and illegally failing 

to maintain specie payments. Over the next year, the BUS began a 

series of enormous contractions, forced curtailment of loans, 

contractions of credit in the south and west.... The contraction of 

money and credit swiftly brought to the United States its first 

widespread economic and financial depression. The first nationwide 

"boom-bust" cycle had arrived in the United States.... 

The result of this contraction was a rash of defaults, bankruptcies 

of business and manufacturers, and a liquidation of unsound 

investments during the boom. 

THE CYCLE IS WORSENED BY GOVERNMENT 

INTERFERENCE 

It is widely believed that panics, boom-bust cycles, and depressions 

are caused by unbridled competition between banks; thus the 

need for government regulation. The truth is just the opposite. 

These disruptions in the free market are the result of government 

prevention of competition by the granting of monopolistic power to 

a central bank. In the absence of a monopoly, individual banks may 

operate in a fraudulent manner only to a limited extent and for a 

short period of time. Inevitably, they will be exposed by their more 

honest competitors and will be forced out of business. Yes, their 

depositors will be injured by the bankruptcy, but the damage will 

be limited to a relatively few and will occur only now and then. 

Even geographical regions may be hard hit on occasion, but it will 

not be a national tragedy with everyone brought to their knees. The 

overall economy will absorb the losses, and commerce at large will 

continue to prosper. Within an environment of prosperity, even 

those who have been injured by fraudulent banking would have a 

good chance for rapid recovery. But, when a central bank is 

allowed to protect the fraudulent operators and to force all banks to 

function the same, the forces of competition can no longer dampen 

the effect The expansion becomes universal and gigantic. And, of 

course, so does the contraction. Except for the bankers and the 

politicians, everyone is injured at the same time; depression is 

everywhere; and recovery is long delayed. 

This is exactly what happened in the so-called panic of 1819. In 

the Documentary History of Banking and Currency, Herman Krooss 

writes: 

r1. Rothbard, Mystery, pp. 204-05. Also see Galbraith, p. 77.


A DEN OF VIPERS 347 

The Bank, as the largest creditor [to 

alternatives: it 

the state banks], had two 

could write off its debts which of course would wipe 

out the stockholders' equity and result in bankruptcy, or it could force 

the state banks to meet their obligations which would mean wholesale 

bankruptcy among state banks. There was no doubt about the 

choice.... The pressure placed upon state banks deflated the economy 

drastically, and as the money supply wilted, the country sank into 

severe depression. 

As historian William Gouge observed: "The Bank was saved, 

and the people were ruined/' 

Competition between the national Bank and the state banks 

during this period had been moved from the open field of the free 

market to the closed arena of politics. Free-market competition had 

been replaced by government favoritism in the form of charters 

which granted the right of monopoly. A federal charter was clearly 

better than one issued by a state, but the states fought back fiercely 

with what weapons they possessed, and one of those was the 

power to tax. Several states began to levy a tax on the paper notes 

issued by any bank doing business within their borders which was 

not also locally chartered. The intent, although pretended to be the 

raising of state revenue, was really to put the federal Bank out of 

business. 

THE SUPREME COURT UPHOLDS THE BANK 

When the Bank refused to pay such a tax to the state of 

Maryland, the issue was taken to the Supreme Court in 1819 as the 

celebrated case of McCulloch v. Maryland. The Chief Justice at that 

time was John Marshall, a leading Federalist and advocate of a 

strong, centralized federal government. As was expected, the 

Marshall Court carefully tailored its decision to support the federal 

government's central bank. 

The narrow issue upon which the constitutionality of the Bank 

was decided was not whether Congress had the power to directly 

or indirectly emit bills of credit or otherwise convert debt into 

money. If that had been the issue, the Court would have been hard 

pressed to uphold the Bank, for that not only is expressly prohibited 

by the Constitution, it is precisely what the Bank had been 

1. Krooss, pp. 190-91. 

2. William M. Gouge, A Short History of Paper Money and Banking in the United States 

(New York: Augustus M. Kelly, 1968), p. 110. 

doing all along, and everyone knew it. Instead, the Court focused 

upon the narrow question of whether or not the Bank was a 

"necessary and proper" means for Congress to execute any other 

constitutional powers it might have. From that perspective, it was 

unanimously held that the Bank was, indeed, constitutional. 

Were the Bank's paper notes the same as Bills of Credit? No, 

because they were backed by the credit of the Bank, not the federal 

government. True, the Bank created money, and most of it was 

used by the government Never mind all that. The Treasury did not 

print it, therefore, it was not government money. 

Was not the Bank the same as an agency of government? No, 

because merely granting it a national monopoly and enforcing that 

monopoly with the power of the state does not necessarily make it 

"state action/' 

Furthermore, the states cannot tax the federal government or 

any of its 

instruments, including the Bank of the United States, 

because, as Marshall stated: "The power to tax is the power to 

destroy/' 

Here was another end run around the Constitution, executed 

this time by the very men who were assumed to be its most loyal 

defenders. 

The Supreme Court had spoken, but the Court of Public 

Opinion had not yet disposed of the case. During the 1820s, 

popular sentiment shifted back to the laissez-faire and soundmoney 

principles espoused by the Jeffersonian Republicans. But 

since the Republican Party had by then abandoned those principles, 

a new coalition was formed, headed by Martin Van Buren and 

Andrew Jackson, to resurrect them. It was called the Democratic 

Party, and one of its agenda items was to abolish the Bank of the 

United States. After Jackson was elected to the Presidency in 1828, 

he wasted no time in attempting to build Congressional support for 

that goal. 

NICHOLAS BIDDLE 

By this time, the Bank had come under the direction of Nicholas 

Biddle who was a formidable adversary to Jackson, not only 

because of the power of his position, but because of his strong will 

and sense of personal destiny. He was the archetype of the new 

Eastern Establishment: wealthy, arrogant, ruthless, and brilliant. 

He had graduated from the University of Pennsylvania at the age


of only thirteen, and, as a young man entering business, had fully 

mastered the secret science of money. 

With the ability to control the flow of the nation's credit, Biddle 

soon became one of the most powerful men in America. This was 

brought out dramatically when he was asked by a Senate Committee 

if his bank ever took advantage of its superior position over the 

state banks. He replied: "Never. There are very few banks which 

might not have been destroyed by an exertion of the powers of the 

Bank. None has ever been injured." As Jackson publicly noted a 

few months later, this was an admission that most of the state 

banks existed only at the pleasure of the Bank of the United States, 

and that, of course, meant at the pleasure of Mr. Biddle. 

The year was 1832. The Bank's charter was good for another 

four years. But Biddle decided not to wait that long for Jackson to 

build his forces. He knew that the President was up for reelection, 

and he reasoned that, as a candidate, he would hesitate to be too 

controversial. To criticize the Bank is one thing, but to come down 

squarely for its elimination altogether would surely cost him many 

votes. So, Biddle requested Congress to grant an early renewal of 

the charter as a means of softening Jackson's campaign against it. 

The bill was backed by the Republicans led by Senator John Clay 

and was passed into law on July 3, just before the election 

campaigns began in earnest. 

JACKSON OVERRIDES CONGRESS 

It was brilliant strategy on Biddle's part but it didn't work. 

Jackson decided to place his entire political career on the line for 

this one issue and, with perhaps the most passionate message ever 

delivered to Congress by any President, before or since, he vetoed 

the measure. The President's biographer, Robert Remini, says: "The 

veto message hit the nation like a tornado. For it not only cited 

constitutional arguments against recharter—supposedly the only 

reason for resorting to a veto—but political, social, economic, and 

nationalistic reasons as well." 

Jackson devoted most of his veto message to three general 

topics: (1) the injustice that is inherent in granting a government- 

1 J.D. Richardson, A Compilation of the Messages and Papers of the Presidents, 1 789- 

1908 (Washington: Bureau of National Literature and Art, 1908), Vol. II, p. 581. 

2. Robert V. Remini, The Life of Andrew Jackson (New York: Harper & Row, 1988), 

pp. 227-28. 

sponsored monopoly to the Bank; (2) the unconstitutionality of the 

Bank even if it were not unjust; and (3) the danger to the country in 

having the Bank heavily dominated by foreign investors. 

Regarding the injustice of a government-sponsored monopoly, 

he pointed out that the stock of the Bank was owned only by the 

richest citizens of the country and that, since the sale of stock was 

limited to a chosen few with political influence, the common man, 

not only is 

unfairly excluded from an opportunity to participate, 

but he is forced to pay for his banking services far more than they 

are worth. Unearned profits are bad enough when they are taken 

from one class of citizens and given to another, but it is even worse 

when the people receiving those benefits are not even citizens at all 

but are, in factforeigners. Jackson said: 

It is not our own citizens only who are to receive the bounty of our 

Government. More than eight millions of the stock of this bank are 

held by foreigners. By this act the American Republic proposes 

virtually to make them a present of some millions of dollars.... It 

appears that more than a fourth part of the stock is held by foreigners 

and the residue is held by a few hundred of our own citizens, chiefly 

of the richest class. For their benefit does this act exclude the whole 

American people from competition in the purchase of this monopoly 

and dispose of it for many millions less than it is worth. 

Regarding the issue of constitutionality, he said that he was not 

bound by the previous decision of the Supreme Court, because the 

President and Congress had just as much right to decide for 

themselves whether or not a particular law is 

constitutional This 

view, incidentally, was not novel at that time. It is only in relatively 

recent decades that people have begun to think of the Supreme 

Court as being specifically authorized to pass on this question. In 

fact, as Jackson correctly pointed out in his veto message, the 

founding fathers created a government with power divided between 

the executive, legislative, and judicial branches, and that the 

purpose of this division was, not merely to divvy up the chores, but 

to balance one branch against the other. The goal was not to make 

government efficient but to deliberately make it inefficient. Each 

President and each legislator is 

morally bound, even by oath, to 

uphold the Constitution. If each of them does not have the power to 

:1- Krooss, pp. 22-23.


decide in conscience what is constitutional, then taking an oath to 

uphold it has little meaning. 

THE BANK CONTROLLED BY FOREIGN INVESTORS 

Regarding the danger to our national security, Jackson returned 

to the fact that a major portion of the Bank's stockholders were 

foreigners. Even though foreign investors technically were not 

allowed to vote their shares, their financial power was so great that 

the American investors were clearly beholden to them and would 

likely follow their instructions. Jackson concluded: 

Is there no danger to our liberty and independence in a bank that 

in its nature has so little to bind it to our country?... [Is there not] cause 

to tremble for the purity of our elections in peace and for the 

independence of our country in war?... Of the course which would be 

pursued by a bank almost wholly owned by the subjects of a foreign 

power, and managed by those whose interests, if not affections, would 

run in the same direction there can be no doubt.... Controlling our 

currency, receiving our public monies, and holding thousands of our 

citizens in dependence, it would be more formidable and dangerous 

than a naval and military power of the enemy. 

Jackson saved the greatest passion of his argument for the end. 

Speaking now, not to Congress, but to the voters at large, he said: 

It is to be regretted that the rich and powerful too often bend the 

acts of government to their selfish purposes. Distinctions in society 

will always exist under every just government. Equality of talents, of 

education, or of wealth cannot be produced by human institutions. In 

the full enjoyment of the gifts of Heaven and the fruits of superior 

industry, economy, and virtue, every man is equally entitled to 

protection by law; but when the laws undertake to add to these natural 

and just advantages artificial distinctions, to grant titles, gratuities, 

and exclusive privileges, to make the rich richer and the potent more 

powerful, the humble members of society—the farmers, mechanics, 

and laborers—who have neither the time nor the means of securing 

like favors to themselves, have a right to complain of the injustice of 

their Government. There are no necessary evils in government. Its 

evils exist only in its abuses. If it would confine itself to equal 

protection, and, as Heaven does its rains, shower its favor alike on the 

high and the low, the rich and the poor, it would be an unqualified 

blessing. In the act before me there seems to be a wide and 

unnecessary departure from these just principles. 

The veto did not defeat the Bank. It was merely a declaration of 

war. The major battles were yet to come. 

BIDDLE'S CONTROL OVER CONGRESS 

As Commanding General of the pro-bank forces, 

Biddle had 

one powerful advantage over his adversary. For all practical 

purposes, Congress was in his pocket. Or, more accurately, the 

product of his generosity was in the pockets of Congressmen. 

Following the Rothschild Formula, Biddle had been careful to 

reward compliant politicians with success in the business world. 

Few of them were willing to bite the hand that fed them. Even the 

great Senator, Daniel Webster, found himself kneeling at Biddle's 

throne. Galbraith says: 

Biddle was not without resources. In keeping with his belief that 

banking was the ultimate source of power, he had regularly advanced 

funds to members of Congress when delay on appropriations bills had 

held up their pay. Daniel Webster was, at various times, a director of 

the Bank and on retainer as its counsel. "I believe my retainer has not 

been renewed or refreshed as usual. If it be wished that my relation to 

the Bank should be continued, it may be well to send me the usual 

retainers." Numerous other men of distinction had been 

accommodated, including members of the press. 1 

Webster is a particularly interesting study in how even socalled 

"great" men can be compromised by an addiction to wealth. 

He had always been an advocate of sound money in Congress, yet, 

as a lawyer on Biddle's payroll, he represented the Bank's position 

before the Supreme Court in McCulloch v. Maryland. Much of the 

twisted logic that allowed the Court to end-run the Constitution 

and destroy sound money came from his pen. 

After Jackson's veto of the Bank's charter, Biddle requested 

Webster to deliver speeches specifically for the purpose of having 

the Bank reprint them for mass distribution. In one of those 

speeches, Webster echoed the old refrain that the Bank served as a 

moderating influence on the nation's other banks and then piously 

proclaimed: "Congress can alone coin money;... no State (nor even 

Congress itself) can make anything a tender but gold and silver, in 

the payment of debts." In an act of astounding hypocrisy, this 

speech was distributed widely by the very institution that was 

1. Krooss, pp. 26-27. 

2. Ibid., pp. 36-37. 

1- Galbraith, p. 80. 

2. Krooss, p. 2.


designed specifically for creating fractional fiat money, without 

gold or silver backing, to function as tender in the payment of 

debts. Then, as now, most people did not discern between words 

and actions and believed that this speech, delivered by such a 

"great" man, was evidence of the Bank's worthiness. Biddle even 

distributed 300,000 copies of Jackson's veto message, apparently in 

the belief that many would not read it Obviously, if the Bank 

thought it was so bad as to distribute it, it must be bad. 

The power of the Bank's money was everywhere. It was as John 

Randolph, the fiery Old Republican from Virginia, had said: "Every 

man you meet in this House or out of it, with some rare exceptions, 

which only serve to prove the rule, is either a stockholder, 

president, cashier, clerk or doorkeeper, runner, engraver, papermaker, 

or mechanic in some other way to a bank/' 

JACKSON APPEALS DIRECTLY TO THE VOTERS 

Congress, the banks, speculators, industrialists, and segments 

of the press; these were the forces commanded by Biddle. But 

[ackson had a secret weapon which had never been used before in 

American politics. That weapon was a direct appeal to the electorate. 

He took his message on the campaign trail and delivered it in 

words well chosen to make a lasting impression on the voter. He 

spoke out against a moneyed aristocracy which had invaded the 

halls of Congress, impaired the morals of the people, threatened 

their liberty, and subverted the electoral process. The Bank, he said, 

was a hydra-headed monster eating the flesh of the common man. 

He swore to do battle with the monster and slay it or be slain by it. 

He bellowed his position to every crowd he could reach: Bank and 

no Jackson, or no bank and jacksonl 

On the subject of paper money, the President was equally 

emphatic. His biographer describes the campaign: 

On his homeward journey he reportedly paid all his expenses in 

gold. "No more paper money, you see, fellow citizens," he remarked 

with each gold payment, "if I can only put down this Nicholas Biddle 

and his monster bank." Gold, hardly the popular medium of 

exchange, was held up to the people as the safe and sound currency 

1. Remini, Life, p. 234. 

2. Annals of Congress, 14 Cong., 1st sess., pp. T066, 1110 ff. 

3. Robert Remini, Andrew Jackson and the Course of American Freedom, 1822-1832 

(New York: Harper & Row, 1981), p. 373. 


which Jackson and his administration hoped to restore to regular use. 

Unlike paper money, gold represented real value and true worth. It 

was the corn of honest men. Rag money, on the other hand, was the 

instrument of banks and swindlers to corrupt and cheat an innocent 

and virtuous public. 

Jackson had awakened the indignation of the American people. 

When the November ballots were cast, he received a mammoth 

vote of confidence. He received fifty-five per cent of the popular 

vote (with thirty-seven per cent for Clay, eight per cent for Wirt) 

and eighty per cent of the vote in the electoral college. But the war 

still was not over. Jackson won the election, but the Bank had four 

more years to operate, and it intended to use those years to sway 

public sentiment back to its support. The biggest battles were yet to 

come. 

JACKSON REMOVES FEDERAL DEPOSITS 

Jackson did not wait to act. He knew that time would be used as 

a weapon against him. "The hydra of corruption is only scotched, 

not dead" he said. 

Soon after the election, he ordered Secretary of 

the Treasury, William Duane, to place all new deposits of the 

federal government into various state banks around the country 

and to pay current expenses out of the funds still held by the Bank 

of the United States until that account was drained to zero. Without 

the use of federal money, surely the monster would perish. To 

Jackson's chagrin, however, Duane balked at the order out of a 

sincere conviction that, to do so, would be disruptive to the 

economy. 

This was not the first time a Cabinet officer and a President had 

come to disagreement. In the past, however, the impasse had 

always been resolved by the resignation of the Secretary. This time 

was different. Duane refused to resign, and that raised an interesting 

constitutional question. A President could appoint a member of 

the executive branch only with the consent of the Senate. The 

Constitution was silent, however, on the matter of dismissal. Did 

that, too, require Senate approval? The implication was that it did, 

but the issue had never been tested. 

Jackson had no patience for such theoretical 

questions. The 

letter arrived promptly on Duane's desk: "Your further services as 

1- Remini, Life, pp. 234-35. 

2. Remini, Course, p. 52.


own course is decided. All other banks and all the merchants may 

Secretary of the Treasury are no longer required." On October 1, 

5. Remini, Democracy, p. 111. 2. Quoted by Viola, p. 86. 

1833, federal deposits began to move out of the Bank. 

break, but the Bank of the United States shall not break." 

Jackson felt that he finally had the monster firmly within his 

Biddle, therefore, decided to use the American people as 

grasp. "I have it chained/ 7 he said. With gleeful confidence, he 

sacrificial pawns in the giant chess match for the Bank's survival. 

added: "I am ready with the screws to draw every tooth and then 

the stumps/ 7 If I am not mistaken, he went on, we will have "Mr. 

Biddle and his Bank as quiet and harmless as a lamb in six weeks." 

The resulting economic chaos is not difficult to imagine. Biddle's 

contraction of the money supply was executed at a particularly 

vulnerable moment. Business had been expanding as a result of the 

Bank's prior easy credit and 

BIDDLE DELIBERATELY CREATES MONETARY CHAOS 

now was dependent on it. Also, the 

tariff came due at precisely this time, placing still more demand for 

The President's view of the Bank's meek captivity was premature, 

to say the least. Biddle responded, not like a lamb, but more 

cash and credit Losses were sustained everywhere, wages and 

prices sagged, men were put out of work, companies went bankrupt. 

By the time Congress reconvened in December, in what was 

like a wounded lion. His plan was to rapidly contract the nation's 

money supply and create another panic-depression similar to the 

called the "Panic Session," the nation was in an uproar. Newspapers 

editorialized with alarm, and letters of angry protest flooded 

one the Bank had created thirteen years earlier. This then could be 

blamed on Jackson's withdrawal of federal deposits, and the 

into Washington. 

resulting backlash surely would cause Congress to override the 

As the pressure continued to build in Congress, it began to look 

President's veto. Remini tells us: 

as though Biddle's plan would work. In the public eye, it was 

Biddle counterattacked. He initiated a general curtailment of loans 

throughout the entire banking system.. . . It marked the beginning of a 

Jackson who was solely responsible for the nation's woes. It was his 

arrogant removal of Secretary Duane; it was his foolish insistence 

bone-crushing struggle between a powerful financier and a 

on removing the deposits; it was his obstinate opposition to 

determined and equally powerful politician. Biddle understood what 

Congress. 

he was about. He knew that if he brought enough pressure and agony 

to the money market, only then could he force the President to restore JACKSON IS CENSURED BY THE SENATE 

the deposits. He almost gloated. "This worthy President thinks that 

because he has scalped Indians and imprisoned Judges, he is to have 

his way with the Bank. He is mistaken. ,/4 ... 

For one-hundred days, a "phalanx of orators" daily excoriated 

the President for his arrogant and harmful conduct. At length, a 

resolution of censure was introduced into the Senate and, on March 

"The ties of party allegiance can only be broken/' he declared, "by 

28, 1834, it was passed by a vote of 26 to 20. This was the first time 

the actual conviction of existing distress in the community." And such 

that a President had ever been censured by Congress, and it was a 

distress, of course, would eventually put everything to rights. 

savage blow to Jackson's pride. Biddle, at last, had the upper hand. 

"Nothing but widespread suffering will produce any effect on 

The President 

Congress.... Our 

rumbled around the White House in a fit of rage. 

only safety is in pursuing a steady course of firm 

restriction—and I have no doubt 

"You 

that such a course 

are 

will ultimately 

a den of vipers," he said to a delegation of the Bank's 

lead to restoration of the currency and the recharter of the Bank. ... My 

supporters. 'T intend to rout you out and by the Eternal God I will 

rout you out." 2 

1. William J. Duane, Narrative and Correspondence Concerning the Removal of the 

The censure was by no means indicative of popular sentiment. 

Deposits and Occurrences Connected Therewith (Philadelphia: n.p., 1838), pp. 101-03. 

Even in the Senate, which was a hotbed of pro-Bank support, a 

Quoted by Remini, Life, p. 264. 

2. Quoted by Herman J. Viola, Andrew Jackson (New 

swing 

York: Chelsea House, 

of only three votes would have defeated the measure. 

1986), 

p. 88. 

3. A letter from Jackson to Van Buren, November 19, 1833, Van Buren Papers, 

1 Biddle to William Appleton, January 27, 1834, and to J.G. Watmough, 

Library of Congress. Quoted by Remini, Life, p. 264. 

February 8, 1834. Nicholas Biddle, Correspondence, 1807-1844, Reginald C 


McGrane, ed. (New York: Houghton Mifflin, 1919), pp. 219, 221.


During all this time, imperceptibly at first, but quickly growing, the 

public had been learning the truth. Jackson, of course, was doing 

everything within his power to hasten the process, but other factors 

also were at work, not the least of which was Biddle himself. So 

large was his ego that he could not keep from boasting in public 

about his plan to deliberately disrupt the economy. People heard 

these boasts and they believed him. The turning point came when 

Governor George Wolf of Pennsylvania, the Bank's home state, 

came out publicly with a strong denunciation of both the Bank and 

Biddle. This was like the starting bell at a horse race. With the 

Bank's home state turned against it, there was no one left to defend 

it and, literally within days, the mood of the country and of 

Congress changed. 

The Democrats wasted no time consolidating these unexpected 

gains. To test their strength on the issue, on April 4, 

1834, they 

called for a vote in the House on a series of resolutions which were 

aimed at nullifying the censure in the Senate. In essence, the 

resolutions stated that the House totally approved the President's 

bank policy. The first resolution, passed by a vote of 134 to 82, 

declared that the Bank of the United States "ought not to be 

rechartered." The second, passed by a vote of 118 to 103, agreed 

that the deposits "ought not to be restored." And the third, passed 

by an overwhelming vote of 175 to 42, called for the establishment 

of a special committee of Congress to investigate whether the Bank 

had deliberately instigated the current economic crisis. It was an 

overwhelming victory for Jackson which would be culminated a 

few years later with the passage of a resolution in the Senate which 

formally rescinded the previous vote of censure. 

BIDDLE DEFIES CONGRESS 

When the investigating committee arrived at the Bank's doors 

in Philadelphia armed with a subpoena to examine the books, 

Biddle flatly refused. Nor would he allow inspection of correspondence 

with Congressmen relating to their personal loans and 

advances. And he steadfastly refused to testify before the committee 

back in Washington. For lesser mortals, such action would have 

resulted in citations of contempt of Congress and would have 

carried stiff 

Remini explains: 

fines or imprisonment. But not for Nicholas Biddle. 

The committeemen demanded a citation for contempt, but many 

southern Democrats opposed this extreme action, and refused to 

cooperate. As Biddle bemusedly observed, it would be ironic if he 

went to prison "by the votes of members of Congress because I would 

not give up to their enemies their confidential letters." Although 

Biddle escaped a contempt citation, his outrageous defiance of the 

House only condemned him still further in the eyes of the American 

public. 

The Bank was still 

alive but had been mortally wounded. By 

this time, Jackson had completely paid off the national debt 

incurred by the War of 1812 and had even run up a surplus. In fact, 

he ordered the Treasury to give back to the states more than 

$35 million, which was used for the construction of a wide variety 

of public works. 

With these accomplishments close on the heels of his victory 

over the Bank, the President had earned the undying hatred of 

monetary scientists, both in America and abroad. It is not surprising, 

therefore, that on January 30, 1835, an assassination attempt 

was made against him. Miraculously, both pistols of the assailant 

misfired, and Jackson was spared by a quirk of fate. It was the first 

such attempt to be made against the life of a President of the United 

States. The would-be assassin was Richard Lawrence who either 

was truly insane or who pretended to be insane to escape harsh 

punishment. At any rate, Lawrence was found not guilty due to 

insanity. Later, he boasted to friends that he had been in touch 

with powerful people in Europe who had promised to protect him 

from punishment should he be caught. 

The ending to this saga holds no surprises. The Bank's charter 

expired in 1836 and it was restructured as a state bank by the 

Commonwealth of Pennsylvania. After a spree of speculation in 

cotton, lavish advances to the Bank's officers, and the suspension of 

payment in specie, Biddle was arrested and charged with fraud. 

Although not convicted, he was still undergoing civil litigation 

when he died. Within five years, the establishment was forced to 

close its doors forever, and America's third experience with central 

banking came to a close. 


2- Remini, Democracy, p. 228-29. 

Robert J. Donovan, The Assassins (New York: Harper & Brothers, 1952), p. 83.


SOME BAD MDCED IN WITH THE GOOD 

It is tempting to let the story stop right there and allow Jackson 

to forever wear the crown of hero and dragon slayer. But a more 

balanced view of these events leads to the conclusion that the forces 

of virtue were not without contamination. Jackson represented the 

position of those who wanted only gold and silver for the nation's 

money- But this group was not large enough to match the power of 

the Bank. He was joined in that battle by many groups which hated 

the Bank for other, less admirable reasons. State banks and business 

interests along the expanding frontier, for example, were not the 

least interested in Constitutional money. They wanted just the 

opposite. They viewed the modest restraints of the federal Bank as 

excessive. With the federal Bank out of the way, they anticipated no 

restraints at all. As we shall see in the following section, it is ironic 

that this is the group that got what it wanted, not the hard-money 

Jacksonians. 

One cannot blame Jackson for accepting the support of these 

groups in his effort to slay the dragon. In politics, it often is 

necessary to make temporary alliances with one's opponents to 

achieve occasional common objectives. 

But Jackson went further 

than that. More than any other President before him, and rivalled 

by only a few since, he changed the character of American politics. 

He led the nation away from the new concept of diffused powers, 

carefully worked out by the founding fathers, back toward the 

Old-World tradition of concentration and monarchy. By strongly 

challenging the right of the States to secede from the Union, he set 

into motion a concept that, not only would lead to civil war, but 

which would put an end forever to the ability of the states to check 

the expanding power of the federal government. No longer was the 

Union to be based on the principle of consent of the governed. It 

was now to be based on force of arms. And through the manipulation 

of voter passion on the Bank issue, he changed the perception 

of the role of President from public servant to national leader. 

At the height of the battle against the Bank, when Jackson was 

making a direct appeal to the voters for support, he declared: "The 

President is the direct representative of the people." To fully 

comprehend the significance of that statement, it must be remembered 

that the plan of the Constitution was for the President to be 

elected indirectly by the state legislatures, not by the voters at large. 


After fighting a war to throw off the rule of King George, in, the 

founding fathers wanted nothing more to do with kings of any 

land, and they went out of their way to make sure that the 

president of the United States would never be looked upon as such. 

They realized that an elected ruler, unless his power is carefully 

limited and diffused, can become just as despotic as an unelected 

one. Article 2, Section 1, of the Constitution, therefore, established 

an electoral college to select the President. 

Members of the college are to be appointed by the states. 

Congressmen, Senators, or other officers of the federal government 

are specifically and wisely excluded. The college is supposed to 

select a President strictly on the basis of his integrity and executive 

ability, not his party label, political connections, good looks, 

charisma, or stirring orations. The people may elect their Congressmen, 

but the electoral college chooses the President. Thus, it was 

intended that the President would have a different constituency 

from Congress, and this difference was important to insure the 

balance of power that the framers of the Constitution worked so 

hard to create. As a means of keeping government under control, it 

was a truly brilliant piece of political engineering. 

All of that was changed in the election of 1832. One of the sad 

facts of history is that good causes often are the occasion for 

establishing bad precedents. Jackson's fight against the Bank of the 

United States was one of those events. 

SUMMARY 

The government had encouraged widespread banking fraud 

during the War of 1812 as an expedient for paying its bills, and this 

had left the nation in monetary chaos. At the end of the war, 

instead of allowing the fraudulent banks to fall and letting the free 

market heal the damage, Congress decided to protect the banks, to 

organize the fraud, and to perpetuate the losses. It did this by 

creating the nation's third central bank called the Second Bank of 

the United States. 

The new bank was almost an exact carbon copy of the previous 

one. It was authorized to create money for the federal government 

and to regulate state banks. It influenced larger amounts of capital 

and was better organized across state lines than the old bank. 

Consequently its policies had a greater impact on the creation and 

extinguishing of the nation's money supply. For the first time in


our history, the effects began to ricochet across the entire country at 

once instead of being confined to geographical regions. The age of 

the boom-bust cycle had at last arrived in America. 

In 1820, public opinion began to swing back in favor of the 

sound-money principles espoused by the Jeffersonian Republicans. 

But since the Republican Party had by then abandoned those 

principles, a new coalition was formed, headed by Martin Van 

Buren and Andrew Jackson, called the Democrat Party. One of its 

primary platforms was the abolishment of the Bank. After Jackson 

was elected in 1828, he began in full earnest to bring that about 

The head of the Bank was a formidable adversary by the name 

of Nicholas Biddle. Biddle, not only possessed great personal 

abilities, but many members of Congress were indebted to him for 

business favors. Consequently, the Bank had many political 

friends. 

As Jackson's first term of office neared its end, Biddle asked 

Congress for an early renewal of the Bank's charter, hoping that 

Jackson would not risk controversy in a reelection year. The bill 

was easily passed, but Jackson accepted the challenge and vetoed 

the measure. Thus, a battle over the Bank's future became the 

primary presidential campaign issue. 

Jackson was reelected by a large margin, and one of his first acts 

was to remove federal deposits from the Bank and place them into 

private, regional banks. Biddle counterattacked by contracting 

credit and calling in loans. This was calculated to shrink the money 

supply and trigger a national panic-depression, which it did. He 

publicly blamed the downturn on Jackson's removal of deposits. 

The plan almost worked. Biddle's political allies succeeded in 

having Jackson officially censured in the Senate. However, when 

the truth about Biddle's strategy finally leaked out, it backfired 

against him. He was called before a special Congressional investigative 

committee to explain his actions, the censure against Jackson 

was rescinded, and the nation's third central bank passed into 

oblivion. 

Chapter Eighteen 

LOAVES AND FISHES 

AND CIVIL WAR 

Attempts to stabilize the banking system by 

political 

measures, including regulation of fractional-reserve 

ratios and establishing bank-failure 

insurance funds; the failure of all such schemes; 

the resulting economic conditions that led up to 

the Civil War. 

As detailed in the previous chapter, by 1836 the hydra-headed 

monster had been slain and, true to the President's campaign 

promise, the nation had Jackson and no Bank. 

In April of that year, the Administration moved to consolidate 

its victory and pushed a series of monetary reforms through 

Congress. One of these required all banks to cease issuing paper 

notes under five dollars. The figure later was increased to twenty 

dollars, and its purpose was to compel the nation to return to the 

use of gold and silver coin for everyday use, leaving bank notes 

primarily for large commercial transactions. The White House also 

announced that, in the future, all federal land sales would require 

full payment in "lawful money," which, of course, meant preciousmetal 

coins. 

It must be remembered, however, that even though the Bank of 

the United States was dead, banking was very much alive, and so 

were Jackson's enemies. Much to the disappointment of the hardmoney 

advocates, these measures were not sufficient to usher in 

the millennium. Not only were they inadequate by themselves, 

they were soon circumvented by the development of new banking 

techniques and eventually were dismantled completely by a fickle 

Congress. 

I 

(Columbia, South Carolina: Foundation for American Education, 1979), p. 115. 

Otto Scott, The Secret Six: The Fool as Martyr, Vol. Ill of The Sacred Fool Quartet

362 THE CREATURE FROM JEKYLL ISLAND LOAVES AND FISHES AND CIVIL WAR 363 

The prohibition against bank notes of small denomination 

deserves special notice. It was an excellent concept, but what the 

legislators failed to understand, or at least pretended not to understand, 

was that banks at this time were increasingly dealing with 

checkbook money, technically called demand deposits. As people 

gradually became accustomed to this new method of transferring 

funds, the importance of bank notes declined. Placing a limit on the 

issuance of bank notes without any restriction on the creation of 

demand deposits was an exercise in futility. 

In 1837, as the Bank of the United States slipped into history, 

the nation was at the tail end of an economic boom. Professor 

Rothbard tells us that this expansion and the accompanying 

inflation had been "fueled by the central bank/' 

Total money in 

circulation had risen by eighty-four per cent in just four years. 

Then, as inevitable as the setting sun, that portion of the money 

supply which had been created by fractional-reserve banking—in 

other words, the 

part which was backed by nothing—began to 

contract. Sixteen per cent of all the nation's money totally disappeared 

in just that first year. Again, men were put out of work, 

businesses went into bankruptcy, homes and savings were lost. 

Many banks folded also, but their operators walked away with the 

spoils. Only the depositors were left holding the empty bag. 

There were numerous proposals advanced regarding how to 

infuse stability into the banking system. But, then as now, none of 

them dealt with the real problem, which was fractional-reserve 

banking itself- As Groseclose observed, these proposals were "each 

according to a particular theory of how to multiply loaves and 

fishes, or how to make candy wool/ 7 

Since the proposals presented 

then are identical to the ones being offered today, and since each of 

them was actually tried, it would seem appropriate to inquire into 

the actual results of these experiments. 

PROPOSAL TO BASE MONEY ON BANK ASSETS 

There were four schools of thought regarding the multiplication 

of loaves and fishes. The first of these was that the creation of 

money should be limited to a ratio of the bank's assets. This was the 

formula that was tried in the New England states. In Massachusetts, 

for example, the issuance of bank notes was limited to two 

1 Rothbard, Mystery, p. 21 1 

2. Groseclose, Money and Man, p. 184. 

times the amount of the bank's capital actually held in the vault. 

Furthermore, this could not be in the form of paper money, bonds, 

securities, or other debt instruments; it had to be strictly gold or 

silver coin. Also, the banks were limited in the number of smalldenomination 

bank notes they could issue and, in this, Massachusetts 

served as the model for Jackson's attempted reform at the 

federal level. By previous standards, and certainly by the standards 

that prevail today, this was an exceptionally conservative policy. In 

fact, even during the previous stress of the War of 1812, when 

banks were failing by the hundreds across the country, the Massachusetts 

banks, and most of the other New England banks as well, 

were able to maintain full payment in specie. 

With fhe passage of time, however, the limit on bank notes 

became less important, because the banks now were using checkbook 

money instead. Their paper notes may have been limited to 

two-hundred per cent of their capital, but there was no effective 

limit to the numbers they could ink into people's deposit books. So 

the "fraction" in fractional-reserve banking began to shrink again. 

Consequently, the monetary contraction of 1837 "was like a scythe 

bver the crop," says Groseclose, and thirty-two Massachusetts 

banks collapsed between that year and 1844. 

The state attempted to patch the system by instituting a 

network of bank examiners and by increasing the liability of bank 

stockholders for the lost funds of their depositors, but the underlying 

problem was still 

ignored. A new crop of banks then sprang 

into existence and a new wave of speculative mania swept through 

the economy. By 1862, even though the law still limited bank notes 

po two times capital, the banks had created $73,685,000 in total 

money, including checkbook money. This was supported by a base 

of only $9,595,000 of specie, a reserve of only thirteen per cent. 

Massachusetts had not solved the problem. 

PROPOSAL TO PROTECT DEPOSITS WITH A SAFETY 

FUND 

The second theory about how to have stable banking and allow 

the banks to create money out of nothing was to create a "safety 

fund." This fund, supported by all 

the banks, would come to the 

aia aid of any member which needed an emergency loan to cover a 

1. Groseclose, Money and Man, p. 185.


365 

sudden drain of its reserves. It was the forerunner of today's 

So rampant was the note-issue mania that the notes came to be 

Federal Deposit Insurance Corporation and related agencies. 

called by the appropriate name of "red dog" and "wild cat" 

The first safety fund was established in New York in 1829. The 

currency.. . . The rising crop of banks created a fictitious demand and a 

law required each bank to contribute annually one-half of one per 

rising market for securities (to be used as capital stock) and a 

cent of its capital stock until the total reached three per cent. The 

consequent stimulus to the creation of public debt by the issue of 

fund was first put to the test during the crisis of 1837, and was 

securities. This was followed by more bank notes being issued against 

almost swamped. The only thing that saved it was that the state 

the securities, demand increasing and the market rising, more 

securities issues, more bank notes, and so on in an endless chain of 

agreed to accept the worthless notes of all the defunct banks as 

debt creation and the inflation of paper wealth. The process was finally 

payment for canal tolls. In other words, the taxpayers were 

brought to a stop by the panic of 1857. 

compelled to make up the difference. When the fund was 

exhausted, the solvent banks were punished by being forced to pay PROPOSAL TO BACK MONEY WITH STATE CREDIT 

for the deficits of the insolvent ones. Naturally, this impelled The fourth proposal for producing something out of nothing 

all 

banks to act more recklessly. Why not? The up side was that profits 

was to back the issuance of money by the full faith and credit of the 

state. 

would be higher—for a time, at least—and the down side was This was the method tried by many of the Southern states and 

that, 

it, too, 

if recklessness got them into trouble, the safety fund would has survived 

bail 

to become one of the cornerstones of our 

them out. The result was that the system provided a penalty modern-day banking system. 

for 

Alabama, for 

prudence and an incentive for recklessness; a situation with 

example, in 1835 created a state bank funded by a 

perfect 

public bond issue of $13,800,000. Instant 

parallel to that which exists in the banking system money flooded through 

today. 

the economy and people were joyous over the miracle prosperity. 

Groseclose says: 

The legislators were so intoxicated with the scheme that they 

The conservatively managed institutions, lending upon the safer 

completely abolished direct taxation and decided to run the 

risks, upon which naturally the margins of profit were smaller, found 

government 

the assessments burdensome, and were compelled to embark upon 

on bank money instead. In other words, instead of 

the 

raising 

more speculative business in order to carry the charges. 

state revenue through taxes, they found it easier to raise it 

through inflation. 

Gradually, all banks sank into the quagmire and, in 1857, the 

Like all the others, this bubble also burst in the panic of 1837. A 

Massachusetts safety-fund was abandoned. 

postmortem examination of the Bank showed that $6,000,000 of its 

Michigan's experience with a safety fund was perhaps more 

assets were completely worthless. The people who had loaned their 

typical of the period. It was established in 1836 and was completely 

real money to the venture, backed by the full faith and credit of the 

blown away the next year, during the panic of 1837. 

state, lost almost all of their investment—in addition to what they 

PROPOSAL TO BASE MONEY ON SECURITIES 

had paid through inflation. 

The third proposal for maintaining a stable monetary system 

while, at the same time, allowing the banks to operate fraudulently 

was to base the money supply on government securities; in other 

words, upon paper certificates of government debt. This was the 

Mississippi put its full faith and credit behind a state bank in 

1838 and issued $15,000,000 in bonds as backing for its bank notes. 

The bank was belly-up within four years, and the state completely 

repudiated its obligations on the bonds. This infuriated the bond 

scheme adopted in the 1850s by Illinois, Indiana, Wisconsin and 

holders, particularly the British financiers who had purchased a 

other Midwestern states. It also set the precedent for the Federal 

Reserve System sixty years later. Groseclose continues: 

large portion of the issue. The devastating effect upon the state and 

its people is described by Henry Poor: 

Groseclose, Money and Man, pp. 188-89.


LOAVES AND FISHES AND CIVIL WAR 367 

The $48,000,000 of the bank's loans were never paid; the 

$23,000,000 of notes and deposits were never redeemed. The whole 

system fell, a huge and shapeless wreck, leaving the people of the State 

very much as they came into the world.... Everybody was in debt, 

without any possible means of payment. Lands became worthless, for 

the reason that no one had any money to pay for them.... Such 

numbers of people fled . . . from the State that the common return upon 

legal processes against debtors was in the very abbreviated form 

"G.T.T."—gone to Texas. 1 

Money, based on the full faith and credit of the state, met 

similar fates in Illinois, Kentucky, Florida, Tennessee, and Louisiana. 

When the state bank collapsed in Illinois in 1825, all of the 

"full-faith" bank notes left in its possession were ceremoniously 

burned at the public square. Another bank was formed in 1835 and 

collapsed in 1842. So devastating were these experiences that the 

Illinois Constitution of 1848 stipulated that, henceforth, the state 

should never again create a bank or own banking stock. 

In Arkansas, even real estate was tried as a magic wand. 

Subscribers to the state bank, instead of putting up cash, were 

allowed merely to pledge their real estate holdings as collateral. 

The bank notes rapidly plummeted in value to only twenty-five per 

cent of their face amount, and within four years, the bank was 

gone. 

THE MIRAGE OF FREE BANKING 

There was a parallel development at this time called "free 

banking." The name is an insult to truth. What was called free 

banking was merely the conversion of banks from corporations to 

private associations. Aside from no longer receiving a charter from 

the state, practically every other aspect of the system remained the 

same, including a multitude of government controls, regulations, 

supports, and other blocks against the free market. George Selgin 

reminds us that "permission to set up a bank was usually accompanied 

by numerous restrictions, including especially required loans 

to the state." 2 

1. Henry V. Poor, Money and Its Laws (London: Henry S. King and Co., 1877), 

p. 540. 

2. George A. Selgin, The TJieory ofFree Banking: Money Supply under Competitive Note 

Issue (Totowa, New Jersey: Rowman & Littlefield, 1988), p. 13. 

The free banks were no less fraudulent than the chartered 

banks. The old custom was revived of rushing gold coins from one 

bank to another just ahead of the bank examiners, and of "putting a 

ballast of lead, broken glass and (appropriately) ten-penny nails in 

the box under a thinner covering of gold coins." 1 

When one such 

free bank collapsed in Massachusetts, it was discovered that its 

bank note circulation of $500,000 was backed by exactly $86.48. 2 

Professor Hans Sennholz writes: 

Although economists disagree on many things, most see eye to 

eye on their acceptance of political control... These economists 

invariably point at American money and banking before the Civil War 

which, in their judgment, confirms their belief. In particular, they cite 

the "Free Banking Era" of 1838-1860 as a frightening example of 

turbulent banking and, therefore, applaud the legislation that 

strengthened the role of government. 

In reality, the instability experienced during the Free Banking Era 

was not caused by anything inherent in banking, but resulted from 

extensive political intervention..,, "Free banking" acts ... did not 

repeal burdensome statutory provisions and regulatory directives. In 

fact they added a few. 3 

For banking to have been truly free, the states would have had 

to do only two things: (1) enforce banking contracts the same as any 

other contract, and then (2) 

step out of the picture. By enforcing 

banking contracts, the executives of any bank which failed to 

redeem its currency in specie would have been sent to prison, an 

eventuality which soon would have put a halt to currency overissue. 

By stepping out of the picture and dropping the pretense of 

protecting the public with a barrage of rules, regulations, safety 

funds, and guarantees, people would have realized that it was their 

responsibility to be cautious and informed. But, instead, the banks 

continued to enjoy the special privilege of suspending payment 

without punishment, and the politicians clamored to convince the 

voters that they were taking care of everything. 

In short, throughout this entire period of bank failures, economic 

chaos, and fleecing of both investors and taxpayers, America 

I Galbraith,p. 87. 

2. Charles Beard, The Rise of American Civilization (New York: Macmillan, 1930), 

Vol. r, pp. 429-30. 

3. "Old Banking Myths/' by Hans F. Sennholz, The Freeman (Irvington-on- 

Hudson, New York), May, 1989, pp. 175-76.



tried everything except full redemption by gold and silver. As the 

name of Andrew Jackson faded into history, so did the dream of 

honest banking. 

Not all banks were corrupt, and certainly not all bankers were 

conspirators against the public. There were many examples of 

honest men striving to act in an ethical manner in the discharge of 

their fiduciary responsibilities. But they were severely hampered 

by the system within which they labored, a system which, as 

previously illustrated, punished prudence and rewarded recklessness. 

In balance, the prudent banker was pushed aside by the 

mainstream and became but a footnote to the history of that period. 

INDUSTRIAL EXPANSION IN SPITE OF DISHONEST 

BANKING 

Another positive aspect to the picture is that it was during this 

same time that many business enterprises came into being and 

greatly prospered, albeit at the expense of those who had no desire 

to contribute. The great canals were dug, the railroads pushed back 

the frontier, boom towns sprang up along the way, prairies were 

turned into agricultural land, and new businesses followed in their 

wake. Much of this expansion was facilitated by a flood of 

fraudulent money created by the banks. Apologists for fractionalreserve 

banking have been prone to look at this development and 

conclude that, in net balance, it was a good thing. The fact that 

some people were cheated in order for others to prosper did not 

seem to be important. America just wouldn't have grown and 

prospered without funny money. Galbraith, for example, exudes: 

As civilization, or some approximation, came to an Indiana or 

Michigan crossroads in the 1830s or 1840s, so did a bank. Its notes, 

when used and loaned to a farmer to buy land, livestock, feed, seed, 

food or simple equipment, put him into business. If he and others 

prospered and paid off their loans, the bank survived. If he and others 

did not so prosper and pay, the bank failed, and someone — perhaps a 

local creditor, perhaps an eastern supplier—was left holding the 

worthless notes. But some borrowers from this bank were by now in 

business. Somewhere, someone holding the notes had made an 

involuntary contribution to the winning of the West.... The [banking] 

anarchy served the frontier far better than a more orderly system that 

kept a tight hand on credit could have done. 1 

pitted brother against brother. 


r 

William Greider continues this rationale: 

"Reckless, booming anarchy/' in short, produced fundamental 

progress. It was not a stable system, racked as it was with bank failures 

and collapsed business ventures, outrageous speculation and 

defaulted loans. Yet it was also energetic and inventive, creating 

permanent economic growth that endured after the froth had blown 

away. 

This, of course, is a classic example of the failure of liberal 

economics. When evaluating a policy, it focuses only on one 

beneficial 

consequence for one group of people and ignores the 

multitude of harmful effects which befall all other groups. Yes, if we 

look only at the frontiersmen who acquired new ranches and 

established new business, the fractional-reserve system looks 

pretty good. But, if we add in to the equation all the financial losses 

to all of the people who were victimized by the system—what 

Galbraith calls "an involuntary contribution ,/ and what Greider 

lightly dismisses as "froth"—then the product is zero at best and, in 

terms of morality, is deeply in the negative. 

Galbraith, Greider, and other popular economists assume that 

the West could not possibly have been won with honest banking. 

Logic does not support such a conclusion. There is every reason to 

believe that the bank failures and the resulting business failures on 

the frontier all but canceled out the gains that were made by hard 

work and honest industry. Had these destructive convulsions been 

absent, as most of them would have been under a less chaotic 

system, there likely would have been fewer business starts, but a 

greater number would have finished, and it is entirely possible that 

the West would have been won even faster than it was. 

It's too bad the theory has never been tried. 

THE UNION IN JEOPARDY 

As chronicled in a previous section, economic conflict has 

always played a major role in fomenting war. There is no time in 

American history in which there was more economic conflict 

between segments of the population than there was prior to the 

Civil War. It is not surprising, therefore, that this period led directly 

into the nation's bloodiest war, made all the more tragic because it 

Gteider, p. 259.


There are many popular myths about the cause of the War 

Between the States. Just as the Bolshevik Revolution is commonly 

believed to have been a spontaneous mass uprising against a 

tyrannical aristocracy, so, too, it is generally accepted that the Civil 

War was fought over the issue of slavery. That, at best, is a 

half-truth. Slavery was an issue, but the primary force for war was a 

clash between the economic interests of the North and the South. 

Even the issue of slavery itself was based on economics. It may 

have been a moral issue in the North where prosperity was derived 

from the machines of heavy industry, but in the agrarian South, 

where fields had to be tended by vast work forces of human labor, 

the issue was primarily a matter of economics. 

The relative unimportance of slavery as a cause for war was 

made clear by Lincoln himself during his campaign for the 

Presidency in 1860, and he repeated that message in his first 

inaugural address: 

Apprehension seems to exist among the people of the Southern 

States that by the accession of a Republican administration their 

property and their peace and personal security are to be 

endangered.... I have no purpose, directly or indirectly, to interfere 

with the institution of slavery in the states where it now exists. I 

believe I have no lawful right to do so, and I have no inclination to do 

so. 

Even after the outbreak of war in 1861, Lincoln confirmed his 

previous stand. He declared: 

My paramount object in this struggle is to save the Union, and it is 

not either to save or destroy slavery. If I could save the Union without 

freeing any slave, I would do it; and if I could save it by freeing all the 

slaves, I would do it; and if I could do it by freeing some and leaving 

others alone, I would also do that. 

It may come as a surprise to learn that, by strict definition, 

Abraham Lincoln was a white supremacist. In his fourth debate 

with Senator Stephen Douglas, he addressed the subject bluntly: 

I am not nor ever have been in favor of bringing about in any way 

the social and political equality of the white and black races—that I am 

1. Don E. Fehrenbacher, ed., Abraham Lincoln: Speeches and Writings, 1859-1865 

(New York: Library of America, 1989), p. 215. 

2, Quoted by Robert L. Polley, ed., Lincoln: His Words and His World (Waukesha, 

Wisconsin: Country Beautiful Foundation, 1965), p. 54. 

not nor ever have been in favor of making voters or jurors of Negroes, 

nor of qualifying them to hold office, nor to intermarry with white 

people; and I will say in addition to this that there is a physical 

difference between the white and black races which I believe will 

forever forbid the two races living together on terms of social and 

political equality. And inasmuch as they cannot so live, while they do 

remain together there must be the position of superior and inferior, 

and I as much as any other man am in favor of having the superior 

position assigned to the white race. 1 

This is not to say that Lincoln was indifferent to the institution 

of slavery, for he felt strongly that it was a violation of personal and 

national 

morality, but he also knew that slavery was gradually 

being swept away all over the world—with the possible exception 

of Africa itself—and he believed that it would soon disappear in 

America simply by allowing the natural forces of enlightenment to 

work their way through the political system. He feared—and 

rightly so—that to demand immediate and total reform, not only 

would destroy the Union, it would lead to massive bloodshed and 

more human suffering than was endured even under slavery itself. 

He said: 

I have not allowed myself to forget that the abolition of the Slave 

trade by Great Britain was agitated a hundred years before it was a 

final success; that the measure had its open fire-eating opponents; its 

stealthy "don't-care" opponents; its dollar-and-cent opponents; its 

inferior-race opponents; its Negro-equality opponents; and its religion 

and good-order opponents; that all these opponents got offices, and 

their adversaries got none. But I have also remembered that though 

they blazed like tallow-candles for a century, at last they flickered in 

the socket, died out, stank in the dark for a brief season, and were 

remembered no more, even by the smell. School boys know that 

Wilbeforce and Granville Sharpe helped that cause forward; but who 

can now name a single man who labored to retard it? Remembering 

these things I cannot but regard it as possible that the higher object of 

this contest may not be completely attained within the term of my 

natural life. 

If Lincoln's primary goal in the War was not the abolition of 

slavery but simply to preserve the Union, the question arises: Why 

did the Union need preserving? Or, more pointedly, why did the 

Southern states want to secede? 

1. Fehrenbacher, p. 636. 

Ibid., p. 438.


LEGAL PLUNDER, NOT SLAVERY, THE CAUSE OF WAR 

The South, being predominantly an agricultural region, had to 

import practically all of its manufactured goods from the Northern 

states or from Europe, both of which reciprocated by providing a 

market for the South's cotton. However, many of the textiles and 

manufactured items were considerably cheaper from Europe, even 

after the cost of shipping had been added. The Southern states, 

therefore, often found it to their advantage to purchase these 

European goods rather than those made in the North. This put 

considerable competitive pressure on the American manufacturers 

to lower their prices and operate more efficiently. 

The Republicans were not satisfied with that arrangement. 

They decided to use the power of the federal government to tip the 

scales of competition in their favor. Claiming that this was in the 

"national interest/' they levied stiff import duties on almost every 

item coming from Europe that was also manufactured in the North. 

Not surprisingly, there was no duty applied to cotton which, 

presumedly, was not a commodity in the national interest One 

result was that European countries countered by stopping the 

purchase of U.S. cotton, which badly hurt the Southern economy. 

The other result was that manufacturers in the North were able to 

charge higher prices without fear of competition, and the South 

was forced to pay more for practically all of its necessities. It was a 

classic 

case of legalized plunder in which the law was used to 

enrich one group of citizens at the expense of another. 

Pressure from the North against slavery in the South made 

matters even more volatile. A fact often overlooked in this episode 

is that the cost of a slave was very high, around $1,500 each. A 

modest plantation with only forty or fifty slaves, therefore, had a 

large capital investment which, in terms of today's purchasing 

power, represented many millions of dollars. To the South, therefore, 

abolition meant, not only the loss of its ability to produce a 

cash crop, but the total destruction of an enormous capital base. 

Many Southern plantation owners were working toward the 

day when they could convert their investment to more profitable 

industrial production as had been done in the North, and others felt 

that freemen who were paid wages would be more efficient than 

slaves who had no incentive to work. For the present, however, 

they were stuck with the system they inherited. They felt 

that a 


complete and sudden abolition of slavery with no transition period 

would destroy their economy and leave many of the former slaves 

to starve—all of which actually happened in due course. 1 

That was the situation that existed at the time of Lincoln's 

campaign and why, in his speeches, he attempted to calm the fears 

of the South about his intentions. But his words were mostly 

political rhetoric. Lincoln was a Republican, and he was totally 

dependent on the Northern industrialists who controlled the Party. 

Even if he had wanted to—and there is no indication that he 

did—he could not have reversed the trend of economic favoritism 

and protectionism that swept him into office. 

MEXICO AND THE MONROE DOCTRINE 

In addition to the conflicting interests between North and 

South, there were other forces also working to split the nation in 

two. Those forces were rooted in Europe and centered around the 

desire of France, Spain, and England to control the markets of Latin 

America. Mexico was the prime target. This was the reason the 

Monroe Doctrine had been formulated thirty-eight years previously. 

President James Monroe had put the European nations on 

notice that the United States would not interfere in their affairs, and 

that any interference by them in American affairs would not be 

tolerated. In particular, the proclamation said that the American 

continents were no longer to be considered as available for 

colonization. 

None of the European powers wanted to put this issue to the 

test, but they knew that if the United States were to become 

embroiled in a civil war, it could not also cross swords in Latin 

America. To encourage war between the states, therefore, was to 

pave the way for colonial expansion in Mexico. The Americas had 

become a giant chess board for the game of global politics. 

In the American Heritage Picture History of the Civil War, we read: 

The war had not progressed very far before it was clear that the 

ruling classes in each of these two countries [England and France] 

sympathized strongly with the Confederacy—so strongly that with 

just a little prodding they might be moved to intervene and bring 

about Southern independence by force of arms.... Europe's 

aristocracies had never been happy about the prodigious success of 

| See "No Civil War at All; Part One/' by WiUiam Mcllhany, Journal ofIndividualist 

Studies, Winter, 1992, p. 41.


the Yankee democracy. If the nation now broke into halves, proving 

that democracy did not contain the stuff of survival, the rulers of 

Europe would be well pleased. 

The global chess match between Lincoln on the one side and 

England and France on the other was closely watched by the other 

leaders of Europe. One of the most candid observers at that time 

was the Chancellor of Germany, Otto von Bismarck. Since Bismarck 

was, himself, deeply obligated to the power of international 

finance, his observations are doubly revealing. He said: 

The division of the United States into federations of equal force 

was decided long before the Civil War by the high financial powers of 

Europe. These bankers were afraid that the United States, if they 

remained in one block and as one nation, would attain economic and 

financial independence, which would upset their financial domination 

over the Europe and the world. Of course, in the "inner circle" of 

Finance, the voice of the Rothschilds prevailed. They saw an 

opportunity for prodigious booty if they could substitute two feeble 

democracies, burdened with debt to the financiers,... in place of a 

vigorous Republic sufficient unto herself. Therefore, they sent 

their 

emissaries into the field to exploit the question of slavery and to drive 

a wedge between the two parts of the Union.. . . 

The rupture between 

the North and the South became inevitable; the masters of European 

finance employed all their forces to bring it about and to rum it to their 

advantage. 

The strategy was simple but effective. Within months after the 

first clash of arms between North and South, France had landed 

troops in Mexico. By 1864, the Mexicans were subdued, and the 

French monarch installed Ferdinand Maximilian as the puppet 

emperor. The Confederacy found a natural ally in Maximilian, and 

it was anticipated by both groups that, after the successful execution 

of the War, they would combine into a new nation 

dominated by the financial power of Rothschild, of course. At the 

same time, England moved eleven-thousand troops into Canada, 

1. Bruce Catton, author; Richard M. Ketchum, ed v The American Heritage Picture 

History of the Civil War (New York: American Heritage Publishing Co., I960), p. 249. 

2. This statement was quoted by Conrad Siem, a German who became a U.S. 

citizen and who wrote about the lifeand views of Bismark. It was published in La 

Vieille France, No. 216, March 17-24, 1921, pp. 13-16. The reader should be 

cautioned that Bismarck was no paragon of virtue and, as the father of modern 

socialism, his political views should be taken with a healthy degree of caution. All 

that aside, there is little doubt that this quotation represents an accurate appraisal 

of the machinations of the European Cabal at that time. 

positioned them menacingly along the Union's northern flank, and 

placed the British fleet onto war-time alert 

The European powers were closing in for a checkmate. 

SUMMARY 

The Second Bank of the United States was dead, but banking 

was very much alive. Many of the old problems continued, and 

new ones arrived. The issuance of banknotes had been severely 

limited, but that was largely offset by the increasing use of 

checkbook money, which had no limits at all on its issue. 

When the Bank of the U.S. slipped into history, the nation was 

nearing the end of the boom phase of a boom /bust cycle. When the 

inevitable contraction of the money supply came, politicians began 

to offer proposals on how to infuse stability into the banking 

system. None dealt with the real problem, which was fractionalreserve 

banking itself. They concentrated instead on proposals on 

how to make it work. All of these proposals were tried and they 

failed. 

These years are sometimes described as a period of free 

banking, which is an insult to truth. All that happened was that 

banks were converted from corporations to private associations, a 

change in form, not substance. They continued to be burdened by 

^government controls, regulations, supports, and other blocks 

against the free market. 

The economic chaos and conflict of this period was a major 

cause of the Civil War. Lincoln made it clear during his public 

speeches that slavery was not the issue. The basic problem was the 

North and the South were dependent on each other for trade. The 

industrialized North sold its products to the South which sold its 

•cotton to the North. The South also had a similar trade with 

Europe, and that was an annoyance to the North. Europe was 

selling many products at lower prices, and the North was losing 

-market share. Northern politicians passed protectionist legislation 

putting import duties on industrial products. This all but stopped 

§he importation of European goods and forced the South to buy 

(from the North at higher prices. Europe retaliated by curtailing the 

burchase of American cotton. That hurt the South even more. It was 

a classic case of legalized plunder, and the South wanted out. 

1 . Catton and Ketchum, p. 250. Also Otto Eisenschiml, The Hidden Face of the Civil 

War (New York: Bobbs-Merril, 1961), p. 25.


Meanwhile, there were powerful forces in Europe that wanted 

to see America embroiled in civil war. If she could be split into two 

hostile countries, there would be less obstacle to European expansion 

on the North American continent. France was eager to capture 

Mexico and graft it onto a new empire which would include many 

of the Southern states as well. England, on the other hand, had 

military forces poised along the Canadian border ready for action. 

Political agitators, funded and organized from Europe, were active 

on both sides of the Mason-Dixon line. The issue of slavery was but 

a ploy. America had become the target in a ruthless game of world 

economics and politics. 

Chapter Nineteen 

GREENBACKS AND 

OTHER CRIMES 

The causes of the Civil War shown to be economic 

and political, not the issue offreedom vs. slavery; 

the manner in which both sides used fiat money to 

finance the war; the important role played by 

foreign powers. 

In the previous chapter, we saw how the American continent 

had become a giant chess board in a game of global politics. The 

European powers had been anxious to see the United States 

become embroiled in a civil war and eventually break into two 

smaller and weaker nations. That would pave the way for their 

further colonization of Latin America without fear of the Americans 

being able to enforce the Monroe Doctrine. And so it was that, 

within a few months after the outbreak of war between North and 

South, France landed troops in Mexico and, by 1864, had installed 

Maximilian as her puppet monarch. Negotiations were begun 

immediately to bring Mexico into the war on the side of the 

Confederacy. England moved her troops to the Canadian border in 

a show of strength. America was facing what appeared to be a 

checkmate from the powers in Europe. 

RUSSIA AUGNS WITH THE NORTH 

It was a masterful move that possibly could have won the game 

had not an unexpected event tipped the scale against it. Tsar 

Alexander II—who, incidentally, had never allowed a central bank 

to be established in Russia —notified Lincoln that he stood ready 

to militarily align with the North. Although the Tsar had recently 

freed the serfs in his own country, his primary motivation for 

1- His grandson, Tsar Nicholas, II, did accept loans from J.P. Morgan. In a classic 

application of the Rothschild Formula, Morgan also funded the Mensheviks and the 

Bolsheviks. The Mensheviks forced Nicholas to abdicate, and the Bolsheviks executed 

him. See Chernow, pp. 195, 211.

378 THE CREATURE FROM JEKYLL ISLAND GREENBACKS AND OTHER CRIMES 379 

coming to the aid of the Union undoubtedly had little to do with 

emancipating the slaves in the South. England and France had been 

maneuvering to break up the Russian empire by splitting off 

Finland, Estonia, Latvia, Poland, Crimea, and Georgia. Napoleon 

III, 

of France, proposed to Great Britain and Austria that the three 

nations immediately declare war on Russia to hasten this dismemberment. 

Knowing that war was being considered by his enemies, Tsar 

Alexander decided to play a chess game of his own. In September 

of 1863, he dispatched his Baltic fleet of war ships to Alexandria, 

Virginia, and his Asiatic fleet to San Francisco. The significance of 

this move was explained by Russian-born Carl Wrangell- 

Rokassowsky: 

No treaty was signed between Russia and the United States, but 

their mutual interest, and the threat of war to both, unified these two 

nations at this critical moment. By dispatching his Baltic Fleet to the 

North American harbors, the Tsar changed his position from a 

defensive to an offensive one. Paragraph 3 of the instructions given to 

Admiral Lessovsky by Admiral Krabbe, at that time Russian Secretary 

of the Navy, dated July 14th, 1863, ordered the Russian Fleet, in case of 

war, to attack the enemies' commercial shipping and their colonies so 

as to cause them the greatest possible damage. The same instructions 

were given to Admiral Popov, Commander of the Russian Asiatic 

Fleet. 

The presence of the Russian Navy helped the Union enforce a 

devastating naval blockade against the Southern states which 

denied them access to critical supplies from Europe. It was not that 

these ships single-handedly kept the French and English vessels at 

bay. Actually there is 

no record of them even firing upon each 

other, but that is the point. The fact that neither France nor England 

at that time wanted to risk becoming involved in an open war with 

the United States and Russia led them to be extremely cautious with 

overt military aid to the South. Throughout the entire conflict, they 

found it expedient to remain officially neutral. Without the inhibiting 

effect of the presence of the Russian fleet, the course of the war 

could have been significantly different. 

I 

The beginning of the war did not go well for the North, and in 

the early years, the outcome was far from certain. Not only did the 

Union army face repeated defeats on the battlefield, but enthusiasm 

from the people at home was badly sagging. As mentioned 

previously, at the outset this was not a popular war based on 

humanitarian principle; it was a war of business interests. That 

presented two serious problems for the North. The first was how to 

get people to fight, and the second was how to get them to pay. 

Both problems were solved by the simple expediency of violating 

the Constitution. 

THE EMANCIPATION PROCLAMATION 

To get people to fight, it was decided to convert the war into an 

anti-slavery crusade. The Emancipation Proclamation was primarily 

a move on the part of Lincoln to fan the dying embers of support 

for the "Rich-man's war and the poor-man's fight/' as it was 

commonly called in the North. Furthermore, it was not an amendment 

to the Constitution nor even an act of Congress. It was issued, 

totally without constitutional authority, as the solitary order of 

Lincoln himself, acting as Commander-in-Chief of the armed forces. 

Preservation of the Union was not enough to fire men's 

enthusiasm for war. Only the higher issue of freedom could do 

that. To make the cause of freedom synonymous with the cause of 

the North, there was no alternative but to officially declare against 

slavery. After having emphasized over and over again that slavery 

was not the reason for war, Lincoln later explained why he changed 

his course and issued the Proclamation: 

Things had gone from bad to worse until I felt we had reached the 

end of our rope on the plan we were pursuing; that we had about 

played our last card, and must change our tactics or lose the game. I 

now determined upon the adoption of the emancipation policy. 

The rhetoric of the Proclamation was superb, but the concept 

left a great deal to be desired. Bruce Catton, writing in the American 

Heritage Pictorial History of the Civil War explains: 

Technically, the proclamation was almost absurd. It proclaimed 

freedom for all slaves in precisely those areas where the United States 

could not make its authority effective, and allowed slavery to continue 

in slave states which remained under Federal control. . . . But in the end 

1. Carl Wrangell-Rokassowsky, Before the Storm (Ventimiglia, Italy: Tipo- 

Litografia Ligure, 1972), p. 57. 

1. Quoted by Charles Adams, Fight, Flight, Fraud: The Story of Taxation (Curacao, 

Th, The Netherlands: Euro-Dutch Publishers, 1982), p. 229.


it 

changed the whole character of the war and, more than any other 

single thing, doomed the Confederacy to defeat. 

The Proclamation had a profound impact on the European 

powers as well. As long as the war had been viewed as an attempt 

on the part of a government to put down rebellion, there was 

nothing sacred about it, and there was no stigma attached to 

helping either side. But now thatfreedom was the apparent issue, no 

government in Europe—least of all England and France—dared to 

anger its own subjects by taking sides against a country that was 

trying to destroy slavery. After 1862 the chance that Europe would 

militarily intervene on behalf of the Confederacy rapidly faded to 

zero. On the propaganda front, the South had been maneuvered 

into a position which could not be defended in the modern world. 

Converting the war into an antislavery crusade was a brilliant 

move on Lincoln's part, and it resulted in a surge of voluntary 

recruits into the Union army. But this did not last. Northerners may 

have disapproved of slavery in the South but, once the bloodletting 

began in earnest, their willingness to die for that conviction began 

to wane. At the beginning of the war, enlistments were for only 

three months and, when that period was over, many of the soldiers 

declined to renew. Lincoln faced the embarrassing reality that he 

soon would have no army to carry on the crusade. 

RAISING ARMIES ON BOTH SIDES 

Historically, men are willing to take up arms to defend their 

families, their homes, and their country when threatened by a 

hostile foe. But the only way to get them to fight in a war in which 

they have no perceived personal interest is either to pay them large 

bonuses and bounties or toforce them to do so by conscription. It is 

not surprising, therefore, that both methods were employed to 

keep the Union army in the field. Furthermore, although the 

Constitution specifies that only Congress can declare war and raise 

an army, Lincoln did so entirely on his own authority. 

The Northern states were given an opportunity to fill 

a specified 

quota with volunteers before conscription began. To meet 

these quotas and to avoid the draft, every state, township, and 

county developed an elaborate bounty system. By 1864, there were 

1 Catton and Ketchum, p. 252. 

2. Congress later ratified Lincoln's actions, but, by that time, it had little choice. 

The War was underway. 

many areas where a man could receive more than $1,000 

equivalent to over $50,000 today — 

just for joining the army. A 

person of wealth could avoid the draft simply by paying a 

commutation fee or by hiring someone else to serve in his place. 

In the South, the government was even more bold in its 

approach to conscription. Despite its cherished views on states' 

rights, the Confederacy immediately gathered into Richmond 

many of the powers and prerogatives of a centralized, national 

government. In 1862 it passed a conscription law which placed 

exclusive control over every male citizen between the ages of 

eighteen and thirty-five into the hands of the Confederate President. 

As in the North, there were important loopholes. The owner 

or overseer of twenty slaves, for example, could not be called into 

military service. 

In all fairness, it must be noted that many did not 

take advantage of this exclusion. In contrast to the North, soldiers 

perceived that they were fighting for the defense of their families, 

homes, and property rather than for an abstract cause or for a cash 

bounty. 

REBELLION IN THE NORTH 

When conscription was initiated by Lincoln in 1863, people in 

&he North were outraged. In New York's Madison Square, 

thousands of protesters marched in torch parades and attended 

anti-Lincoln rallies. 

Historian James Horan describes the mood: 

''When caricatures of the President were lifted above the speaker's 

stand, hisses rose to fill the night with the noise of a million angry 

bees/' 

Federal troops eventually had to be called in to put down 

Itfitidraft riots in Ohio and Illinois. In New York City, when the first 

names of the draft were published in the papers on July 12, mobs 

Stormed the draft offices and set fire to buildings. The riots 

continued for four days and were suppressed only when the 

federal Army of the Potomac was ordered to fire into the crowds. 

Over a thousand civilians were killed or wounded. 

After the passage of many years, it is easy to forget that Lincoln 

had an insurrection on his hands in the North as well as in the 

South. The shooting of a thousand civilians by soldiers of their own 

1. Catton and Ketchum, pp. 484-85. 

2. James D. Horan, Confederate Agent: A Discovery in History (New York: Crown, 

1954), p. 209. 

3. Catton and Ketchum, pp. 486, 511.


government is a tragedy of mammoth proportions and it tells much 

about the desperate state of the Union at that time. To control that 

insurrection, Lincoln ignored the Constitution once again by suspending 

the right of Imbeas corpus, which made it possible for the 

government to imprison its critics without formal charges and 

without trial. Thus, under the banner of opposing slavery, 

American citizens in the North, not only were killed on the streets 

of their own cities, they were put into military combat against their 

will and thrown into prison without due process of law. In other 

words, free men were enslaved so that slaves could be made free. 

Even if the pretended crusade had been genuine, it was a bad 

exchange. 

How to get people to pay for the war was handled in a similar 

fashion. If the Constitution could be pushed aside on the issue of 

personal rights and of war itself, it certainly would not stand in the 

way of mere funding. 

It has often been said that truth is the first casualty in war. To 

which we should add: money is the second. During the fiscal year 

ending in 1861, expenses of the federal government had been 

$67 million. After the first year of armed conflict they were 

$475 million and, by 1865, had risen to one billion, three-hundred 

million dollars. On the income side of the ledger, taxes covered only 

about eleven per cent of that figure. By the end of the war, the 

deficit had risen to $2.61 billion. That money had to come from 

somewhere. 

INCOME TAXES AND WAR BONDS 

The nation's first experiment with the income tax was tried at 

this time; another violation of the Constitution. By today's standards 

it was a small bite, but it was still an extremely unpopular 

measure, and Congress knew that any additional taxes would 

further fan the flames of rebellion. 

Previously, the traditional source of funding in time of war had 

been the banks which simply created money under the pretense of 

loaning it. But that method had been severely hampered by the 

demise of the Bank of the United States. The state banks were 

anxious to step into that role; but, by this time, most of them had 

already defaulted in their promise to pay in specie and were in no 

position to manufacture further money, at least not money which 

the public would be willing to accept. 

American banks may have been unable to supply adequate 

loans, but the Rothschild consortium in Britain was both able and 

willing. It was during this time that the Rothschilds were consolidating 

their new industrial holdings in the United States through 

their agent, August Belmont. Derek Wilson tells us: "They owned 

or had major shareholdings in Central American ironworks, North 

American canal construction companies, and a multiplicity of other 

concerns. They became the major importers of bullion from the 

newly discovered goldfields." 

Belmont had placed large amounts of Rothschild money into 

the bonds of state-sponsored banks in the South. Those bonds, of 

course, had fallen in value to practically zero. As the war shifted in 

favor of the North, however, he began to buy up as many 

additional bonds as he could, paying but a few pennies on each 

dollar of face value. It was his plan to have the Union force the 

Southern states at the end of the war to honor all of their pre-war 

debt obligations—in full. That, of course, would have been a source 

of gigantic speculative profits to the Rothschilds. Meanwhile, on 

the northern side of the Mason-Dixon Line, Belmont became the 

chief agent for the sale of Union bonds in England and France. It 

was rumored that, when Belmont called on President Lincoln and 

personally offered Rothschild money at 27 Vi per cent interest, he 

was rudely thrown out of the office. The story is doubtful, but it 

represents a larger truth. Profiting from war and placing money on 

both sides of the conflict were exactly the kind of maneuvers for 

which the Rothschilds had become famous throughout Europe and 

were now practicing in America. 

In the North, the sale of government bonds was the one 

measure for raising funds that seemed to work. Even that, 

however, with the lure of compounded interest to be paid in gold at 

a future date, failed to raise more than about half the needed 

amount. So the Union faced a real dilemma. The only options 

remaining were (1) terminate the war or (2) print fiat money. For 

Lincoln and the Republicans who controlled Congress, the choice 

Was never seriously in doubt. 

The precedent had already been set during the War of 1812. At 

that time, Secretary of the Treasury, Albert Gallatin, had abrogated 

the Constitutional ban against "bills of credit" by printing Treasury 

1- See Derek Wilson, p. 178.


notes, most of which paid interest at 5.4 per cent. The money was 

tender, and that probably was the basis on 

never declared legal 

which it was defended as constitutional. 

THE GREENBACKS 

By the time of the War Between the States, however, all 

pretense at constitutionality had been dropped. In 1862, Congress 

authorized the Treasury to print $150 million worth of bills of credit 

and put them into circulation as money to pay for its 

They were declared as legal tender for all 

expenses. 

private debts but could 

not be used for government duties or taxes. The notes were printed 

with green ink and, thus, became immortalized as "greenbacks." 

Voters were assured that this was a one-time emergency measure, a 

promise that was soon broken. By the end of the war, a total of 

$432 million in greenbacks had been issued. 

The pragmatic mood in Washington was that a constitution is 

nice to have in times of peace, but an unaffordable luxury in war. 

Salmon P. Chase, for example, as Secretary of the Treasury, 

strongly endorsed the greenbacks which were issued under his 

direction. They were, in his words, an "indispensable necessity." 

Eight years later, as Chief Justice of the Supreme Court, he declared 

that they were unconstitutional. Had he changed his mind? Not at 

all. When he endorsed them, the nation was at war. When he 

declared them unconstitutional, it was at peace. It was merely 

another example of the universal trait of all governments in time of 

war. That trait was presented in a previous section as the premise 

of the Rothschild Formula: "The sanctity of its laws, the prosperity 

of its citizens, and the solvency of its treasury will be quickly 

sacrificed by any government in its primal act of self-survival." 

The pressure for issuance of greenbacks originated in Congress, 

but Lincoln was an enthusiastic supporter. His view was that: 

Government, possessing power to create and issue currency and 

credit as money and enjoying the right to withdraw currency and 

credit from circulation by taxation and otherwise, need not and should 

not borrow capital at interest... The privilege of creating and issuing 

money is not only the supreme prerogative of the government but it is 

the government's greatest creative opportunity. 

It would appear that Lincoln objected to having the government 

pay interest to the banks for money they create out of nothing 

when the government can create money out of nothing just as easily 

and not pay interest on it. If one ignores the fact that both of these 

schemes are forbidden by the Constitution and is willing to tolerate 

the plunder-by-inflation that is the consequence of both, then there 

is an appealing logic to the argument. The politicians continue to 

have their fiat money, but at least the banks are denied a free ride. 

LINCOLN'S MIXED VIEW OF BANKING 

It is apparent that Lincoln had undergone a change of heart 

regarding banks. Early in his political career, he had been a friend 

of the banking industry and an advocate of easy credit. As a 

member of the Whig political party in the 1830s—before becoming 

a Republican in his campaign for the Presidency—he had been a 

supporter of Biddle's Second Bank of the United States. During his 

famous debates with Senator Stephen Douglas, one of the points of 

contention between the two was that Lincoln defended the Bank 

and advocated its reestablishment. Furthermore, after becoming 

President, he took the initiative in requesting Congress to reestablish 

central banking. 

Lincoln appears to have been inconsistent, and one gets a 

gnawing feeling that, in his effort to finance an unpopular war, he 

sometimes found it necessary, like Salmon Chase and other politicians 

of the time, to anesthetize his personal convictions and do 

whatever was required to meet the exigencies of governmental 

survival. 

One thing, however, is clear. Regardless of Lincoln's personal 

rs on money, the greenbacks were not pleasing to the bankers 

who were thereby denied their customary override on government 

debt. They were anxious to have this federal fiat money replaced by 

bank fiat money. For that to be possible, it would be necessary to 

create a whole new monetary system with government bonds used 

as backing for the issuance of bank notes; in other words, a return 

to central banking. And that was precisely what Secretary Chase 

was preparing to establish. 

1. This is taken from an abstract of Lincoln's monetary policy that was prepared 

by the Legislative Reference Service of the Library of Congress. Quoted by Owen, 

I. See Lincoln's speech on the Sub-Treasury, Fehrenbacher, pp. 56-57. 

i. See Lincoln's annual message to Congress, December 1, 1862, Fehrenbacher, 

p. 91. " p. 398.

, Another 


In 1862, the basic position of the bankers was outlined in a 

memo, called The Hazard Circular, prepared by an American agent 

of British financiers and circulated among the country's wealthy 

businessmen. It said: 

The great debt that capitalists will see to it is made out of the war 

must be used as a means to control the volume of money. To 

accomplish this the bonds must be used as a banking basis. We are 

now waiting for the Secretary of the Treasury to make this 

recommendation to Congress. It will not do to allow the greenback, as 

it is called, to circulate as money any length of time, as we cannot 

control that. But we can control the bonds and through them the bank 

issues. 

THE NATIONAL BANKING ACT 

On February 25, 1863, Congress passed the National Banking 

Act (with major amendments the following year) which established 

a new system of nationally-chartered banks. The structure was 

similar to the Bank of the United States with the exception that, 

instead of one central bank with power to influence the activities of 

the others, there were now to be many national banks with control 

over all of them coming from Washington. Most banking legislation 

is sold to the public under the attractive label of reform. The 

National Banking Act was one of the rare exceptions. It was 

promoted fairly honestly as a wartime emergency scheme to raise 

money for military expenses by creating a market for government 

bonds and then transforming those bonds into circulating money. 

Here is how it worked: 

When a national bank purchased government bonds, it did not 

hold on to them. It turned them back to the Treasury which 

exchanged them for an equal amount of "United States Bank 

Notes" with the bank's name engraved on them. The government 

declared these to be legal tender for taxes and duties, and that 

status caused them to be generally accepted by the public as 

money. The bank's net cost for these bonds was zero, because they 

got their money back immediately. Technically, the bank still 

owned the bonds and collected interest on them, but they also had 

the use of an equal amount of newly created bank-note money 

which also could be loaned out at interest. When all the smoke and 

1. The Hon. Charles A, Lindburgh, Banking and Currency and the Money Trust 

(Washington, D.C: National Capital Press, 1913), p. 102. 

mirrors were moved away, it was merely a variation on the ancient 

scheme. The monetary and political scientists had simply converted 

government debt into money, and the bankers were collecting a 

substantial fee at both ends for their service. 

The one shortcoming of the system, at least from the point of 

view of the manipulators, was that, even though the bank notes 

were widely circulated, they were not classified as "lawful" money. 

In other words, they were not legal tender for all debts, just for 

taxes and duties. Precious-metal coins and greenbacks were still the 

country's official money. It was not until the arrival of the Federal 

Reserve System fifty years later that government debt in the form 

of bank notes would be mandated as the nation's official money for 

all transactions—under penalty of law. 

The National Banking Act of 1863 required banks to keep a 

percentage of their notes and deposits in the form of lawful money 

(gold coins) as a reserve to cover the possibility of a run. That 

percentage varied depending on the size and location of the bank 

but, on an average, it was about twelve per cent. That means a bank 

with $1 million in coin deposits could use approximately $880,000 

of that ($1 million less 12%) to purchase government bonds, 

exchange the bonds for bank notes, lend out the bank notes, and 

collect interest on both the bonds and the loans. The bank could now 

earn interest on $880,000 loaned to the government in the form of 

coins plus interest on $880,000 loaned to its customers in the form of 

bank notes. That doubled the bank's income without the inconvenience 

of having to increase its capital. Needless to say, the 

bonds were gobbled up just as fast as they could be printed, and the 

problem of funding the war had been solved. 

consequence of the national banking system was to 

make it impossible from that date forward for the federal government 

ever to get out of debt- Please reread that statement. It is not 

an exaggeration. Even friends of central-banking are forced to 

admit this reality. Galbraith says gloomily: 

Rarely has economic circumstance managed more successfully to 

confound the most prudent in economic foresight. In numerous years 

1 That represents the theoretical maximum. The actual numbers would have been 

lightly less due to the fact that banks seldom were able to keep a full 100% of their 

bank notes circulating in the form of loans. The functional asset leverage probably 

averaged about 70% rather than 88%.


following the war the Federal government ran a heavy surplus. It 

could not pay off its debt, retire its securities, because to do so meant 

there would be no bonds to back the national bank notes. To pay off 

the debt was to destroy the money supply. 

As pointed out in a previous section, that is essentially the 

situation which exists today. Every dollar of our currency and 

checkbook money was created by the act of lending. If all debt were 

repaid, our entire money supply would vanish back into the 

inkwells and computers. The national debt is the principal foundation 

upon which money is created for private debt. To pay off or 

even greatly reduce the national debt would cripple our monetary 

system. No politician would dare to advocate that, even if surplus 

funds were available in the Treasury. The Federal Reserve System, 

therefore, has virtually locked our nation into perpetual debt. 

THE HIDDEN COST OF WAR 

The third consequence of the National Banking Act will come 

as no surprise to anyone who has survived the previous pages of 

this book. During the war, the purchasing power of the greenbacks 

fell by 65%. The money supply increased by 138%. Prices more than 

doubled while wages rose by less than half. By that mechanism, 

Americans surrendered to the government and to the banks more 

than half of all the money they earned or held during that 

period—in addition to their taxes. 

Financial conditions in the South were even worse. With the 

exception of the seizure of about $400,000 in gold from the Federal 

mint at New Orleans, almost all of the war was funded by the 

printing of fiat money. Confederate notes increased in volume by 

214% per year, while the volume of all money, including bank 

notes and check-book money, rose by over 300% per year. In 

addition to the Confederate notes, each of the Southern states 

issued its own fiat money and, by the end of the war, the total of all 

notes was about a billion dollars. Within the four-year period, 

prices shot up by 9,100%. After Appomattox, of course, Confederate 

notes and bonds alike were totally worthless. 


2. See chapter ten, The Mandrake Mechanism. 

3. See Paul and Lehrman, pp. 80-81 ; Groseclose, Money and Man, p. 193; Galbraith, 

pp. 93-94; Rothbard, Mystery, p. 222. 

4. See Galbraith, p. 94. Also Paul and Lehrman, p. 81. 

As usual, the average citizen did not understand that the newly 

created money represented a hidden tax which he would soon have 

Ito pay in the form of higher prices. Voters in the Northern states 

certainly would not have tolerated an open and honest tax increase 

of that magnitude. Even in the South where the cause was 

perceived as one of self defense, it is possible that they would not 

have done so had they known in advance the true dimension of the 

assessment. But especially in the North, because they did not 

understand the secret science of money, Americans not only paid 

the hidden tax but applauded Congress for creating it. 

On June 25, 1863, exactly four months after the National Bank 

Act was signed into law, a confidential communique was sent from 

the Rothschild investment house in London to an associate banking 

firm in New York. It contained an amazingly frank and boastful 

summary: 

The few who understand the system [bank loans earning interest 

and also serving as money] will either be so interested in its profits or 

so dependent upon its favors that there will be no opposition from that 

class while, on the other hand, the great body of people, mentally 

incapable of comprehending,... will bear its burdens without 

complaint, 

LINCOLN'S CONCERN FOR THE FUTURE 

Lincoln was privately apprehensive about the Bank Act, but 

loyalty to his Party and the need to maintain unity in time of war 

compelled him to withhold his veto. His personal view, however, 

was unequivocal. In a letter to William Elkins the following year he 

said: 

The money power preys upon the nation in times of peace and 

conspires against it in times of adversity. It is more despotic than 

monarchy, more insolent than autocracy, more selfish than 

bureaucracy. I see in the near future a crisis approaching that unnerves 

me and causes me to tremble for the safety of my country. 

Corporations have been enthroned, an era of corruption will follow, 

and the money power of the country will endeavor to prolong its reign 

by working upon the prejudices of the people, until the wealth is 

aggregated in a few hands, and the republic destroyed. 2 

j* Quoted by Owen, pp. 99-100. 

2- A letter to William F. Elkins, November 21, 1864. Archer H. Shaw, ed., The 

uncoln Encyclopedia; The Spoken and Written Words of A. Lincoln (New York: 

MacmilJan Co., 1950), p. 40.


In reviewing Lincoln's role throughout this painful chapter of 

history, it is impossible not to feel ambivalence. On the one hand, 

he declared war without Congress, suspended the writ of habeas 

corpus, and issued the Emancipation Proclamation, not as an 

administrative executive carrying out the wishes of Congress, but 

as the Commander-in-Chief of the armed forces. Furthermore, the 

Proclamation was not issued out of humanitarian motives, as 

popular history portrays, but as a maneuver to generate popular 

support for the war. By participating in the issuance of the 

greenbacks, he violated one of the most clearly written and 

important sections of the Constitution. And by failing to veto the 

National Bank Act, he acquiesced in the delivery of the American 

people back into the hands of the international Cabal, an act which 

was similar in many ways to the forcible return of captured 

runaway slaves. 

On the positive side, there is no question of Lincoln's patriotism. 

His concern was in preserving the Union, not the Constitution, 

and his refusal to let the European powers split America into a 

cluster of warring nation-states was certainly wise. Lincoln 

believed that he had to violate part of the Constitution in order to 

save the whole. But that is dangerous reasoning. It can be used in 

almost any national crisis as the excuse for the expansion of 

totalitarian power. There is no reason to believe that the only way 

to save the Union was to scrap the Constitution. In fact, if the 

Constitution had been meticulously observed from the very beginning, 

the Southern minority could never have been legally plundered 

by the Northern majority and there likely would have been 

no movement for secession in the first place. And, even if there had 

been, a strict reading of the Constitution at that point could have 

led the way to an honorable and peaceful settlement of differences. 

The result would have been, not only the preservation of the Union 

without war, but Americans would be enjoying far less government 

intervention in their daily lives today. 

WITH MALICE TOWARD NONE 

There is one point that is clearly on Lincoln's side. While his 

political compatriots were howling for economic vengeance against 

the South, the President stood firmly against it. "With malice 

toward none" was more than a slogan with him, and he was willing 

to risk his political survival on that one issue. The reason he had 

vetoed the Wade-Davis emancipation bill was because it would 

have applied a lien against Southern cotton at the end of the war to 

the benefit of New England textile manufactures. The cotton also 

would have been taken as security to pay off Southern debt which 

had been contracted before the war, thus providing the funds to 

buy back at face value all of the bonds which had been purchased at 

discount by Rothschild's agent, August Belmont. Such defiance of 

the financiers and speculators undoubtedly required great courage. 

But the issue ran deeper than that. Lincoln had offered a 

general amnesty to any citizen in the South who would agree to 

take a loyalty oath to the Union. When ten per cent of the voters 

had taken such an oath, he proposed that they could then elect 

Congressmen, Senators, and a state government which would be 

recognized as part of the Union once again. The Republicans, on 

the other hand, had incorporated into the Wade-Davis bill the 

provision that each seceded state was to be treated like a conquered 

country. Political 

representation was to be denied until fifty-one 

per cent, not ten per cent, had taken an oath. Former slaves were 

given the right to vote—although women had not yet gained that 

right even in the North—but, because of their lack of education and 

political awareness, no one expected them to play a meaningful 

role in government for many years to come. Furthermore, those 

taking the oath had to swear that they had never taken up arms 

against the Union. Since almost every able-bodied white male had 

done so, the effect would have been to deny the South political 

representation for at least two generations. 

Under Lincoln's amnesty policy, it would not be long before the 

Republicans would be overwhelmed in Congress by a large majority 

of Democrats. The Democrats in the North were already gaining 

strength on their own and, once they could be joined by the solid 

block of Democrats from the reunited South, the Republicans' 

political and economic power would be lost. So, when Lincoln 

vetoed the bill, his own Party bitterly turned against him. 

Running throughout these cross-currents of motives and special 

interests were two groups which found it increasingly to their 

advantage to have Lincoln out of the way. One group consisted of 

the financiers, Northern industrialists, and radical Republicans, all 

of whom wanted to legally plunder the South at the end of the war. 

The politicians within that group also looked forward to further 

consolidating their power and literally establishing a military

| 

stereotyped 


dictatorship. 1 The other group was smaller in size but equally 

dangerous. It consisted of hothead Confederate sympathizers— 

from both South and North—who sought revenge. Later events 

revealed that both of these groups had been involved in a conspiratorial 

liaison with an organization called the Knights of the Golden 

Circle. 

KNIGHTS OF THE GOLDEN CIRCLE 

The Order of the Knights of the Golden Circle was a 

secret 

organization dedicated to revolution and conquest. Two of its 

better known members were Jesse James and John Wilkes Booth. It 

was organized by George W.L. Bickley who established its first 

"castle" in Cincinnati in 1854, drawing membership primarily from 

Masonic lodges. It had close ties with a secret society in France 

called The Seasons, which itself was a branch of the Illuminati. 

After the beginning of the war, Bickley was made head of the 

Confederacy's secret service, and his organization quickly spread 

throughout the border and Southern states as well. 

In the North, the conspirators were seeking "to seize political 

power and overthrow the Lincoln government/ 7 In fact, the 

Northern anti-draft riots 

mentioned previously were largely the 

result of the planning and leadership of this group. 

In the South 

"they tried to promote the extension of slavery by the conquest of 

Mexico/ 75 

In partnership with Maximilian, the Knights hoped to 

establish a Mexican-American empire which would be an effective 

counter force against the North. In fact, the very name of the 

organization is based on their goal of carving an empire out of 

North America with geographical boundaries forming a circle with 

the center in Cuba, and its 

Pennsylvania, southward to Panama. 

circumference reaching northward to 

1 For highly readable accounts of this movement, see Theodore Roscoe, The Web 

of Conspiracy: The Complete Story of the Men Who Murdered Abraham Lincoln (Englewood 

Cliffs, New Jersey: Prentice-Hall, 1959); also Claude G. Bowers, The Tragic 

Era: The Revolution after Lincoln, (New YoTk: Houghton Mifflin, 1957). 

2. "No Civil War at All, Part Two/' by Will^m Mcllhany, Journal of Individualist 

Studies, Fall, 1992, pp. 1&-20. 

3. Horan, p. 15. 

4. Ibid., pp. 20&-23. 

5. Ibid., p. 16. Regarding the annexation of Mexico, also see the Columbia Encyclopedia, 

Third Edition, p. 1143. 

In 1863 the group was reorganized as the Order of American 

Knights and, again the following year, as the Order of the Sons of 

Liberty. Its membership then was estimated at between 200,000 and 

300,000. After the war, it went further underground and remnants 

eventually emerged as the Ku Klux Klan. 

JOHN WILKES BOOTH 

One of the persistent legends of this period is that John Wilkes 

Booth was not killed in Garretfs barn, as generally accepted, but 

was allowed to escape; that the corpse actually was that of an 

accomplice; and that the government, under the firm control of 

War Secretary Edwin M. Stanton, moved heaven and earth to cover 

up the facts. On the face of it, that is an absurd story. But, when the 

voluminous files of the War Department were finally declassified 

and put into the public domain in the mid 1930s, historians were 

shocked to discover that there are many facts in those files which 

lend credence to the legend. The first to probe these amazing 

records was Otto Eisenschiml whose Why Was Lincoln Murdered? 

was published by Little, Brown and Company in 1937. The best and 

most readable compilation of the facts, however, was written 

twenty years later by Theodore Roscoe. In the preface to this work, 

he states the startling conclusions which emerge from those longhidden 

files: 

I 

Of the immense 19th century literature that exists on Lincoln's 

assassination, much of the writing treats the tragedy at Ford's theater 

as though it were Grand Opera.. . . Only a few have seen the crime as a 

murder case: Lincoln dying by crass felony, Booth a stalking gunman 

leading a gang of primed henchmen, the murder plot containing 

ingredients as base as the profit motive. Seventy years after the crime, 

writers were garbling it with a dignity it did not deserve: Lincoln, the 

martyr; Booth, the stereotyped villain; the assassination 

avenged by classic justice; conspiracy strangled; Virtue (in the robes of 

Government) emerging triumphant, and Lincoln "belonging to the 

ages." 

But the facts of the case are neither so satisfying nor so gratifying. 

For the facts indicate that the criminals responsible for Lincoln's death 

got away with murder. 

Izola Forrester was the granddaughter of John Wilkes Booth. In 

book entitled This One Mad Act, she tells of discovering the 

Roscoe, p. vii.


secret records of the Knights of the Golden Circle which had been 

SUMMARY 

carefully wrapped and placed in a government vault many decades 

It is time now to leave this tragic 

ago and designated as classified documents by 

episode 

Secretary Stanton. 

and move along. So let 

us summarize. America's bloodiest 

Since the assassination of Lincoln, no one had ever been allowed 

and most 

to 

devastating war was 

fought, not over the issue of 

examine that package. Because of her lineage to Booth and because 

freedom versus slavery, but because of 

clashing economic 

of her credentials as a professional writer, she was interests. 

eventually 

At the heart of this conflict were 

questions of legalized 

permitted to become the first person in all those years to examine 

plunder, banking monopolies, and even 

European territorial 

its contents. Forrester recounts the experience: 

expansion into Latin America. The boot print 

of the Rothschild formula is unmistakable across the 

It was five years before I was able to examine the contents of graves 

the 

of 

American soldiers on both sides. 

mysterious old package hidden away in the safe of the room which 

In the North, 

contained the relics and exhibits used in the Conspiracy 

neither 

Trial.... ] 

greenbacks, taxes, nor war bonds were 

would never have seen them, had I not knelt on the floor of the 

enough to 

cell five 

finance the war. So a national banking system was 

years ago and seen into the back of the old safe where the package lay. 

created to convert government bonds into fiat money, and the 

It is all part of the odd mystery thrown about the case by the officials 

people lost over half of their monetary assets to the hidden tax of 

of the war period—the concealment of these documents and articles, 

inflation. In the South, printing presses accomplished 

and the hiding away of the two flakes of bone with the bullet and 

the same 

effect, and the monetary loss 

pistol. What mind 

was total. 

ever grouped together such apparently 

The issuance of the 

incongruous and macabre 

Emancipation 

exhibits?... 

Proclamation by Lincoln and 

the 

Here at last was a link with my grandfather. I knew that he had 

naval assistance offered by Tsar Alexander, II, were largely 

been a member of the secret order founded by Bickley, the Knights of 

responsible for keeping England and France from intervening in 

the Golden Circle. I have an old photograph of him taken in a group of 

the war on the side of the Confederacy. Lincoln was assassinated 

the brotherhood, in full uniform, one that Harry's daughter had by a member of the Knights of the Golden Circle, a secret society 

discovered for me in our grandmother's Bible. I knew that the 

with rumored ties to American politicians 

newspapers, directly following the assassination, had denounced and 

the 

British financiers. 

Tsar Alexander 

order as having instigated the killing of Lincoln, and had proclaimed 

was assassinated a few years later by a member of 

Booth to have been its member and tool. And I was reminded again 

the 

of 

People's Will, a Nihilist secret society in Russia with rumored 

those words I had heard from my grandmother's lips, that her 

ties to financiers in New York City, specifically, Jacob Schiff and the 

husband had been "the tool of other men." 

firm of Kuhn, Loeb & Company. 

An interesting comment. One is compelled to wonder: The tool 

As for the Creature of central banking, there had been some 

of what other men? Was Forrester's grandmother referring to the 

victories and some defeats. The greenbacks had for a while 

leaders of the Knights of the Golden Circle? To agents of European deprived the bankers of their override on a small portion of 

financiers? Or was it to conspirators within Lincoln's own Party? government debt, but the National Banking Act quickly put a stop 

We shall probably never know with certainty the extent to which 

to that. Furthermore, by using government bonds as backing for 

any of these groups may have been involved in Lincoln's assassination, 

but we do know that there were powerful forces within the foundation was firmly in place, but the ultimate structure still 

the money supply, it locked the nation into perpetual debt. The 

federal government, centered around Secretary of War Stanton, needed to be erected. The monetary system was yet to be concentrated 

into one central-bank mechanism, and the control was yet to 

which actively concealed evidence and hastily terminated the 

investigation. Someone was protected. 

be taken away from the politicians and placed into the hands of the 

ankers themselves. 

1. Lzola Forrester, This One Mad Act (Boston: Hale, Cushman & Flint, 1937), p. 359- It was time for the Creature to visit Congress.

President Andrew Jackson put 

his political career on the line in 

1832 by vetoing renewal of the 

charter for the Second Bank of 

the United States. He called 

the Bank a monster and 

declared: am "1 ready with the 

screws to draw every tooth and 

then the stumps." Voters 

approved and re-elected him 

by a large margin. 

ZJL 

a 

During the Civil War, Lincoln 

had an insurrection on his 

hands in the North as well as 

the South, These two Leslie's 

engravings depict the 1 863 

anti-draft riots that occurred in 

"»

Library of Congress 

Hulton Deutsch 

I Montagu Norman (above) was head of the 

Bank of England during the first years of the 

Federal Reserve. He is shown here in 1931 

aboard the Duchess of York at Southampton. 

Norman frequently traveled to the U.S. to 

meet in secret with Benjamin Strong, head of 

the Federal Reserve. Strong agreed to use the 

Federal Reserve System to unofficially help 

Great Britain meet its financial obligations, and 

The crew of the Russian ship, Osliaba, posed for this photograph at Alexandria, 

Virginia, in 1863. Tsar Alexander II had dispatched his Baltic fleet to Alexandria and 

his Asiatic fleet to San Fransciso where they were committed to assist the Union 

-j 

blockade against the South. This had little to do with freeing the slaves. France ha

nmownrm 

V * > 

x 

John D. Rockefeller, III 

(right) presents a check in the amount 

of $8,500,000 to Trygve Lie, First Secretary-General of the 

United Nations. The date is March 25, 1947. The money is for 

buying the land on Manhattan Island which will house the LIN 

building. Through the Council on Foreign Relations (CFR), the 

[Rockefellers have been in the forefront of the drive for a world 

government which is to be built upon the principles of 

socialism and feudalism. They have no doubt that they and 

their counterparts in other countries will be in control. 

s*.> 

John D. Rockefeller, Sr., is shown here giving a dime to a child, while an admirij 

crowd looks on. This was one of his favorite publicity stunts, it was conceived by H 

public-relations staff as a means of offsetting adverse publicity regarding his busing 

dealings. Large-scale philanthropy was an extension of that same technique. 

400 401 

UPl/Settmann

Treasury Department 

'WM 

William Jennings Bryan (left) was one of the most powerful Democrats in 

Congress. He opposed the Federal Reserve Act because it would privately issue 

money rather than through the government. He was fooled into supporting the bill 

when phony compromises were made which gave the appearance of public 

control and government issue but which, in fact, did neither. Bryan was also 

rewarded with an appointment as Secretary of State. He became disillusioned by 

Ihe duplicity of his own government and resigned after Wilson failed to warn the 

public that the Lusitania was carrying munitions. He complained that it was "like 

Butting women and children in front of an army." 

Alan Greenspan (above), was an eloquent spokesman for the gold standard and 

a critic of the System's subservience to the banking cartel. That was in 1966. 

After he became a director of J. P. Morgan & Company and was appointed 

hairman of the Federal Reserve in 1987, he became silent on these issues and 

did nothing to anger the Creature he now served. Like Bryan, even the best of 

rnen can be corrupted by the rewards of politics. 

Betxmann Arcmve 

402 

403

IM 

Jmtr J * A A u 

ir 

Section V 

UPl/Bettmann 

The First National Bank in St. 

Petersburg, Florida experiences a 

run on June 12, 1930. Angry 

depositors want their money, butthij 

bank cannot pay them. Their money 

has been loaned to others. This 

scene has been repeated thousand 

of times throughout history and in 

every country. It is the consequence 

of fractional-reserve banking. 

John Kenneth Galbraith, well-kno^ 

historian and professor at Harvard 

has verified that he was asked to u 

part of the team that put together 

Report from Iron Mountain, a thinktank 

study commissioned by the J 

Defense Department. The purpose. 

the study was to explore novel yw 

keeping the masses in subserviei* 

e£ 

When a copy of the Report was 

| 

to the press, the government clai^j 

it was a hoax. Galbraith confirm^ 

it was totally authentic. 

THE HARVEST 

Monetary and political scientists continue to 

expound the theoretical merits of the Federal 

Reserve System. It has become a modern act of 

faith that economic life simply could not go on 

without it. But the time for theory is past The 

Creature moved into its final lair in 1913 and has 

snorted and thrashed about the landscape ever 

since. If we wish to know if it is 

a creature of 

service or a beast of prey, we merely have to look 

at what it has done. And, after the test of all those 

years, we can be sure that what it has done, it will 

continue to do. Or, to use the Biblical axiom, a tree 

shall be known by the fruit it bears. Let us now 

examine the harvest. 

UPl/Bettmann 

404

Chapter Twenty 

THE LONDON 

CONNECTION 

The rise of the House of Morgan; Morgan's ties 

with England and the House of Rothschild; the 

connection between the Federal Reserve System 

and the Bank of England; the Fed's decision to 

inflate American dollars to assist the ailing 

British economy. 

The period between the Civil War and the enactment of the 

Federal Reserve System was one of great economic volatility and no 

small measure of chaos. The National Banking Acts of 1863-65 

established a system of federally chartered banks which were given 

significant privilege and power over the monetary system. They 

were granted a monopoly in the issuance of bank notes, and the 

government agreed to accept those notes for the payment of taxes 

and duties. They were allowed to back this money up to ninety per 

cent with government bonds instead of gold. And they were guaranteed 

that every bank in the system would have to accept the notes 

of every other bank at face value, regardless of how shaky their 

position. The net effect was that the banking system of the United 

States after the Civil War, far from being free and unregulated as 

some historians have claimed, was literally a halfway house to central 

banking. 

The notion of being able to generate prosperity simply by creating 

more money has always fascinated politicians and businessmen, 

but at no time in our history was it more in vogue than in the second 

half of the nineteenth century. The nation had gone mad with the 

Midas complex, a compulsion to turn everything into money 

through the magic of banking. Personal checks gradually had 

become accepted in commerce just as readily as bank notes, and the 

banks obliged their customers by entering into their passbooks just 

as many little numbers as they cared to "borrow." As Groseclose


observed: 'The manna of cheap money became the universal cry, 

and as with the Israelites, the easier the manna was acquired, the 

louder became the complaint, the less willing the people to struggle 

for it/' 1 

The prevailing philosophy of that time was aptly expressed by 

Jay Cooke, the famous financier who had marketed the huge Civil 

War loans of the federal government and who now was raising $100 

million for the Northern Pacific Railroad. Cooke had published a 

pamphlet which was aptly summarized by its own title: How Our 

National Debt May Be a National Blessing, The Debt is Public Wealth, 

Political 

Union, Protection of Industry, Secure Basis for National 

Currency. "Why," asked Cooke, "should this Grand and Glorious 

country be stunted and dwarfed—its activities chilled and its very 

life blood curdled by these miserable 'hard coin' theories—the 

musty theories of a bygone age." 2 As it turned out, however, the 

chilling and curdling came, not from the musty hard-coin theories 

of the past, but from the glittering easy-money theories of the present. 

The Northern Pacific went bankrupt and, as the mountain of 

imaginary money invested in it collapsed back into nothing, 

Cooke's giant investment firm disappeared along with it, triggering 

the panic of 1873 as it went. Matthew Josephson writes: 

"All about the failure of Jay Cooke!" newsboys hawked throughout 

the country.... 

The largest and most pious bank in the Western world had fallen 

with the effect of a thunderclap. Soon allied brokers and national 

banks and 5,000 commercial houses followed it into the abyss of 

bankruptcy. All day long, in Wall Street, one suspension after another 

was announced; railroads failed; leading stocks lost 30 to 40 points, or 

half their value, within the hour; immeasurable waves of fear altered 

the movement of greed; the exchanges were closed; the stampede, the 

"greatest" crisis in American history, was on. 

AND STILL MORE BOOMS AND BUSTS 

Altogether, there were four major contractions of the money 

supply during this period: the so-called panics of 1873, 1884, 1893, 

and 1907. Each of them was characterized by inadequate bank 

reserves and the suspension of specie payment. Congress reacted, 

1 Groseclose, Money and Man, p. 202, 

2. Quoted by Rothbard, Mystery, p. 231 

3. Matthew Josephson, The Robber Barons: The Great American Capitalists, 1861-1901 

(New York: Harcourt Brace Jovanovich, 1934), p- 170. 

THE LONDON CONNECTION 409 

not by requiring an increase in reserves which would have 

improved the safety margin, but by allowing a decrease. In June of 

1874, legislation was passed which permitted the banks to back their 

notes entirely with government bonds. That, of course, meant more 

fiat money for Congress, but it also meant that bank notes no longer 

had any specie backing at all, not even ten per cent. This released 

over $20 million from bank reserves which then could be used as the 

basis for pyramiding even more checkbook money into the economy. 

It has become accepted mythology that these panics were 

caused by seasonal demands for farm loans at harvest time. To supply 

those funds, the country banks had to draw down their cash 

reserves which generally were deposited with the larger city banks. 

This thinned out the reserves held in the cities, and the whole system 

became more vulnerable. Actually that part of the legend is 

true, but apparently no one is expected to ask questions about the 

rest of the story. Several of them come to mind. Why wasn't there a 

painic every Autumn instead of just every eleven years or so? Why 

didn't all 

banks—country or city—maintain adequate reserves to 

cover their depositor demands? And why didn't they do this in all 

seasons of the year? Why would merely saying no to some loan applicants 

cause hundreds of banks to fail? The myth falls apart under 

the weight of these questions. 

The truth is that, if it hadn't been seasonal demand by agriculture, 

the money magicians simply would have found another scapegoat. 

It would have been "immobile" reserves, lack of "elasticity" in 

the money supply, "imbalance" of international payments, or some 

other technocratic smoke screen to cover the real problem which 

Was—and always has been—fractional-reserve banking itself. The 

bottom line was that, in spite of an elaborate scheme to pool the 

minuscule reserves of country banks into larger regional banks 

where they could be rushed from town to town like a keg of coins on 

the old frontier, it still didn't work. The loaves and fishes stubbornly 

refused to multiply. 

Morgan prospers when others fail 

The monetary expansions and contractions of this period were 

large waves that capsized thousands of investment ships at sea. But 

there was one large vessel that, somehow, bobbed up and down 

With the surges quite well and could be seen throughout the storm



salvaging the abandoned cargoes of those that were in distress. This 

It was during this trip that Peabody opened an import-export 

vessel brought back to port untold riches that once had been the 

business at 22 Old Broad Street in London and began to provide 

property of others but now belonged to the master of the salvage 

loans and letters of credit to many of his shippers. That moved him 

ship in accordance with rules of the high sea. The captain's name 

into the investment business specializing in transactions between 

Britain and the United States. 

was J.P. Morgan. 

It will be recalled from a previous section that J.P. Morgan and 

It was fortunate liming. This was the beginning of a period of 

Company was no small player in the world chess match called 

rapid expansion in the United States, accompanied by an insatiable 

World War I. Morgan had been chosen by the French and British 

need for investment capital and a plethora of bond issues offering 

governments as the official agent to sell their war bonds in the U.S. 

tantalizing rates of return which were substantially higher than 

When the war began to go badly for them, the Morgan interests 

comparable offerings in Europe. Peabody's firm was in an unusual 

began to agitate for American entry into the conflict, a move which 

position to exploit this expanding market, and his firm grew rapidly. 

was calculated to save the loans. The Morgan firm also was the of h- 

cial U.S. trade agent for Britain. In violation of international treaty, it 

Peabody never married and, as he advanced in years, began to 

handled the purchase and shipping to England of all war material, 

look for someone to carry on the business. The qualifications for 

including the enormous cargo of munitions aboard the Lusitanw 

such a position were difficult. First, the man had to be an American 

when she went down. 

by birth in order to appear authentic as the representative of 

The close relationship between the Morgans and Great Britain 

American investments. Secondly, he had to be British by instinct 

was no accident. J.P. Morgan, Jr., was the driving force behind the 

and preference. This included being well educated and with good 

Council on Foreign Relations, the American branch of a secret society 

established by Cecil Rhodes for the expansion of the British 

breeding in order to be accepted by the aristocracy in London's 

financial world. Third, he had to have knowledge of Angloempire. 

In truth, the Morgans were more British than American. 

American finance. And fourth, Peabody had to like him. 

The reason for this is to be found in the origin of the Morgan 

dynasty. It all began with an American merchant from Danvers, JUNIUS MORGAN SELECTED BY PEABODY 

Massachusetts, by the name of George Peabody. In 1837, Peabody When the Boston merchant, Junius Morgan, met George 

travelled to England as a bond salesman for the Chesapeake and Peabody at a London dinner party in 1850, little did he realize that 

Ohio Canal, hoping to find British investors to replace the missing 

the elder financier took an immediate liking to him and began to 

ranks of Americans who, because of a recession at that time, showed 

discreetly inquire into his background and reputation. This began 

little interest in the project. He routinely was rejected by the large an extended period of business and social contact that eventually 

investment houses of London but, eventually, his persistence paid ended in 1854 when Junius moved his family to London and became 

off. Stanley Jackson, in his biography of Morgan, says of Peabody: 

a full partner in the firm which, eventually became known as 

When the panic [in the U.S.] at last started to subside, he called Peabody, Morgan & Company. 

time and again on the big City barons [in London] to assure them that 

In addition to selling bonds in England for American commercial 

ventures and state governments, the partnership also became 

Maryland and other states would honor their bonds. He also 

continued backing American securities with his personal funds. 

the chief fiscal agent for the Union government during the Civil 

Buying at almost giveaway levels, he later reaped a rich harvest. He 

War, and it was during this period that the firm's great profits 

unloaded most of the Chesapeake and Ohio Canal bonds and won 

pushed it into the 

acclaim back home for returning his $60,000 commission intact to 

top echelons of London's financial fraternity. In 

1864, Peabody finally retired and completely turned the business 

Maryland's meager treasury. 

over to Junius who immediately changed the firm's name to J.S. 

1. Stanley Jackson, J.P. Morgan (New York: Stein and Day, 1983), p. 37. Morgan and Company.



Junius's son, John Pierpont, attended the English High School in 

eventually was accomplished by the addition of Edward 

Boston but, during much of his youth, was enrolled in European 

Grenfell, a long-time director of the Bank of England, as the 

tThis 

new 

schools and became engulfed in British tradition. He had been born 

senior partner of what became Morgan, Grenfell & Company. But 

in the United States, however, and that made him ideally suited to 

none of this window dressing altered the reality that J.P. Morgan & 

carry on the Anglo-American role played so deftly by Peabody and 

Co. in New York remained more British in orientation than Ameri- 

Junius. It was inevitable that the boy would be trained in international 

finance and groomed to step into his father's shoes. The first 

A casual reading of the events of this period would lead to the 

can. 

move was to find employment for him in 1857 at the New York : conclusion that Peabody and Morgan were fierce competitors of the 

investment firm of Duncan, Sherman & Company. Seven years 

Rothschilds. It is true they often bid against each other for the same 

later, Junius acquired a competitor New York firm and set his son 

business, but it is also true that almost every biographer has told 

up as a partner in Dabney, Morgan & Company, which became the how the American newcomers to London were in awe of the great 

New York branch of the London firm. In 1871, with the addition of 

power of the Rothschilds and how they purposely cultivated their 

a third partner, Anthony Drexel from Philadelphia, the firm became 

friendship, a friendship that eventually became so intimate that the 

Drexel, Morgan & Company. In 1895, following the death of Drexel, 

Americans were received as the personal house guests of the 

there was a final change of name to J.P. Morgan & Company. A 

Rothschilds. The Morgan firm often worked closely with the House 

branch in Paris became known as Morgan, Harjes & Company. 

of Rothschild on large joint ventures, but that was—and still is 

AMERICANIZING THE NEW YORK BRANCH 

common practice among large investment houses. In light of subsequent 

events, however, it is appropriate to consider the possibility 

After the unexpected death of Junius in a carriage accident a few 

that an arrangement had 

years later, it was decided by Pierpont to reshape the image 

been worked out in which the 

of the 

Peabody 

London firm to be a more British operation. This would 

/Morgan firm went one step further and, on occasion, 

allow the 

became a secret Rothschild agent. 

New York branch to represent the American side with less suspicion 

of being essentially the same firm. By that time, his son, J.P. CONCEALED ALLIANCE WITH ROTHSCHILD? 

Morgan, Jr.—known as Jack by his friends—had already been 

Some writers have suggested that the clandestine relationship 

brought into the firm as a partner, and he was to play an important 

began almost from the beginning. Eustace Mullins, for example, 

role in the creation of that image. Biographer John Forbes tells us: 

writes: 

J.P, Morgan, Jr., became a partner in the London house of J.S. 

Soon after he arrived in London, George Peabody was surprised 

Morgan & Co. on January 1, 1898, and a fortnight later, with his wife 

to be summoned to an audience with the gruff Baron Nathan Mayer 

Jessie and their three children,... he left New York and took up 

Rothschild. Without mincing words, Rothschild revealed to Peabody 

residence in England for the next eight years. 

that much of the London aristocracy openly disliked Rothschild and 

Morgan was sent to London to do two specific things. The first 

refused his invitations. He proposed that Peabody, a man of modest 

was to learn at first hand how the British carried on a banking business 

means, be established as a lavish host whose entertainments would 

under a central banking system dominated by the Bank of England. 

soon be the talk of London. Rothschild would, of course, pay all the 

Morgan, Sr., anticipated the establishment of the Federal Reserve 

bills. Peabody accepted the offer and soon became known as the most 

System in the United States and wanted someone who would 

popular host in London. His annual Fourth-of-July dinner, celebrating 

eventually have authority in the Morgan firms to know how such a 

American Independence, became extremely popular with the English 

system worked. The second was quietly to look about the City and 

aristocracy, many of whom, while drinking Peabody's wine, regaled 

select British partners to convert the elder Morgan's privately owned 

each other with jokes about Rothschild's crudities and bad manners, 

J.S. Morgan & Co. into a British concern. 1 

1. John Douglas Forbes, ].P. Morgan, Jr. (Charlottesville: University Press of 

Virginia, 1981), p. 31. 

B. This apparently has not diminished over the years. The December 23, 1991, 

ffcsue of Business Week (p. 69) reminds us that the CEO of J.P. Morgan & Co., Dennis 

Weatherstone who lives in Connecticut, was knighted by Queen Elizabeth 11.

— 


without realizing that every drop they drank had been paid for by 

Rothschild. 1 

Mullins does not give a reference for the source of this story, and 

one cannot help being skeptical that such details could be proved. 

Nevertheless, a secret arrangement of this kind is not as absurd as it 

may sound. There is no question that the Rothschilds were quite 

capable of such a clandestine relationship and, in fact, this is exactly 

the kind of deception for which they had become famous. Furthermore, 

there was ample reason for them to do so. A strong anti- 

Semitic and anti-Rothschild sentiment had grown up in Europe and 

the United States, and the family often found it to its advantage to 

work through agents rather than to deal directly. Derek Wilson tells 

us: "The name 'Rothschild' was, thus, beginning to be heard in 

places far removed from sophisticated London and Paris. But the 

connection with the great bankers was sometimes tenuous.'" 

That tenuous connection was precisely the role to be played by 

August Belmont in the United States, and the anti-Semitism he 

found there was undoubtedly the reason he changed his name from 

Schoenberg to Belmont upon landing in New York in 1837. Prior to 

that, the Rothschild agent had been the firm of J.L. and S.I. Joseph & 

Company, about as American sounding as one can get. It was not 

long, however, before the Belmont-Rothschild connection became 

common knowledge, and the ploy ceased to be effective. 

In 1848, the family decided to send Alphonse Rothschild to the 

United States to check on Belmont's operations and to evaluate the 

possibility of replacing him with a direct Rothschild representative, 

perhaps Alphonse himself. After an extended visit, he wrote home: 

In a few years from now America will have attracted to itself the 

greater part of trade with China and the Indies and will be enthroned 

between the two oceans.... The country possesses such elements of 

prosperity that one would have to be blind not to recognize them. ... I 

have no hesitation in saying that a Rothschild house, and not just an 

agency, should be established in America.... Today we are presented 

with a fine opportunity. Later on, difficulties will of necessity arise as 

a result of competition from all sides. 

1. Eustace Mullins, Secrets of the Federal Reserve (Virginia: Bankers Research 

Institute, 1983), p. 49. 


3. B. Gille, Histoire de la Maison Rothschild, Vol. 1, 1965-1967, p. 581, cited by Derek 

Wilson, p. 181. 


Some historians have expressed amazement over the fact that 

khe recommendation was never acted upon. Wilson says: "This was 

the greatest opportunity the Rothschilds ever lost." Those with a 

more skeptical bent are tempted to wonder if the opportunity really 

was lost or if it was merely taken in a more indirect fashion. It is 

significant that, precisely at this time, George Peabody was making 

a name for himself in London and had established a close relation- 

\ 

ship with Nathan Rothschild. Is it possible that the Peabody firm 

was given the nod from the Rothschild consortium to represent 

them in America? And is it possible that the plan included allowing 

Belmont to operate as a known Rothschild agent while using 

Peabody & Company as an unknown agent, thus, providing their 

own competition? 

John Moody answers: "The Rothschilds were content to remain 

a close ally of Morgan rather than a competitor as far as the 

American field was concerned." Gabriel Kolko says: "Morgan's 

[activities in 1895-1896 in selling U.S. gold bonds in Europe were 

based on his alliance with the House of Rothschild." Sereno Pratt 

says: "These houses may, like J.P. Morgan & Company . . . represent 

here the great firms and institutions of Europe, just as August 

Belmont & Company have long represented the Rothschilds." And 

George Wheeler writes: "Part of the reality of the day was an ugly 

resurgence of anti-Semitism.... Someone was needed as a cover. 

Who better than J. 

Pierpont Morgan, a solid, Protestant exemplar of 

capitalism able to trace his family back to pre-Revolutionary 

times?" 5 

RISE OF THE HOUSE OF MORGAN 

With these considerations as background, the meteoric rise of 

Morgan's star over London and Wall Street can be readily understood. 

It is no longer surprising, for example, that Peabody & 

Company was the sole American investment firm to receive a 

gigantic loan from the Bank of England during the U.S. panic of 

1857, a loan which not only saved it from sinking, but made it 


|- Moody, p. 27. 

3. Kolko, Triumph, p. 142. 

4. Sereno S. Pratt, The Work of Wall Street (New York: D. Appleton, 1916; rpt. New 

York: Arno Press, 1975), p. 349. 

5. Wheeler, pp. 17-18,42.


possible to seize and salvage many other ships that were then capsized 

on Wall Street. 

Peabody had become active in the business of discounting 

acceptances, which is banker language for insuring commercial 

loans issued for the purchase of goods. This is how it works: The 

seller issues a bill with a stipulation that he must be paid at a future 

date, usually ninety days. When the buyer receives the bill, his bank 

writes the word "accepted" across the face of it and adds the signature 

of an officer, making it 

a legally binding contract. In other 

words, the bank becomes a co-signer on the buyer's credit and guarantees 

payment even if the buyer should default. 

Naturally, there is a price for this guarantee. That price is stated 

as a percentage of the total bill and it is either added to the amount 

paid by the buyer or deducted from the amount received by the 

seller. Actually there is a fee paid at both ends of the transaction, one 

to the seller's bank which receives the acceptance and pays out the 

money, and one to the issuing bank which assumes the liability of 

guaranteeing payment. The sale is said to be "discounted" by the 

amount paid to the banks. And so it was that Peabody & Company 

had been active in the business of discounting acceptances, primarily 

between sellers in England and buyers in the United States. 

MORGAN AND THE PANIC OF 1857 

In the Wall Street panic of 1857, many U.S. buyers were unable 

to pay their bills, and Peabody and Morgan were expected to make 

good on their guarantees. Naturally, they didn't have the money, 

and the firm was facing certain bankruptcy unless the money could 

be obtained from somewhere. Stanley Jackson provides the details: 

The slump was catastrophic for Peabody & Co. It suddenly found 

itself committed to acceptances of £2 million and with no hope of 

discharging even part of a stockpile of depreciating bonds on New 

York brokers and bankers, themselves now desperately short of ready 

funds. The firm was soon paying out thousands of pounds a day. 

Without raising a large temporary loan the partners would be forced 

to suspend business altogether. 1 

Ron Chernow, in The House of Morgan, says: "Rumors raced 

through London that George Peabody and Company was about to 

fail, a prospect heartily relished by rivals.... The major London 

1. Jackson, p. 56. 


houses told Morgan they would bail out the firm—but only if 

Peabody shut down the bank within a year." Jackson continues the 

narrative: 

The clouds lifted dramatically when the Bank of England 

announced a loan to Peabody's of £800,000, at very reasonable interest, 

with the promise of further funds up to a million sterling if and when 

required. It was a remarkable vote of confidence as Thomas Hankey 

[governor of the Bank of England] had already rejected similar appeals 

from various American firms who did not measure up to his 

standards.... Peabody & Company recovered almost overnight and 

indeed hoisted its turnover above pre-slump levels. 

With an almost unlimited access to cash and credit backed by 

the Bank of England, Peabody and Morgan were able to wade hip 

deep through the depreciated stocks and bonds that were sold to 

them at sacrifice prices on Wall Street. Within only a few years, 

when sanity had been restored to American markets, the assets of 

the firm had grown to gigantic proportions. 

This event tells us a great deal about relationships. If 

Rothschilds truly had been competitors, they would have seized 

upon this opportunity and used their great influence within the 

Bank of England and the other investment houses in London to 

squeeze out Peabody, not to assist him. The Barings, in particular, 

were already trying to accomplish exactly that. The Rothschilds 

must have believed that a successful Peabody firm ultimately 

would be in their own best interest. 

ANTI-SEMITISM WAS PROFITABLE 

In later years, Jack Morgan Q.P., Jr.) would assume the role of a 

staunch anti-Semite, and this undoubtedly strengthened his hand at 

dealing with American investors and borrowers who were loath to 

have anything to do with Jewish bankers. That, of course, included 

officials of the U.S. Treasury. It was particularly helpful during the 

1896 rescue of the federal government from a decline in its gold 

reserves. Fearing that it would not be able to honor its promise to 

exchange paper money for gold coins, the government was forced 

to borrow $62 million in gold. The House of Rothschild was an 

obvious source for such a loan, but the Treasury wanted to avoid an 

1 Chernow, . 

p 1 1 

2- Jackson, pp. 56-57. 

3. Josephson, p. 60. 

the

418 THE CREATURE FROM JEKYLL ISLAND THE LONDON CONNECTION 419 

anti-Semitic backlash. Everything fell into place, however, when 

Morgan and Company became the primary lender, with Rothschild 

apparently demoted to the role of a mere participant. Wheeler 

writes: 

The consummate politicians of the Cleveland administration ... 

were certainly aware of the dangers inherent in promoting a rescue 

effort for the United States Treasury that would be financed by those 

archetypes of "international Jewish financiers/' the Rothschilds. . 

During these developments, Pierpont Morgan took no direct part 

in the salvage effort. Up to this point it looked as if the aging 

financier—he would be fifty-eight in two months—would be merely 

one among many in this and whatever subsequent bond arrangements 

would be necessary. It seemed as though he would move on into old 

age with little more to round out his obituary than his awkward 

attempt to profiteer on the sale of rifles at the start of the Civil War, his 

minor shorting of the Union in gold trading toward the close, and a 

bold but largely unsuccessful move in the 1880s to impose an eastern 

capitalist cease-fire on the country's warring railroads. 

But there were steps being taken even now to bring him out of the 

financial backwaters—and they were not being taken by Pierpont 

Morgan himself. The first suggestion of his name for a role in the 

recharging of the reserve originated with the London branch of the 

House of Rothschild. 

The apparent anti-Semitism of J. P. Morgan, Jr., was again 

extremely profitable during World War 1, when it was widely publicized 

that the Kaiser was funded by German-Jew bankers. To deal 

with the Morgan group, therefore, as opposed to Kuhn Loeb, for 

example, was in some circles almost a point of national patriotism. 

When J. P. Morgan, Sr., died in 1913, people were shocked to 

learn that his estate was valued at only $68 million, a paltry sum 

compared to the fortunes held by the Vanderbilts, Astors, and 

Rockefellers. It was even more unbelievable when Jack Morgan 

died in 1943 and left an estate valued at only $16 million. A small 

amount had been transferred to members of their families prior to 

their deaths, but that did not account for the vast fortunes which 

they visibly controlled during their lives. Surely, there had been a 

bookkeeping sleight-of-hand. On the other hand, it may have been 

true. When Alphonse Rothschild died in Paris in 1905, it was revealed 

that his estate contained $60 million in American securities. 

1. Wheeler, pp. 16-17. 

. 

The Rothschilds in Britain undoubtedly held an equally large bloc. 

Furthermore, many of these securities were handled through the 

House of Morgan. The possibilities are obvious that a major portion 

of the wealth and power of the Morgan firm was, and always 

had been, merely the wealth and power of the Rothschilds who had 

raised it up in the beginning and who sustained it through its entire 

existence. 

How much of Morgan's apparent anti-Semitism was real and 

how much may have been a pragmatic guise is, in the final analysis, 

of little importance, and we should not give unwarranted emphasis 

to it 

here. Regardless of one's interpretation of the nature of the 

relationship between the Houses of Morgan and Rothschild, the fact 

remains that it was close, it was ongoing, and it was profitable to 

both. If Morgan truly did harbor feelings of anti-Semitism, neither 

he nor the Rothschilds ever allowed them to get in the way of their 

business. 

To put the London connection into proper perspective, it will be 

necessary once again to abandon a strict chronological sequence of 

events and jump ahead to the year 1924. So let us put our cast of 

characters on hold for a moment and, before allowing them to act 

out the drama of creating the Federal Reserve System, we shall pick 

up the storyline eleven years after that event had already taken 

place. 

ENGLAND FACES A DILEMMA 

At the end of World War I, Britain faced an economic dilemma. 

She had abandoned the gold standard early in the war in order to 

remove all limits from the creation of fiat money, and the result had 

been extreme inflation. But now she wanted to regain her former 

position of power and prestige in the world's financial markets and 

decided that, to accomplish this, it would be necessary to return to 

the gold standard. It was decided, further, to set the exchange value 

of the pound sterling (the British monetary unit) at exactly $4.86 in 

U.S. currency, which was approximately what it had been before the 

war began. 

To say that she wanted to return to the gold standard actually is 

misleading. It was not a pure standard in which every unit of money 

was totally backed by a stated weight of gold. Rather, it was a 

1. See "Head of Rothschilds' Paris House Is Dead/' The New York Times, May 27, 

1905, p. 9.


fractional gold standard in which only a certain fraction of all 

monetary units were so backed. But, even that was much to be desired 

over no backing whatsoever for three reasons. First, it created 

greater consumer confidence in the money system because of the 

implied promise to redeem all currency in gold—even though such 

promises are always broken when based on a fractional-reserve. 

Secondly, it provided an efficient means of settling financial accounts 

between nations, gold always being the international medium 

of choice. Thirdly, it applied some braking action to the 

production of fiat money, thus, providing a certain degree of restraint 

to inflation and the boom-bust cycle. 

The decision to return to a fractional gold standard, therefore, 

while it left much to be desired, was still a step in the right direction. 

But there were two serious problems with the plan. The first was 

that the exchange value of gold can never be decided by political 

decree. It will always be determined by the interplay of supply and 

demand within the marketplace. Trying to fix the number of dollars 

which people will be willing to exchange for a pound sterling was 

like trying to legislate how many baseball cards a schoolboy will 

give for a purple agate. The international currency market is like a 

huge auction. If the auctioneer sets the opening bid too high, there 

will be no takers—which is exactly what happened to the pound. 

The other problem was that, during the war, England had 

adopted a massive welfare program and a strong network of labor 

unions. The reason this was a problem was that the only way to 

make the pound acceptable in international trade was to allow its 

value to drop to a competitive and realistic level, and that would 

have meant, not only a drastic reduction in welfare benefits, but also 

a general lowering of prices—including the price of labor which is 

called wages. Politicians were quite willing to allow prices of commodities 

to move downward, but they did not have the courage to 

take any action which would reduce either welfare benefits or 

wages. To the contrary, they continued to bid for votes with promises 

of still more socialism and easy credit. Prices continued to rise. 

1 . The government hedged even on this provision. Only bars of gold bullion were 

available for redemption, not coins. This insured that gold would not circulate as 

money and that it would be used almost exclusively for large-scale international 

transactions. 

the 


ENGLAND IN DEPRESSION 

With the value of the pound set artificially high in order to sustain 

prices, wages, and profit levels, the cost of British exports also 

became high, and they ceased to be competitive in world markets. 

With exports in decline, the amount of money coming into the country 

also declined. England became a debtor nation, which means 

that her payments to other countries were larger than her income 

from those countries. 

As pointed out in chapter five, if 

an individual spends more 

than his income, he must either increase his income, dip into savings, 

sell off assets, create counterfeit, or borrow. The same is true of 

nations. England had already borrowed to the limit of her credit and 

was rapidly exhausting her savings in order to continue purchasing 

foreign goods to sustain the high standard of living to which she 

had grown accustomed. She couldn't counterfeit because payments 

for these imports had to be settled in gold, which meant that, as her 

national savings were spent, her gold supply moved out of the 

country. The handwriting was on the wall. If this process continued, 

the nation soon would be broke. It was a situation, incidentally, 

which was amazingly parallel to what has plagued the United 

States since the end of Word War II, and for mostly the same reasons. 

By March of 1919, England's trade was so depressed that she 

had no choice but to let the value of the pound "float," which means 

to seek its own level in response to supply and demand. Within a 

year it had dropped to $3.21, a loss of thirty-four per cent. Since the 

American dollar was the de facto world monetary standard at that 

time, receiving fewer dollars for each pound sterling meant that the 

pound was valued lower in all the markets of the world. The result 

was that the price Britishers had to pay for imported goods was 

becoming higher while the price she received for the export of her 

own goods was becoming lower. The British economy was, not only 

badly anemic, it was experiencing a monetary hangover from the 

vast inflation of World War I. In other words, it was undergoing a 

painful but, in the long run, healthy recovery and a return to reality. 

Such a condition was intolerable to the monetary and political 

Pcientists who were determined to find a quick and painless remedy 

which would allow the binge to continue. Several emergency 

therapies were administered. The first was to use the Financial


Committee of the League of Nations—which England dominated 

to require all the other European nations to follow similar inflationary 

monetary policies. They were also required to establish what 

was called the "gold exchange standard," a scheme whereby all 

countries based their currency, not on gold, but on the pound sterling. 

In that way, they could all inflate together without causing a 

disruptive flow of gold from one to the other, and England would 

act as the regulator and guarantor of the system. In other words, 

England used the power of her position within the League of Nations 

to establish the Bank of England as a master central bank for all 

the other central banks of Europe. It was the prototype for what the 

Cabal now is doing with Federal Reserve and the World Bank 

within the framework of the United Nations. 

PROBLEM OF AMERICAN PROSPERITY 

Europe was well in hand, but that still left the United States to be 

controlled. America had also inflated during the war but not nearly 

as much. She also had a fractional gold standard, but the stockpile of 

gold was very large and still growing. As long as America continued 

to exist as the producer of so many commodities that England 

needed for import, and as long as the value of the dollar continued 

to be high, the anemia of the pound sterling would continue. 

The therapy chosen for this problem was simple. Perform a 

monetary transfusion from a healthy patient to the unhealthy one. 

All the London financiers had to do was find a large and robust 

specimen who, without asking too many questions, would be willing 

to become the donor. The specimen selected, of course, was 

Uncle Sam himself. It was the prototype of the transfer mechanism, 

previously described, which has been the life support keeping alive 

the moribund Communist and Socialist countries since World War 

II. 

There are several ways the life blood of one nation can be transfused 

to another. The most direct method, of course, is to make an 

outright gift, such as the bizarre American ritual called foreign aid. 

Another is to make a gift disguised as something else, such as needlessly 

stationing military bases abroad for the sole purpose of bolstering 

the foreign economy, or granting a loan to a foreign 

1. For an overview of the foregoing developments, see "The Federal Reserve as A 

Cartelization Device/' by Murray N. Rothbard, in Money in Crisis, Barry N. Siegei 

ed. (New York: Ballinger, 1984), pp. 115-17. 


government at below market rates or—worse—with the full expectation 

that the loan will never be repaid. But the third way is the 

most ingenious of them all: to have one nation deliberately inflate its 

currency at a rate greater than the other nation so that real purchasing 

power, in terms of international trade, moves from the more inflating 

to the less inflating nation. This is a method truly worthy of 

the monetary scientists. It is so subtle and so sophisticated that not 

one in a thousand would even think of it, much less object to it. It 

was, therefore, the ideal method chosen in 1925 to benefit England 

at the expense of America. As Professor Rothbard observed: 

In short, the American public was nominated to suffer the burdens 

of inflation and subsequent collapse [the crash of 1929] in order to 

maintain the British government and the British trade union 

movement in the style to which they insisted on becoming 

accustomed. 

° 

At the inception of the Federal Reserve System, there had been a 

brief struggle for power but, within a few years, the contest was 

decisively won by the head of the New York Bank, Benjamin Strong. 

Strong, it will be recalled, previously had been head of Morgan's 

Bankers Trust Company and was one of the seven participants at 

the secret meeting on Jekyll Island. Professor Quigley reminds us 

that "Strong owed his career to the favor of the Morgan bank. ... He 

became Governor of the Federal Reserve Bank of New York as the 

joint nominee of Morgan and Kuhn, Loeb and Company." 2 

Strong was the ideal choice for the cartel. Not the least of his 

qualifications was his alliance with the financial powers of London. 

When Montagu Norman was made the Governor of the Bank of 

England in 1920, there began a close personal relationship between 

the two central bankers which lasted until Strong's sudden death in 

1928. 

Norman was considered by many to be eccentric if not mentally 

unbalanced. Quigley says: 

Norman was a strange man whose mental outlook was one of 

successfully suppressed hysteria or even paranoia. He had no use for 

government and feared democracy. Both of these seemed to him to be 

threats to private banking, and thus to all that was proper and 

[ 

precious in human life.... When he rebuilt the Bank of England, he 

1 Rothbard, Crisis, pp. 131-32. 

2 

- 

Quigley, Tragedy, p. 326.


constructed it 

as a fortress prepared to defend itself against any 

popular revolt, with the sacred gold reserves hidden in deep vaults 

below the level of underground waters which could be released to 

cover them by pressing a button on the governor's desk. For much of 

his life, Norman rushed about the world by fast steamship, covering 

tens of thousands of miles each year, often travelling incognito, 

concealed by a black slouch hat and a long black cloak, under the 

assumed name of "Professor Skinner."... 

Norman had a devoted colleague in Benjamin Strong.,,. In the 

1920s, they were determined to use the financial power of Britain and 

of the United States to force all the major countries of the world to go 

on the gold standard [with an artificial value set for the benefit of 

England] and to operate it through central banks free from all political 

control, with all questions of international finance to be settled by 

agreements by such central banks without interference from 

governments. 

Strong and Norman spent many holidays together, sometimes 

in Bar Harbor, Maine, but usually in Southern France, and they 

crisscrossed the Atlantic on numerous other occasions to consult 

with each other on their plan for controlling the world economy. 

Lester Chandler tells us: 'Their associations were so frequent and 

prolonged and their collaboration so close that it is still impossible 

to determine accurately their relative roles in developing some of 

the ideas and projects that they shared." 

The Bank of England provided 

Strong with an office and a private secretary during his visits, 

and the two men kept in close contact with each other through the 

weekly exchange of private cables. All of these meetings and communiques 

were kept in strict secrecy. When their frequent visits 

drew inquiries from the press, the standard reply was that they 

were just friends getting together for recreation or informal chats. 

By 1926, the heads of the central banks of France and Germany were 

occasionally included in their meetings which, according to 

Norman's biographer, were "more secret than any ever held by 

Royal Arch Masons or by any Rosicrucian Order/ 

1. Quigley, Tragedy, p. 326. 

2. Lester V. Chandler, Benjamin Strong, Central Banker (Washington, D.C.: Brookings 

Institution, 1958, reprinted by Arno Press, A New York Times Company, 1978), 

p. 259. 

3. John Hargrave, Montagu Norman (New York: Greystone Press, 1942), p. 108. 

SECRET MEETING OF 1927 

The culmination of these discussions took place at a secret meeting 

in 1927 at which it was agreed that the financial lifeblood of the 

American people would be donated for a massive transfusion to 

Great Britain. Galbraith sets the scene: 

On July 1, 1927, the Maureiania arrived in New York with two 

notable passengers, Montagu Norman, Governor of the Bank of 

England, and Hjalmar Schacht, head of the German Reichsbank.. . . The 

secrecy covering the visit was extreme and to a degree ostentatious. 

The names of neither of the great bankers appeared on the passenger 

list. Neither, on arriving, met with the press.... 

In New York the two men were joined by Charles Rist, the Deputy 

Governor of the Banque de France, and they went into conference with 

Benjamin Strong, the Governor of the Federal Reserve Bank of New 

York.... 

The principle, or in any case the ultimately important, subject of 

discussion was the persistently weak reserve position of the Bank of 

England. This, the bankers thought, could be helped if the Federal 

Reserve System would ease interest rates, encourage lending. Holders 

of gold would then seek the higher returns from keeping their metal in 

London. And, in time, higher prices in the United States would ease 

the competitive position of British industry and labor. 1 

Galbraith speaks with soft phrases to cushion a harsh reality. 

What he is saying is that the purpose of the meeting was to finalize 

a plan whereby the Governor of the Federal Reserve System was to 

deliberately create inflation in the U.S. so that American prices 

would rise, making U.S. goods less competitive in world markets 

and causing American gold to move to the Bank of England. Governor 

Strong needed little convincing. That is precisely what he and 

Norman had planned to do all along and, in fact, he had already 

begun to implement the plan. The purpose of inviting the Germans 

and the French to the meeting was to enlist their agreement to create 

inflation in their countries as well. Schacht and Rist would have no 

part of it and left the meeting early, leaving Strong and Norman to 

work out the final details between them. 

Strong was more concerned about British fortunes than 

American. In a letter written in May of 1924 to Secretary of the 

Treasury Andrew Mellon, he discussed the necessity of lowering 

American interest rates as a step toward money expansion with the 

Galbraith, pp. 174-75.


objective of raising American prices relative to those in Great 

Britain. He acknowledged that the goal was to protect England from 

having to cut back on wages, profits, and welfare. He said: 

At the present time it is probably true that British prices for goods 

internationally dealt in are as a whole, roughly, in the neighborhood of 

10 percent above our prices, and one of the preliminaries to the 

re-establishment of gold payment by Great Britain will be to facilitate 

a gradual readjustment of these price levels before monetary reform is 

undertaken. In other words, this means some small advance in prices 

here and possibly some small decline in their prices.. . 

The burden of this readjustment must fall more largely upon us 

than upon them. It will be difficult politically and socially for the 

British Government and the Bank of England to face a price 

liquidation in England ... in face of the fact that trade is poor and they 

have over a million unemployed people receiving government aid. 

BRINGING DOWN THE DOLLAR 

The Mandrake Mechanism of the Federal Reserve went into 

high gear on behalf of the Bank of England in 1924, several years 

before the historic meeting between Strong, Norman, and Rist. 

There were two great surges of monetary expansion. The first came 

with the monetization of $492 million in bonds plus almost twice as 

much in banker's acceptances. The second burst of inflation came in 

the latter half of 1927, immediately following the secret meeting 

between Strong, Norman, Schacht, and Rist. It involved the funding 

of $225 million in government bonds plus $220 million in banker's 

acceptances, for a total increase in bank reserves of $445 million. At 

the same time, the rediscount rate to member banks (the interest 

rate they pay to borrow from the Fed) was lowered from 4 to 3.5 per 

cent, making it 

easier for those banks to acquire additional 

"reserves" out of which they could create even more fiat dollars- 

The amount created on top of that by the commercial banks is about 

five and a-half times the amount created by the Fed, whic±i means a 

total money flood in excess of $10 billion in just six years. 

L Chandler, pp. 282-84. i 

2. Approximately $1,328,000,000 in the first burst, including bothbonds ana 

acceptances, plus"$445,000,000 in the second burst equals 

S^^^Jg 

amount multiplied by 5.5 equals $9,751,500,000. Add the original $1,773,000,000 

used as a base, and the total is $11,524,500,000. This estimate is reasonably close to 

the figure of $10,661,000,000 published by the Fed itself, which represents the 

growth in total deposits and currency in circulation during that period. See Depc* 

its and Currency," p. 34. 


Throughout this period, the demand by the System for government 

bonds and acceptances pushed interest rates down. As anticipated, 

people with gold then preferred to send it to London where 

it could earn a higher yield, and America's gold supply began to 

move abroad. Furthermore, as inflation began to eat its way into the 

purchasing power of the dollar, the prices of American-made goods 

began to rise in world markets making them less competitive; U.S. 

exports began to decline; unemployment began to rise; low interest 

rates and easy credit led to speculation in the securities markets; 

and the system lunged full speed ahead toward the Great Crash of 

1929. But that part of the story must wait for another chapter. 

The technician who actually drafted the final version of the 

Federal Reserve Act was H. Parker Willis. After the System was created, 

he was appointed as First Secretary of the Board of Governors. 

By 1929, he had become disillusioned with the cartel and, in an article 

published in The North American Review, he wrote: 

In the autumn of 1926 a group of bankers, among whom was one 

with a world famous name, were sitting at a table in a Washington 

hotel. One of them raised the question whether the low discount rates 

of the System were not likely to encourage speculation. "Yes," replied 

the conspicuous figure referred to, "they will, but that cannot be 

helped. It is the price we must pay for helping Europe." 

There can be little doubt that the banker in question was J.P. 

(Jack) Morgan, Jr. It was Jack who was imbued with English 

tradition from the earliest age, whose financial empire had its roots 

in London, whose family business was saved by the Bank of 

England, who spent six months out of every year of his later life as 

a resident of England, who had openly insisted that his junior partners 

demonstrate a "loyalty to Britain," and who had directed the 

Council on Foreign Relations, the American branch of a secret society 

dedicated to the supremacy of British tradition and political 

1- When an item is in demand, its price goes up. In the case of bonds and other 

interest-bearing debt instruments, the price is expressed in reverse of its interest 

yield. The higher the price, the lower the interest. In other words, the higher the 

price, the more one has to pay to obtain the same dollar return in interest. Therefore, 

when the Fed creates an artificial demand for bonds or commercial paper, such as 

acceptances, the interest yield on these items goes down, which makes them more 

costly as an investment. 

2 - 

"The Failure of the Federal Reserve," by H. Parker Willis, The North American 

Revieiv, May, 1929, p. 553. 

3- 

Chernow, p. 167.


power. It is only with that background that one can fully appreciate 

Reunion with her American children is the only sure way to 

the willingness to sacrifice American interests. Indeed, "it is the 

prevent continued decline.... Whatever obstructs reunion I oppose; 

whatever promotes reunion I favor. I judge all political questions from 

this standpoint... 

The Parliament of Man and the Federation of the World have 

already been hailed by the poet, and these mean a step much farther in 

advance of the proposed reunion of Britain and America.... I say that 

as surely as the sun in the heavens once shone upon Britain and 

Our policy of the last four years, up to this January, has been 

America united, so surely is it one morning to rise, shine upon, and 

effective in accomplishing the purpose for which it was designed. It 

greet again the reunited state, "The British-American Union/' 

has enabled monetary reorganization to be completed in Europe, 

which otherwise would have been impossible. It was undertaken with SUMMARY 

the well recognized hazard that we were liable to encounter a big 

After the Civil War, America experienced a series of expansions 

speculation and some expansion of credit. . . 

Our course was perfectly 

and contractions of the money supply leading directly to economic 

obvious. We had to undertake it. The conditions permitted it, and the 

booms and busts. This was the result of the creation of fiat money by 

possibility of damage abroad was at a minimum. 

a banking system which, far from being free and competitive, was a 

Damage abroad? What about damage at home? It is clear that 

half-way house to central banking. Throughout the chaos, one banking 

firm, the House of Morgan, was able to prosper out of the failure 

Strong saw little difference between the two. He was the forerunner 

of the internationalists who have operated the Federal Reserve ever 

of others. Morgan had close ties with the financial structure and culture 

of England and was, in fact, more British than American. 

since. He viewed the United States as but one piece in a complex 

world financial structure, and what was good for the world was 

Events suggest the possibility that Morgan and Company was in 

good for America. And, oh yes, what was good for England was 

concealed partnership with the House of Rothschild throughout 

good for the world! 

most of this period. 

THE BRITISH-AMERICAN UNION 

Benjamin Strong was a Morgan man and was appointed as the 

It is one of the least understood realities of modern history that 

first Governor of the Federal Reserve Bank of New York which rapidly 

assumed dominance over the System. Strong immediately 

many of America's most prominent political and financial figuresthen 

as now—have been willing to sacrifice the best interests of the 

entered into close alliance with Montagu Norman, Governor of the 

United States in order to further their goal of creating a one-world Bank of England, to save the English economy from depression. 

government. The strategy has remained unchanged since the formation 

of Cecil Rhodes' society and its offspring, the Round Table which caused an outflow of gold, a loss of foreign markets, unem- 

This was accomplished by deliberately creating inflation in the U.S. 

Groups. It is to merge the English-speaking nations into a single 

ployment, and speculation in the stock market, all of which were 

political entity, while at the same time creating similar groupings 

factors that propelled America into the crash of 1929 and the great 

for other geopolitical regions. After this is accomplished, all of these 

depression of the 30s. 

groupings are to be amalgamated into a global government, the 

Although not covered in this chapter, it must be remembered 

so-called Parliament of Man. And guess who is planning to control 

that the same forces were responsible for American involvement in 

that government from behind the scenes. 

both world wars to provide the economic and military resources 

This strategy was expressed aptly by Andrew Carnegie in his 

England 

book, Triumphant Democracy. Expressing concern that England was 

needed to survive. Furthermore, the key players in this 

in decline as a world power, he said: 

Andrew Carnegie, Triumphant Democracy (New York: Charles Scribner's Sons, 

1893), pp. 530-49. This is a revised edition of the book which was originally written 

1. Chandler, p. 458. For additional clarification, also see pp. 459-63- *n 1886. Earlier editions do not contain these words. 

price we must pay for helping Europe." 

In spite of the growing signs of crisis in the American economy, 

Morgan's protege, Benjamin Strong, was nonetheless pleased with 

his accomplishment. In a letter written in 1929 to Parker Gilbert, 

who was the American Agent for Reparations, he said:


action were men who were part of the network of a secret society 

established by Cecil Rhodes for the expansion of the British empire. 

Chapter Twenty-One 

COMPETITION IS A SIN 

The story of how the New York investment 

bankers formed a cartel to avoid competition; the 

drafting of proposed legislation to legalize that 

cartel; the strategy to camouflage the true nature 

of the legislation; the failure of the deception and 

the defeat of the bill. 

We have travelled to many points on a large circle of time and 

now are reapproaching the journey to Jekyll Island where this book 

began. 

In the last chapter, we saw how the expansion and contraction 

Of the money supply following the Civil War led to a series of 

booms and busts. We saw how the firm of J.P. Morgan & Company, 

with help from financiers in London, was able to reap great profits 

from both sides of those cycles but particularly from the recessions. 

At that point, we jumped ahead in time to examine how J.P. 

Morgan and other leading American financiers were closely 

aligned with British interests. We also saw how, in the 1920s, the 

American dollar was deliberately weakened by Morgan agents 

within the Federal Reserve System in order to prop up the sagging 

British economy. Let us return now to the point of departure and 

allow our cast to resume playing out that most important prior 

scene: the actual creation of the Federal Reserve System itself. 

HALF-WAY HOUSE TO CENTRAL BANKING 

Historians seeking to justify governmental control of the monetary 

system have claimed that the booms and busts that occurred 

during this period were the result of free and competitive banking. 

As we have seen, however, these destructive cycles were the direct 

result of the creation and then extinguishing of fiat money through 

a system of federally chartered national banks—dominated by a 

handful of firms on Wall Street—which constituted a half-way 

house to central banking. None of these banks were truly free of 

state control nor were they competitive in the traditional sense of

432 THE CREATURE FROM JEKYLL ISLAND COMPETITION IS A SIN 433 

the word. They were in fact subsidized by the government and had 

many monopolistic privileges. From the perspective of bankers on 

Wall Street, however, there was a great deal more to be desired. For 

one thing, America still did not have a "lender of last resort/' That 

is banker language for a full-blown central bank with the power to 

create unlimited amounts of fiat money which can be rushed to the 

aid of any individual bank that is under siege by its depositors 

wanting their money back. Having a lender of last resort is the only 

way a bank can create money out of nothing and still be protected 

from a potential "run" by its customers. In other words, it is the 

means by which the public is forced to pay a hidden tax of inflation 

to cover the shortfall of fractional-reserve banking. That is why the 

so-called virtue of a lender of last resort is taught with great 

reverence today in virtually all academic institutions offering 

degrees in banking and finance. It is one of the means by which the 

system perpetuates itself. 

The banks could now inflate more radically and more in unison 

than before the war but, when they pushed too far and too fast, 

their bank-generated booms still 

collapsed into recessions. While 

this could be highly profitable to the banks, it was also precarious. 

As the American economy expanded in size, the magnitude of the 

booms and busts increased also, and it was becoming more and 

more difficult for firms like Morgan & Company to safely ride out 

the storm. There was a growing dread that the next collapse might 

be more than even they could handle. 

In addition to these concerns was the fact that many state 

banks, mostly in the developing Southern and Western states, had 

elected not to join the national banking system and, consequently, 

had escaped control by the Wall-Street-Washington axis. As the 

population expanded south and westward, much of the nation's 

banking moved likewise, and the new banks were becoming an 

increasing source of competition to the New York power center. By 

1896, the number of non-national banks had grown to sixty-one per 

cent, and they already held fifty-four per cent of the country's total 

banking deposits. By 1913, the year in which the Federal Reserve 

Act was passed, those numbers had swelled to seventy-one per 

cent non-national banks holding fifty-seven per cent of the nation's 

deposits. 1 Something had to be done to stop this movement. 

Additional competition was developing from the trend in 

industry to finance itself from profits rather than borrowed capital. 

Between 1900 and 1910, seventy per cent of American corporate 

growth was funded internally, making industry increasingly independent 

of the banks. What the bankers wanted—and what many 

businessmen wanted also—was a more "flexible" or "elastic" 

money supply which would allow them to create enough of it at 

any point in time so as to be able to drive interest rates downward 

at will. That would make loans to businessmen so attractive they 

would have little choice but to return to the bankers' stable. 

TRUSTS AND CARTELS REPLACE COMPETITION 

One more problem facing Wall Street was the fact that the 

biggest investment houses, such as Morgan & Company and Kuhn, 

Loeb & Company, although they remained as competitors, were by 

this time so large they had ceased doing serious battle against each 

other. The concept of trusts and cartels had dawned in America 

and, to those who already had made it 

to the top, joint ventures, 

market sharing, price fixing, and mergers were far more profitable 

than free-enterprise competition. Ron Chernow explains: 

»Wall Street was snowballing into one big, Morgan-dominated 

institution. In December 1909, Pierpont had bought a majority stake in 

the Equitable Life Assurance Society from Thomas Fortune Ryan. This 

gave him strong influence over America's three biggest insurance 

companies—Mutual Life, Equitable, and New York Life.... His 

Bankers Trust had taken over three other banks. In 1909, he had gained 

control of Guaranty Trust, which through a series of mergers he 

converted into America's largest trust.... The core Money Trust group 

included J.P. Morgan and Company, First National Bank, and 

National City Bank.. . 

Wall Street bankers incestuously swapped seats on each others 

boards. Some banks had so many overlapping directors it was hard to 

separate them.... The banks also shared large equity stakes in each 

other.... 

Why didn't banks just merge instead of carrying out the charade 

of swapping shares and board members? Most were private 

partnerships or closely held banks and could have done so. The 

answer harked back to traditional American antipathy against 

concentrated financial power. The Morgan-First National-National 

City trio feared public retribution if it openly declared its allegiance. 

1. See Kolko, Triumph, p. 140. f Chernow, pp. 152-53.


Interlocking directorates and other forms of hidden control 

were far more safe than open consolidation but they, too, had their 

limitations. For one thing, they could not penetrate the barriers of 

similar competitive groupings. As these combines became larger 

and larger, ways were sought to bring them together at the top 

rather than to capture the corporate entities which comprised them. 

Thus was born the concept of a cartel, a "community of interest" 

among businessmen in the same field, a mechanism for coming 

together as partners at a high level and to reduce or eliminate 

altogether the harsh necessity of competition. 

All cartels, however, have an internal self-destruct mechanism. 

Sooner or later, one of the members inevitably becomes dissatisfied 

with his agreed-upon piece of the pie. He decides to compete once 

again and seeks a greater share of the market. It was quickly 

recognized that the only way to prevent this from happening was 

to use the police power of government to enforce the cartel 

agreement. The procedure called for the passage of laws disguised 

as measures to protect the consumer but which actually worked to 

ensure the elimination of competition. Henry P. Davison, who was 

a Morgan partner, put it bluntly when he told a Congressional 

committee in 1912: '1 would rather have regulation and control 

than free competition/' 

John D Rockefeller was even more to the 

point in one of his often repeated comments: "Competition is a 

sin „2 

This trend was not unique to the banking industry. Ron Paul 

and Lewis Lehrman provide the historical perspective: 

After 1896 and 1900, then, America entered a progressive and 

predominantly Republican era. Compulsory cartelization in the name 

of "progressivism" began to invade every aspect of American 

economic life. The railroads had begun the parade with the formation 

of the ICC in the 1880s, but now field after field was being centralized 

and cartelized in the name of "efficiency," "stability," "progress," and 

the general welfare.... In particular, various big business groups, led 

by the J.P. Morgan interests, often gathered in the National Civic 

Federation and other think tanks and pressure organizations, saw that 

the voluntary cartels and the industrial merger movements of the late 

1 Quoted by Gabriel Kolko, Main Currents in Modern American History (New York: 

Harper & Row, 1976), p.. 13. 

2. Quoted by William Hoffman, David: A Report on a Rockefeller (New York: Lyle 

Stewart, Inc., 1971), p. 29. 

f 

1890s 

COMPETITION IS A SIN 435 

had failed to achieve monopoly prices in industry. Therefore, 

they decided to turn to governments, state and federal, to curb the 

winds of competition and to establish forms of compulsory cartels, in 

the name, of course, of "curbing big business monopoly" and 

advancing the general welfare. 

The challenge no longer was how to overcome one's adversaries, 

but how to keep new ones from entering the field. When John 

D. used his enormous profits from Standard Oil to take control of 

the Chase National Bank, and his 

brother, William, bought the 

National City Bank of New York, Wall Street had yet one more 

gladiator in the financial arena. Morgan found that he had no 

choice except to allow the Rockefellers into the club but, now that 

they were in, they all agreed that the influx of competitors had to be 

stopped. And that was to be the hidden purpose of federal 

legislation and government control. Gabriel Kolko explains: 

The sheer magnitude of many of the mergers, culminating in U.S. 

Steel, soon forced him [Morgan] to modify his stand, though at times 

he would have preferred total control. More important, by 1898 he 

could not ignore the massive power of new financial competitors and 

had to treat them with deference. Standard Oil Company, utilizing 

National City Bank for its investments, had fixed resources 

substantially larger than Morgan's, and by 1899 was ready to move 

into the general economy.... The test came, of course, in the Northern 

Securities battle, which was essentially an expensive draw. Morgan 

and Standard paid deference to each other thereafter, and mutual 

toleration among bankers increased sharply.... A benign armed 

neutrality, rather than positive affection, is as much a reason as any for 

the high number of interlocks among the five major New York 

banking houses. 

Writing in the year 1919, from the perspective of an inside view 

of Wall Street at that time, John Moody completes the picture: 

J- 

This remarkable welding together of great corporate interests 

could not, of course, have been accomplished if the "masters of 

capital" in Wall Street had not themselves during the same period 

become more closely allied. The rivalry of interests which was so 

characteristic during the reorganization period a few years before had 

very largely disappeared. Although the two great groups of financiers, 

represented on the one hand by Morgan and his allies and on the other 

by the Standard Oil forces, were still distinguishable, they were now 

Paul and Lehrman, p. 119. 

2- Kolko, Triumph, pp. 143-44.


working in practical harmony on the basis of a sort of mutual 

"community of interest" of their own. Thus the control of capital and 

credit through banking resources tended to become concentrated in 

the hands of fewer and fewer men.... Before long it could be said, 

indeed, that two rival banking groups no longer existed, but that one 

vast and harmonious banking power had taken their pLace. 

THE ALDRICH-VREELAND ACT 

The monetary contractions of 1879 and 1893 were handled by 

Wall Street fairly easily and without government intervention, but 

the crisis of 1907 pushed their resources close to the abyss. It 

became clear that two changes had to be made: all remnants of 

banking competition now had to be totally eliminated and replaced 

by a national cartel; and far greater sums of fiat money had to be 

made available to the banks to protect them from future runs by 

depositors. There was now no question that Congress would have 

to be brought in as a partner in order to use the power of 

government to accomplish these objectives. Kolko continues: 

The crisis of 1907, on the other hand, found the combined banking 

structure of New York inadequate to meet the challenge, and 

chastened any obstreperous financial powers who thought they might 

build their fortunes independently of the entire banking 

community.... The nation had grown too large, banking had become 

too complex. Wall Street, humbled and almost alone, turned from its 

own resources to the national government. 

The first step in this direction was openly a stop-gap measure. 

In 1908, Congress passed the Aldrich-Vreeland Act which, basically, 

accomplished two objectives. First, it authorized the national 

banks to issue an emergency currency, called script, to substitute 

for regular money when they found themselves unable to pay their 

depositors. Script had been used by the bank clearing houses 

during the panic of 1907 with partial success, but it had been a bold 

experiment with no legal foundation. Now Congress made it quite 

legal and, as Galbraith observed, "The new legislation regularized 

these arrangements. This could be done against the security of 

sundry bonds and commercial loans—these could, in effect, be 

turned into cash without being sold/' 

1. Moody, pp. 117-18, 150 

2. Ko\ko f 

Triumph, p. 144. 

3. This legalized script was used only once—in 1914 at the outbreak of World 

War I. See Galbraith, p. 120. 


The second and perhaps most important feature of the Act was 

to create a National Monetary Commission to study the problems 

of American banking and then make recommendations to Congress 

on how to stabilize the monetary system. The commission 

consisted of nine senators and nine representatives. The Vice- 

Chairman was Representative Edward Vreeland, a banker from the 

Buffalo area. The chairman, of course, was Senator Nelson Aldrich. 

From the start, it was obvious that the Commission was a sham. 

Aldrich conducted virtually a one-man show. The so-called factfinding 

body held no official meetings for almost two years while 

Aldrich toured Europe consulting with the top central bankers of 

England, France, and Germany. Three-hundred thousand tax dollars 

were spent on these junkets, and the only tangible product of 

the Commission's work was thirty-eight massive volumes of the 

history of European banking. None of the members of the Commission 

were ever consulted regarding the official recommendations 

issued by Aldrich in their name. Actually, these were the work of 

Aldrich and six men who were not even members of the Commission, 

and their report was drafted, not in a bare Congressional 

conference room in Washington, but in a plush private hunting 

resort in Georgia. 

And this event finally brings us back to that cold, blustery night 

at the New Jersey railway station where seven men, representing 

one-fourth of the wealth of the world, boarded the Aldrich private 

car for a clandestine journey to Jekyll Island. 

THE JEKYLL ISLAND PLAN 

As summarized in the opening chapter of this book, the 

purpose of that meeting was to work out a plain to achieve five 

primary objectives: 

1. How to stop the growing influence of small, rival banks and to 

insure that control over the nation's financial resources would 

remain in the hands of those present; 

2. How to make the money supply more elastic in order to reverse 

the trend of private capital formation and to recapture the 

industrial loan market; 

3- How to pool the meager reserves of all the nation's banks into 

one large reserve so that at least a few of them could protect


4. How to shift the inevitable losses from the owners of the banks to 

the taxpayers; 

5. How to convince Congress that the scheme was a measure to 

protect the public. 

It was decided that the first two objectives could be achieved 

simply by drafting the proper technical language into a cartel 

agreement and then re-working the vocabulary into legislative 

phraseology. The third and fourth could be achieved by including 

in 

that legislation the establishment of a lender of last resort; in 

other words, a true central bank with the ability to create unlimited 

amounts of fiat money. These were mostly technical matters and, 

although there was some disagreement on a few minor points, 

generally they were content to follow the advice of Paul Warburg, 

the man who had the most experience in these matters and who 

was regarded as the group's theoretician. The fifth objective was 

the critical one, and there was much discussion on how to achieve 

it. 

To convince Congress and the public that the establishment of a 

banking cartel was, somehow, a measure to protect the public, the 

Jekyll Island strategists laid down the following plan of action: 

1. Do not call it a cartel nor even a central bank. 

2. Make it look like a government agency. 

3. Establish regional branches to create the appearance of 

decentralization, not dominated by Wall Street banks. 

4. Begin with a conservative structure including many sound 

banking principles knowing that the provisions can be quietly 

altered or removed in subsequent years. 

5. Use the anger caused by recent panics and bank failures to create 

popular demand for monetary reform. 

6. Offer the Jekyll Island plan as though it were in response to that 

need. 

7. Employ university professors to give the plan the appearance of 

academic approval. 

8. Speak out against the plan to convince the public that Wall Street 

bankers do not want it. 

A CENTRAL BANK BY ANY OTHER NAME 

Americans would never have accepted the Federal Reserve 

System if they had known that it was half cartel and half central 

bank. Even though the concept of government protectionism was 

rapidly gaining acceptance in business, academic, and political 

circles, the idea of cartels, trusts, and restraint of free competition 

was still quite alien to the average voter. And within the halls of 

Congress, any forthright proposal for either a cartel or a central 

bank would have been soundly defeated. Congressman Everis 

Hayes of California warned: "Our people have set their faces like 

steel against a central bank/' 1 Senator John Shafroth of Colorado 

declared: "The Democratic Party is opposed to a central bank." 2 

The monetary scientists on Jekyll Island decided, therefore, to 

devise a name for their new creature which would avoid the word 

bank altogether and which would conjure the image of the federal 

government itself. And to create the deception that there would be 

no concentration of power in the large New York banks, the 

original plan calling for a central bank was replaced by a proposal 

for a network of regional institutions which supposedly would 

share and diffuse that power. 

Nathaniel 

Wright Stephenson, Senator Aldrich's biographer, 

tells us: "Aldrich entered the discussion at Jekyll Island an ardent 

convert to the idea of a central bank. His desire was to transplant 

the system of one of the great European banks, say the Bank of 

England, bodily to America." 3 Galbraith explains further: "It was 

his [Senator Aldrich's] thought to outflank the opposition by 

having not one central bank but many. And the word bank would 

itself be avoided/ 

Frank Vanderlip tells us the regional concept was merely 

window dressing and that the network was always intended to 

operate as one central bank. He said: 'The law as enacted provided 

for twelve banks instead of one,... but the intent of the law was to 

coordinate the twelve through the Federal Reserve Board in 

Washington, so that in effect they would operate as a central 

bank." 5 

If not using the word bank was essential to the Jekyll Island 

plan, avoiding the word cartel was even more so. Yet, the cartel 

nature of the proposed central bank was obvious to any astute 

observer. In an address before the American Bankers Association, 

1- 

Congressional Record, pL 5, 1913, p. 4655. 

2- Congressional Record, pt 6, 1913, p. 6021 

3 - 

Stephenson, p. 378. 

4- 

Galbraith, p. 122. 

5 - 

Vanderlip, 

"From Farm Boy to Financier/' p, 72.


Aldrich laid it out plainly. He said: 'The organization proposed is 

not a bank, but a cooperative union of all the banks of the country 

for definite purposes." Two years later, in a speech before that 

same group of bankers, A. Barton Hepburn of Chase National Bank 

was even more candid. He said: "The measure recognizes and 

adopts the principles of a central bank. Indeed, if it works out as the 

sponsors of the law hope, it will make all incorporated banks 

together joint owners of a central dominating power/' It would be 

difficult to find a better definition of the word cartel than that. 

The plan to structure the Creature conservatively at the start 

and then to remove the safeguards later was the brainchild of Paul 

Warburg. The creation of a powerful Federal Reserve Board was 

also his idea as a means by which the regional branches could be 

absorbed into a central bank with control safely in New York. 

Professor Edwin Seligman, a member of the international banking 

family of J&W Seligman, and head of the Department of Economics 

at Columbia University, explains and praises the plan: 

It was in my study that Mr. Warburg first conceived the idea of 

presenting his views to the public. ... In its fundamental features the 

Federal Reserve Act is the work of Mr. Warburg more than any other 

man in the country.... The existence of a Federal Reserve Board 

creates, in everything but in name, a real central bank. . . Mr. Warburg 

had a practical object in view. ... It was incumbent on him to remember 

that the education of the country must be gradual and that a large part 

of the task was to break down prejudices and remove suspicion. His 

plans therefore contain all sorts of elaborate suggestions designed to 

guard the public against fancied dangers and to persuade the country 

that the general scheme was at all practicable. It was the hope of Mr. 

Warburg that with the lapse of time it may be possible to eliminate 

1. Krooss, Vol. HI, 1969 edition, p. 1202. 

2. Quoted by Kolko, Triumph, p. 235. 

3. Most historians share Seligman's view regarding Warburg's seminal role in the 

creation of the Federal Reserve System. Certain participants in the drama, however, 

apparently eager to capture some of the spotlight of fame for themselves, are in 

vigorous disagreement. For example, William McAdoo, Secretary of the Treasury 

at the time, says: "This assertion is so completely erroneous that it must have 

emanated from ignorance rather than mendacity." See McAdoo, p. 281. Competing 

egos notwithstanding, an objective reading of the record leads to the conclusion 

that, while others no doubt provided great input in the areas of technical drafts and 

political negotiations, the essence of the plan, its overall concept and the rationale that 

was put forward to sell the plan to Congress was essentially the product of 

Warburg's twisted genius. 

J 

from the law not a few clauses which were inserted largely, at his 

suggestion, for educational purposes. 1 

THE ALDRICH BILL 

The first draft of the Jekyll Island plan was submitted to the 

Senate by Nelson Aldrich but, due to the Senator's unexpected 

illness when he returned to Washington, it was actually written by 

Frank Vanderlip and Benjamin Strong. 2 Although it was coauthored 

by Congressman Vreeland, it immediately became 

known as the Aldrich Bill. Vreeland, by his own admission, had 

little to do with it either, but his willingness to be a team player in 

the game of national deception was of great value. Writing in the 

August 25, 1910, issue of The Independent, which incidentally was 

owned by Aldrich himself and was anything but independent, 

Vreeland said: "The bank I propose.... is an ideal method of 

fighting monopoly. It could not possibly itself become a monopoly 

and it would prevent other banks combining into monopolies. With 

earnings limited to four and one-half per cent, there could not be a 

monopoly. 

What an amazing statement. It is brilliantly insidious because of 

the half truths it contains. It is true that monopolies cannot—or at 

least do not-operate at four and one-half per cent interest. But it is 

untrue that the Federal Reserve banks were to be held to that lowly 

rate. It is true that four per cent was the stated amount they would 

earn on the stock purchased in the System, but it is also true that 

the real profits were to be made, not from stock dividends, but 

from the harvesting of interest payments on fiat money. To this was 

to be added the profits made possible from operating on smaller 

safety margins yet still being protected from bankruptcy. Furthermore, 

being on the inside of the nation's central bank would make 

Jhem privy to the important money-making data and decisions 

long before their competitors. The profits that could be derived 

from such an advantage would be equal to or even greater than 

those from the Mandrake Mechanism. It is 

true that the Federal 

Reserve was to be a private institution, but it is certainly not true 

| Edwin Seligman, Proceedings of the Academy of Political Science, Vol IV, No. 4 

(New York: 1914), pp. 3-6. 

2- Vanderlip, "From Farm Boy to Financier," p. 72. 

l„/ A etteṛ ^ste of Banking 

? 

and Currency," by Edward B. Vreeland, The 

'"dependent, August 25, 1910, p. 394.


that this was to mark the disappearance of the government from 

the banking business. In fact, it was just the opposite, because it 

marked the appearance of the government as a partner with private 

bankers and as the enforcer of their cartel agreement. Government 

would now become more deeply involved than ever before in our 

history. 

Half truths and propaganda notwithstanding, the organizational 

structure proposed by the Aldrich Bill was similar in many 

ways to the old Bank of the United States. It was to have the right to 

convert federal debt into money, to loan that money to the 

government, to control the affairs of regional banks, and to be the 

depository of government funds. The dissimilarities were in those 

provisions which gave the Creature more privilege and power than 

the older central bank. The most important of these was the right to 

create the official money of the United States. For the first time in 

our history, the paper notes of a banking institution became legal 

tender, not only for public debts, but for private ones as well. 

Henceforth, anyone refusing to accept these notes would be sent to 

prison. The words "The United States of America" were to appear 

on the face of every note along with the great seal of the United 

States Treasury. And, of course, the signature of the Treasurer 

himself would be printed in a conspicuous location. All of this was 

designed to convince the public that the new institution was surely 

an agency of the government itself. 

TURNING THE OPPOSITION AGAINST ITSELF 

Now that the basic strategy was in place and a specific bill had 

been drafted, the next step was to create popular support for it. 

This was the critical part of the plan and it required the utmost 

finesse. The task actually was made easier by the fact that there was 

a great deal of genuine opposition to the concentration of financial 

power on Wall Street. Two of the most outspoken critics at that 

time were Wisconsin Senator Robert LaFollette and Minnesota 

Congressman Charles Lindbergh. Hardly a week passed without 

one of them delivering a scathing speech against what they called 

"the money trust" which was responsible, they said, 

for deliberately 

creating economic booms and busts in order to reap the 

profits of salvaging foreclosed homes, farms and businesses. If 

anyone doubted that such a trust really existed, their skepticism 

was abruptly terminated when LaFollette publicly charged that the 


entire country was controlled by just fifty men. The monetary 

scientists were not dismayed nor did they even bother to deny it. In 

fact, when George F. Baker, who was a partner of J.P. Morgan, was 

asked by reporters for his reaction to LaFollette's claim, he replied 

that it was totally absurd. He knew from personal knowledge, he 

said, that the number was not more than eight! 1 

The public was, of course, outraged, and the pressure predictably 

mounted for Congress to do something. The monetary scientists 

were fully prepared to turn this reaction to their own 

advantage. The strategy was simple: (1) set up a special Congressional 

committee to investigate the money trust; (2) make sure the 

committee is staffed by friends of the trust itself; and (3) conceal the 

full 

scope of the trust's operation while revealing just enough to 

intensify the public clamor for reform. Once the political climate 

was hot enough, then the Aldrich Bill could be put forward, 

supposedly as the answer to that need. 

This strategy was certainly not new. As Congressman 

Lindbergh explained: 

Ever since the Civil War, Congress has allowed the bankers to 

completely control financial legislation. The membership of the 

Finance Committee in the Senate and the Committee on Banking and 

Currency in the House, has been made up of bankers, their agents and 

attorneys. These committees have controlled the nature of the bills to 

be reported, the extent of them, and the debates that were to be held on 

them when they were being considered in the Senate and the House. 

No one, not on the committee, is recognized ... unless someone 

I 

favorable to the committee has been arranged for. 2 

nHE PUJO COMMITTEE 

The Pujo Committee was a perfect example of this kind of 

chicanery. It was a subcommittee of the House Committee on 

Banking and Currency and it was given the awesome responsibility 

of conducting the famous "Money Trust" investigation of 1912. Its 

chairman was Arsene Pujo of Louisiana who, true to form, was 

regarded by many as a spokesman for the "Oil Trust" The hearings 

dragged on for eight months producing volumes of dry statistics 

and self-serving testimony of the great Wall Street bankers themselves. 

At no time were the financiers asked any questions about 

I MulJins, p. 16. 

2. Lindbergh, p. 76.

1 

It 


their affairs with foreign investment houses. Nor were they asked 

about their response to competition from new banks. There were 

no questions about their plan to protect the speculative banks from 

currency drains; or their motive for wanting artificially low interest 

rates; or their formula for passing on their losses to the taxpayer. 

The public was given the impression that Congress was really 

prying off the lid of scandal and corruption, but the reality was 

more like a fireside chat between old friends. No matter what 

vagaries or absurdities fell from the bankers' lips, it was accepted 

without contest. 

These hearings were conducted largely as a result of the public 

accusations made by Congressmen Lindbergh and Senator 

LaFollette. Yet, when they requested to appear before the Committee, 

both of them were denied access. The only witnesses to testify 

were the bankers themselves and their friends. Kolko tells us: 

Fortunately for the reformers, the Pujo Committee swung into 

high gear in its investigation of the Money Trust during the summer of 

1912 and for eight months frightened the nation with its awesome, if 

inconclusive, statistics on the power of Wall Street over the nation's 

economy.... Five banking firms, the elaborate tables of the committee 

showed, held 341 directorships in 112 corporations with an aggregate 

capitalization of over $22 billion. The evidence seemed conclusive, and 

the nation was suitably frightened into realizing that reform of the 

banking system was urgent—presumably to bring Wall Street under 

control.... 

The orgy of Wall Street was resurrected by the newspapers, who 

quite ignored the fact that the biggest advocates of banking reform 

were the bankers themselves, bankers with a somewhat different view 

of the problem.... Yet it was largely the Pujo hearings that made the 

topic of banking reform a serious one. 

Kolko has touched upon an interesting point. Almost no one 

put any significance to the fact that some of the biggest bankers on 

Wall Street were the first marchers to lead the parade for banking 

reform. The most conspicuous among these was Paul Warburg of 

Kuhn, Loeb & Company who, for seven years prior to passage of 

the Federal Reserve Act, travelled around the country doing 

nothing but giving "reform" speeches and writing scholarly articles 

for the media, including an eleven-part series for The New York 

Times. Spokesmen from the houses of Morgan and Rockefeller 

joined in and made regular appearances before professional and 

political bodies echoing the call 

attention to the unmistakable odor of fish. 

for reform. Yet no one paid any 

ENLISTING THE HELP OF ACADEMIA 

The speeches and articles by big-name bankers were never 

intended to sway the public at large. They served the function of 

putting forth the basic arguments and the technical details which 

were to be the starting point for the work of others who could not 

be accused of having self-serving motives. To carry the message to 

the voters, it was decided that representatives from the world of 

academia should be enlisted to provide the necessary aura of 

respectability and intellectual objectivity. For that purpose, the 

banks contributed a sum of $5 million to a special "educational" 

fund, and much of that money found its way into the environs of 

three universities: Princeton, Harvard, and the University of Chicago, 

all of which had been recipients of large endowments from 

the captains of industry and finance. 

was precisely at this time that the study of "economics" was 

becoming a new and acceptable field, and it was not difficult to find 

talented but slightly hungry professors who, in return for a grant or 

a prestigious appointment, were eager to expound the virtues of 

the Jekyll Island plan. Not only was such academic pursuit 

financially rewarding, it also provided national recognition for 

them as pioneers in the new field of economics. Galbraith says: 

Under Aldrich's direction a score or more of studies of monetary 

institutions in the United States and, more particularly, in other 

countries were commissioned from the emergent economics 

profession. It is at least possible that the reverence in which the Federal 

Reserve System has since been held by economists owes something to 

the circumstance that so many who pioneered in the profession 

participated also in its [the System's] birth. 

The principal accomplishment of the bank's educational fund 

Was to create an organization called the National Citizens' League. 

Although it was entirely financed and controlled by the banks 

under the personal guidance of Paul Warburg, it presented itself 

merely as a group of concerned citizens seeking banking reform. 

The function of the organization was to disseminate hundreds of 


| 

Galbraith, p. 121.


thousands of "educational" pamphlets, to organize letter-writing 

campaigns to Congressmen, to supply quotable material to the 

news media, and in other ways to create the illusion of grass-roots 

support for the JekylJ Island plan. 

Nathaniel Stephenson, in his biography of Nelson Aldrich, 

says: "The league was non-partisan. It was careful to abstain from 

emphasizing Senator Aldrich.... First and last, hundreds of thousands 

of dollars were spent by the league in popularizing financial 

science/' 

The man chosen to head up that effort was an economics 

professor by the name of J. 

Laurence Laughlin. Kolko says that 

"Laughlin, nominally very orthodox in his commitment to laissez 

faire theory, was nevertheless a leading academic advocate of 

banking regulation . . . and was sensitive to the needs of banking as 

well as the realities of politics." Did his appointment bring 

intellectual objectivity to the new organization? Stephenson answers: 

"Professor Laughlin of the University of Chicago was given 

charge of the League's propaganda." To which Congressman 

Lindbergh adds this reminder: "The reader knows that the University 

of Chicago is 

an institution endowed by John D. Rockefeller 

with nearly fifty million dollars. It may truly be said to be the 

Rockefeller University. 

This does not necessarily mean that Laughlin was purchased 

like so many pounds of hamburger and told by Rockefeller what to 

say and do. It doesn't work that way. The professor undoubtedly 

believed in the virtue of the Jekyll Island plan, and the evidence is 

that he pursued his assignment with enthusiastic sincerity. But 

there is no doubt that he was selected for his new post precisely 

because he did support the concept of a partnership between 

banking and government as a healthy substitute for "destructive" 

competition. In other words, if he didn't honestly agree with John 

D. that competition was a sin, he probably never even would have 

been given a professorship in the first place. 

1. Stephenson, pp. 38&-89. 


3. Stephenson, p. 388. 

4. Lindbergh, p. 131. 

5. For an excellent overview of the formation and activities of the League, see 

Kolko, Triumph, pp. 186-228. 


WILSON AND WALL STREET 

Woodrow Wilson was yet another academic who was brought 

into the national spotlight as a result of his views on banking 

reform. It will be recalled from a previous chapter that Wilson's 

name had been put into nomination for President at the Democratic 

national convention largely due to the influence of Col. Edward 

Mandell House. But that was 1912. Ten years prior to that, he was 

relatively unknown. In 1902 he had been elected as the president of 

Princeton University, a position he could not have held without the 

concurrence of the University's benefactors among Wall Street 

bankers. He was particularly close with Andrew Carnegie and had 

become a trustee of the Carnegie Foundation. 

Two of the most generous donors were Cleveland H. Dodge 

and Cyrus McCormick, directors of Rockefeller's National City 

Bank. They were part of that Wall Street elite which the Pujo 

Committee had described as America's "Money Trust" Both men 

had been Wilson's classmates at Princeton University. When Wilson 

returned to Princeton as a professor in 1890, Dodge and 

McCormick were, by reason of their wealth, University trustees, 

and they took it upon themselves to personally advance his career' 

Ferdinand Lundberg, in America's Sixty Families, says this: 

For nearly twenty years before his nomination Woodrow Wilson 

had moved in the shadow of Wall Street.... In 1898 Wilson, his salary 

unsatisfactory, besieged with offers of many university presidencies 

threatened to resign. Dodge and McCormick thereupon constituted 

themselves his financial guardians, and agreed to raise the additional 

informal stipendium that kept him at Princeton. The contributors to 

this private fund were Dodge, McCormick, and Moses Taylor Pyne 

and Percy R. Pyne, of the family that founded the National City Bank 

In 1902 this same group arranged Wilson's election as president of the 

university. 

A grateful Wilson often had spoken in glowing terms about the 

rise of vast corporations and had praised J.R Morgan as a great 

American leader. He also had come to acceptable conclusions about 

the value of a controlled economy. "The old time of individual 

competition is probably gone by," he said. "It may come back; I 

don't know; it will not come back within our time, I dare say." 2 

Lundberg, pp. 114-15. 

Greider, p. 276.


H.S. Kenan tells us the rest of the story: 

Woodrow Wilson, President of Princeton University, was the first 

prominent educator to speak in favor of the Aldrich Plan a gesture 

SSi immediately brought him the Govemorsh.p of New Jersey 

^ 

later the Presidency of the United States. During the panic of 1907 

Wilson declared that: "all this trouble could be averted if we 

appointed a committee of six or seven public-spirited men like J.P. 

Morgan to handle the affairs of our country. 

OPPOSITION TO THE ALDRICH BILL 

One of the disagreements at the Jekyll Island meeting was over 

the name to be attached to the proposed legislation^ Warburg, 

being the master psychologist he was, wanted it to be called the 

National Reserve Bill or the Federal Reserve Bill, something which 

would conjure up the dual images of government and reserves, 

both of which were calculated to be subconsciously appealing. 

Aldrich, on the other hand, acting out of personal ego, insisted that 

his name be attached to the bill. Warburg pointed out that the 

Aldrich name was associated in the minds of the public with Wall 

Street interests, and that would be an unnecessary obstacle to 

achieving their goal. Aldrich said that, since he had been the 

chairman of the National Monetary Commission which was created 

specifically to make recommendations for banking reform, 

people would be confused if his name were not associated with the 

bill The debate, we are told, was long and heated. But, in the end, 

the politician's ego won out over the banker's logic. 

Warburg, of course, was right. Aldrich was well known as a 

Republican spokesman for big business and banking His loyal >es 

were further publicized by recently sponsored tariff bills to protect 

banking reform was an easy target for the opposition 

the tobacco and rubber trusts. The Aldrich name on a bill for 

On December 

15, 

Representatives and took careful aim: 

1911, Congressman Lindbergh rose before the House or 

The Aldrich Plan is the Wall Street Plan. It is a broad challenge to 

the government by the champion of the money trust. It means another 

panic, if necessary, to intimidate the people. Aldr.ch, paid by the 

government to represent the people, proposes a plan for the trustinstead. 

1. HS.Kenan,TheFederalReserveBank (Los Angeles: Noontide Press, 1966),p. 105- 

2. Quoted by H.S. Kenan, p. 118. 


The Aldrich Bill never came to a vote. When the Republicans 

lost control of the House in 1910 and then lost the Senate and the 

Presidency in 1912, any hope there may have been of putting 

through a Republican bill was lost. Aldrich had been voted out of 

the Senate by his constituents, and the ball was now squarely in the 

court of the Democrats and their new president, Woodrow Wilson. 

How this came to pass is an interesting lesson on reality 

politics, and we shall turn to that part of the story next. 

SUMMARY 

Banking in the period immediately prior to passage of the 

Federal Reserve Act was subject to a myriad of controls, regulations, 

subsidies, and privileges at both the federal and state levels. 

Popular history portrays this period as one of unbridled competition 

and free banking. It was, in fact, a half-way house to central 

banking. Wall Street, however, wanted more government participation. 

The New York bankers particularly wanted a "lender of last 

resort" to create unlimited amounts of fiat money for their use in 

the event they were exposed to bank runs or currency drains. They 

also wanted to force all banks to follow the same inadequate 

reserve policies so that more cautious ones would not draw down 

the reserves of the others. An additional objective was to limit the 

growth of new banks in the South and West. 

This was a time of growing enchantment with the idea of trusts 

and cartels. For those who had already made it to the top, 

competition was considered chaotic and wasteful. Wall Street was 

snowballing into two major banking groups: the Morgans and the 

Rockefellers, and even they had largely ceased competing with 

each other in favor of cooperative financial structures. But to keep 

these cartel combines from flying apart, a means of discipline was 

needed to force the participants to abide by the agreements. The 

federal government was brought in as a partner to serve that 

function. 

To sell the plan to Congress, the cartel reality had to be hidden 

and the name "central bank" had to be avoided. The word Federal 

'was chosen to make it sound like it was a government operation; 

the word Reserve was chosen to make it appear financially sound; 

fend the word System (the first drafts used the word Association) was 

chosen to conceal the fact that it was a central bank. A structure of 

12 regional institutions was conceived as a further ploy to create


the illusion of decentralization, but the mechanism was designed 

from the beginning to operate as a central bank closely modeled 

after the Bank of England. 

The first draft of the Federal Reserve Act was called the Aldrich 

Bill and was co-sponsored by Congressman Vreeland, but it was 

not the work of either of these politicians. It was the brainchild of 

banker Paul Warburg and was actually written by bankers Frank 

Vanderlip and Benjamin Strong. 

Aldrich' s name attached to a banking bill was bad strategy, 

because he was known as a Wall Street Senator. His bill was not 

politically acceptable and was never released from committee. The 

groundwork had been done, however, and the time had arrived to 

change labels and political parties. The measure would now 

undergo minor cosmetic surgery and reappear under the sponsorship 

of a politician whose name would be associated in the public 

mind with anti-Wall Street sentiments. 

Chapter Twenty-Two 

THE CREATURE 

SWALLOWS 

CONGRESS 

The second attempt to pass legislation to legalize 

the banking cartel; the bankers 1 selection of 

Woodrow Wilson as a Presidential candidate; 

their strategy to get him elected; the role played by 

Wilson to promote the cartels legislation; the 

final passage of the Federal Reserve Act. 

The election of 1912 was a textbook example of power politics 

and voter deception. The Republican President, William Howard 

Taft, was up for reelection. Like most Republicans of that era, his 

political power was based upon the support of big-business and 

banking interests in the industrial regions. He had been elected to 

his first term in the expectation that he would continue the 

protectionist policies of his predecessor, Teddy Roosevelt, particularly 

in the expansion of cartel markets for sugar, coffee, and fruit 

from Latin America. Once in office, however, he grew more 

restrained in these measures and earned the animosity of many 

powerful Republicans, The ultimate breach occurred when Taft 

refused to support the Aldrich Plan. He objected, not because it 

would create a central bank which would impose government 

control over the economy, but because it would not offer enough 

government control. He recognized that the Jekyll Island formula 

Would place the bankers into the driver's seat with only nominal 

participation by the government. He did not object to the ancient 

partnership between monetary and political scientists, he merely 

Wanted a greater share for the political side. The bankers were not 

adverse to negotiating the balance of power nor were they unwilling 

to make compromises, but what they really needed at this 

juncture was a man in the White House who, instead of being


lukewarm on the plan, could be counted on to become its champion 

and who would use his influence as President to garner 

support from the fence straddlers in Congress. From that moment 

forward, Taft was marked for political extinction. 

This was a period of general prosperity, and Taft was popular 

with the voters as well as with the rank-and-file Party organization 

He had easily won the nomination at the Republican convention, 

and there was little doubt that he could take the presidential 

election as well. Wilson had been put forth as the Democratic 

challenger, but his dry personality and aloof mannerisms had 

failed to arouse sufficient voter interest to make him a serious 

contender. 

THE BULL MOOSE CANDIDATE 

However, when Teddy Roosevelt returned from his latest 

African safari, he was persuaded by Morgan's deputies, George 

Perkins and Frank Munsey, to challenge the President for the 

Party's nomination. When that effort failed, he was then persuaded 

to run against Taft as the "Bull Moose" candidate on the Progressive 

Party ticket. It is unclear what motivated him to accept such a 

proposition, but there is no doubt regarding the intent of his 

backers. They did not expect Roosevelt to win, but, as a former 

Republican President, they knew he would split the Party and, by 

pulling away votes from Taft, put Wilson into the White House. 

Presidential campaigns need money and lots of it. The Republican 

Party was well financed, largely from the same individuals 

who now wanted to see the defeat of its own candidate. It would 

not be possible to cut off this funding without causing too many 

questions. The solution, therefore, was to provide the financial 

resources for all three candidates, with special attention to the needs 

of Wilson and Roosevelt. 

Some historians, while admitting the facts, have scoffed at the 

conclusion that deception was intended. Ron Chernow says: "By 

1924, the House of Morgan was so influential in American politics 

that conspiracy buffs couldn't tell which presidential candidate was 

more beholden to the bank." 1 But one does not have to be a 

conspiracy buff to recognize the evidence of foul play. Ferdinand 

Lundberg tells us: 

1. Chemow, p. 254. 

THE CREATURE SWALLOWS CONGRESS 453 

J.P. Morgan and Company played the leading role in the national 

election of 1912.. . . Roosevelt's preconvention backers were George W. 

Perkins and Frank Munsey. These two, indeed, encouraged Roosevelt 

to contest Taffs nomination.... Munsey functioned in the newspaper 

field for J.P. Morgan and Company—buying, selling, creating, and 

suppressing newspapers in consonance with J.P. Morgan's shifting 

needs.. . . Perkins resigned from J.P. Morgan and Company on January 

1, 1911, to assume a larger political role... 

The suspicion seems justified that the two were not over-anxious 

to have Roosevelt win. The notion that Perkins and Munsey may have 

wanted Wilson to win ... is partly substantiated by the view that 

Perkins put a good deal of cash behind the Wilson campaign through 

Cleveland H. Dodge. Dodge and Perkins financed, to the extent of 

$35,500, the Trenton True American, a newspaper that circulated 

nationally with Wilson propaganda. . . 

Throughout the three-cornered fight, Roosevelt had Munsey and 

George Perkins constantly at his heels, supplying money, going over 

his speeches, bringing people from Wall Street in to help, 

and, in 

general, carrying the entire burden of the campaign against Taft... 

Perkins and J.P. Morgan and Company were the substance of the 

Progressive Party; everything else was trimming.... Munsey 's cash 

contribution to the Progressive Party brought his total political outlay 

for 1912 to $229,255.72. Perkins made their joint contribution more 

than $500,000, and Munsey expended $1,000,000 in cash additionally 

to acquire from Henry Einstein the New York Press so that Roosevelt 

would have a New York City morning newspaper. Perkins and 

Munsey, as the Clapp [Senate Privileges and Election] Committee 

learned from Roosevelt himself, also underwrote the heavy expense of 

Roosevelt's campaign train. In short, most of Roosevelfs campaign 

fund was supplied by the two Morgan hatchet men who were seeking 

Taft's scalp. 

Morgan & Company was not the only banking firm on Wall 

Street to endorse a three-way election as a means of defeating Taft. 

Within the firm of Kuhn, Loeb & Company, Felix Warburg was 

dutifully putting money into the Republican campaign as expected, 

but his brother, Paul Warburg and Jacob Schiff were backing 

Wilson, while yet another partner, Otto Kahn, supported 

Roosevelt. Other prominent Republicans who contributed to the 

Democratic campaign that year were Bernard Baruch, Henry 

Morganthau, and Thomas Fortune Ryan. And the Rockefeller 

1. Lundberg, pp. 106-12. 

2. Kolko, Triumph, pp. 205-11

454 THE CREATURE FROM JEKYLL ISLAND THE CREATURE SWALLOWS CONGRESS 455 

component of the cartel was just as deeply involved. William 

McAdoo, who was Wilson's national campaign vice chairman, says 

that Cleveland Dodge of Rockefeller's National City Bank personally 

contributed $51,30C^-more than one-fourth the total raised 

from all other sources. In McAdoo's words, "He was a Godsend." 1 

Ferdinand Lundberg describes Dodge as "the financial genius 

behind Woodrow Wilson." Continuing, he says: 

Wilson's nomination represented a personal triumph for 

Cleveland H. Dodge, director of the National City Bank, scion of the 

Dodge copper and munitions fortune.... The nomination represented 

no less a triumph for Ryan, Harvey, and J.P. Morgan and Company. 

Sitting with Dodge as co-directors of the National Gty Bank at the 

time were the younger J.P. Morgan, now the head of the [Morgan] 

firm, Jacob Schiff, William Rockefeller, J. 

Ogden Armour, and James 

Stillman. In short, except for George F. Baker, everyone whom the Pujo 

Committee had termed rulers of the "Money Trust" was in this bank. 

And so it 

came to pass that the monetary scientists carefully 

selected their candidate and set about to clear the way for his 

victory. The maneuver was brilliant. Who would suspect that Wall 

Street would support a Democrat, especially when the Party 

platform contained this plank: "We oppose the so-called Aldrich 

Bill or the establishment of a central bank; and . . . 

what is known as 

the money trust." 

What irony it was. The Party of the working man, the Party of 

Thomas Jefferson—formed only a few generations earlier for the 

specific purpose of opposing a central bank—was now cheering a 

new leader who was a political captive of Wall Street bankers and 

who had agreed to the hidden agenda of establishing the Federal 

Reserve System. As George Harvey later boasted, the financiers 

"felt no animosity toward Mr. Wilson for such of his utterances as 

they regarded as radical and menacing to their interests. He had 

simply played the political game." 

William McAdoo, Wilson's national campaign vice chairman, 

destined to become Secretary of the Treasury, saw what was 

happening from a ringside seat He said: 

1. McAdoo, p. 117. 

2. Lundberg, pp. 109, 113. 

3. Quoted by Lundberg, p. 120. 

The major contributions to any candidate's campaign fund are 

made by men who have axes to grind—and the campaign chest is the 

grindstone.... The fact is that there is a serious danger of this country 

becoming a pluto-democracy; that is, a sham republic with the real 

government in the hands of a small clique of enormously wealthy 

men, who speak through their money, and whose influence, even 

today, radiates to every corner of the United States. 

Experience has shown that the most practicable method of getting 

hold of a political party is to furnish it with money in large quantities. 

This brings the big money-giver or givers into close communion with 

the party leaders. Contact and influence do the rest. 

THE MONEY TRUST THEY LOVE TO HATE 

Roosevelt actually had very little interest in the banking issue, 

probably because he didn't understand it Furthermore, in the 

unlikely event the blustery "trust buster" would actually win the 

election, the financiers still had little to fear. In spite of his 

well-publicized stance of opposing big business, his true convictions 

were quite acceptable to Wall Street. As Chernow observed: 

Although the Roosevelt-Morgan relationship is sometimes 

caricatured as that of trust buster versus trust king, it was far more 

complex than that. The public wrangling obscured deeper ideological 

affinities.... Roosevelt saw trusts as natural, organic outgrowths of 

economic development. Stopping them, he said, was like trying to 

dam the Mississippi River. Both TR and Morgan disliked the rugged, 

individualistic economy of the nineteenth century and favored big 

business.. . , In the sparring between Roosevelt and Morgan there was 

always a certain amount of shadow play, a pretense of greater 

animosity than actually existed.... Roosevelt and Morgan were secret 

blood brothers. 

It is not surprising, therefore, as Warburg noted in January, 

1912—ten months before the election—that Teddy had been "fairly 

won over to a favorable consideration of the Aldrich Plan." 

Inner convictions on these issues notwithstanding, both Wilson 

and Roosevelt played their roles to the hilt Privately financed by 

Wall Street's most powerful bankers, they publicly carried a 

flaming crusade against the "Money Trust" from one end of the 

country to the other. Roosevelt bellowed that the "issue of currency 

McAdoo, pp. 165-66. 

2. Chernow, pp. 106-12. 

\ Warburg, Vol. I, p. 78.

, Cabinet, 


should be lodged with the government and be protected from 

domination and manipulation by Wall Street/' 1 

And he quoted 

over and over again the Bull Moose (Progressive Party) platform 

which said: "We are opposed to the so-called Aldrich Currency Bill 

because its provisions would place our currency and credit system 

in private hands/' Meanwhile, at the other end of town, Wilson 

declared: 

There has come about an extraordinary and very sinister 

concentration in the control of business in the country.... The growth 

of our nation, therefore, and all our activities, are in the hands of a few 

men.. . . This money trust, or as it should be more properly called, this 

credit trust ... is no myth. 

Throughout the campaign, Taft was portrayed as the champion 

of big business and Wall Street banks—which, of course, he was. 

But so were Roosevelt and Wilson. The primary difference was that 

Taft, judged by his actual performance in office, was known to be 

such, whereas his opponents could only be judged by their words. 

The outcome of the election was exactly as the strategists had 

anticipated. Wilson won with only forty-two per cent of the 

popular vote, which means, of course, that fifty-eight per cent had 

been cast against him. Had Roosevelt not entered the race, most of 

his votes undoubtedly would have gone to Taft, and Wilson would 

have become a footnote. As Colonel House confided to author 

George Viereck years later, "Wilson was elected by Teddy 

Roosevelt/' 3 

Now that the Creature had moved into the White House, 

passage of the Jekyll Island plan went into its final phase. The last 

bastion of opposition in Congress consisted of the Populist wing of 

the Democratic Party under the 

leadership of William Jennings 

Bryan. The problem with this group was that they had taken their 

campaign platform seriously. They really were opposed to the 

Money Trust. While it may have been a simple matter to pull the 

would not be so easy to fool this 

wool over the eyes of voters, it 

group of experienced politicians. What was needed now was an 

1. Henry S. Commager, ed., Documents of American History (New York: F.S. Cofts 

& Co., 1940), pp. 77-79. 

2. Quoted by Carter Glass, Adventures in Constructive Finance (New York: 

Doubleday, 1927; rpt. Arno Press, a New York Times Co., 1975), p. 78-79. 

3. Viereck, p. 34. 


entirely new bill that, on the surface, would appear to contain 

changes of sufficient magnitude to allow the Bryan wing to change 

its position. The essential features of the plan, however, must not be 

abandoned. And, to coordinate this final strategy, the services of 

someone with great political skill would be essential. Fortunately 

for the planners, there was exactly such a man residing at the White 

House. It was not the President of the United States. It was Edward 

Mandell House. 

THE ROLE OF COLONEL HOUSE 

Colonel House, who had been educated in England and whose 

father represented England's merchant interests in the American 

South, had come into public life through the London Connection. It 

will be recalled from previous chapters that, 

perhaps more than 

|any other person in America, he had helped maneuver the United 

States into World War I on the side of a desperate Britain and, by so 

doing, had also rescued the massive loans to Britain and France 

made by the Morgan interests. Not only had he been responsible 

for Wilson's nomination at the Democratic convention, but had 

become the President's constant companion, his personal adviser, 

and in many respects his political superior. It was through House 

that Wilson was made aware of the wishes of the Money Trust, and 

it was House who guided the President in every aspect of foreign 

and economic policy. An admiring biographer, Arthur Smith, 

writing in the year 1918, says that House "holds a power never 

wielded before in this country by any man out of office, a power 

greater than that of any political boss or Cabinet member." A more 

recent biographer, George Viereck, was not exaggerating when he 

described House as "Chief Magistracy of the Republic," "Superambassador," 

"The pilot who guided the ship." 

said: 

Continuing, he 

For six years two rooms were at his disposal in the North Wing of 

the White House.. .. In work and play their thoughts were one. House 

was the double of Wilson. It was House who made the slate for the 

formulated the first policies of the Administration and 

practically directed the foreign affairs of the United States. We had, 

indeed, two Presidents for one!... 

1 Arthur Smith, The Real Colonel House (New York: George H. Doran Company, 

1918), p. 14. 

$~ Viereck, p. 4.


The Schiffs, the Warburgs, the Kahns, the Rockefellers, the 

Morgans put their faith in House. When the Federal Reserve 

legislation at last assumed definite shape, House was the intermediary 

between the White House and the financiers. 

Daily entries in the personal journal of Colonel House reveal 

the extent to which his office had become the command post for the 

Jekyll Island team. The following sample notations are typical: 

December 19, 1912. I Talked with Paul Warburg over the 

telephone regarding the currency reform. I told of my 

Washington trip and what I had done there to get it in 

working order. 

March 24, 1913. 1 had an engagement with Carter Glass at five. 

We drove, in order not to be interrupted.... I spoke to the 

President about this after dinner and advised that McAdoo 

and I whip the Glass measure into final shape, which he 

could endorse and take to Owen [Chairman of the Senate 

Banking Committee] as his own. 

March 27, 1913. Mr. J.P. Morgan, Ir., and Mr. Denny of his firm, 

came promptly at five. McAdoo came about ten minutes 

afterwards. Morgan had a currency plan already formulated 

and printed. We discussed it at some length. I suggested he 

have it typewritten [so it would not seem too prearranged] 

and sent to us today. 

October 19, 1913. I saw Senator Reed of Missouri in the late 

afternoon and discussed the currency question with him. 

October 19, 1913. Paul Warburg was my first caller, and he came 

to discuss the currency measure.... Senator Murray Crane 

followed Warburg. He has been in touch with Senators 

Weeks and Nelson of the Currency Committee. 

November 17, 1913. Paul Warburg telephoned about his trip to 

Washington. He is much disturbed over the currency 

situation and requested an interview, along with lacob 

Schiff and Cleveland H. Dodge. 

January 21, 1914. After dinner we [Wilson and House] went to 

the President's study as usual and began work on the 

Federal Reserve Board appointments. 

1. Viereck,pp.4,35,37. 

2. Seymour, Vol. I pp. 161-68. 


As far as the banking issue was concerned, Colonel House was 

the President of the United States, and all interested parties knew it. 

Wilson made no pretense at knowledge of banking theory. He said: 

"The greatest embarrassment of my political career has been that 

active duties seem to deprive me of time for careful investigation. I 

seem almost obliged to form conclusions from impressions instead 

of from study.. . . I wish that I had more knowledge, more thorough 

acquaintance, with the matters involved." To which Charles 

Seymour adds: "Colonel House was indefatigable in providing for 

the President the knowledge that he sought. . . The Colonel was the 

unseen guardian angel of the bill," 

DEATH OF THE ALDRICH PLAN 

The first task for the Jekyll Island team was to hold a funeral for 

the Aldrich Plan without actually burying it. Professor Laughlin 

had come to agree with Warburg regarding the inadvisability of 

having Aldrich's name attached to any banking bill, especially now 

that the Democrats were in control of both Congress and the White 

House, and he was anxious to give it a new identity. Writing in the 

periodical Banking Reform, which was the official publication of the 

National Citizens' League, Laughlin said: 

"It is progress that the 

Aldrich plan came and went. It is progress that the people have 

been aroused and interested." The League was now free, he said, to 

"try to help in getting a proper bill adopted by the Democrats," a 

bill that "in non-essentials . . . could be made different from the old 

plan." 3 

It did not take long for the Democrats to bring forth their own 

proposal. In fact, that process had begun even before the election of 

1912. One of the most outspoken critics of the Aldrich plan was the 

Democratic Chairman of the House Banking and Currency Committee, 

Congressman Carter Glass from Virginia. And it was Glass 

1. Seymour, Vol. 1, p. 160. 

2. Ibid. William McAdoo, Wilson's Secretary of the Treasury, was indignant over 

the credit generally given to Paul Warburg for his part in the creation of the Federal 

Reserve because McAdoo felt he should have received the recognition. Later, we 

find Carter Glass similarly piqued over Seymour's interpretation of House's importance. 

Glass' book, Adventures in Constructive Finance, was written primarily to 

show that it was he, not House, who rightfully deserved such glory. But neither 

McAdoo nor Glass were part of the hidden power which is the focus of this study 

and neither had any inkling of who was really calling the shots. 

3. Quoted by Kolko, Triumph, p. 222.

.. 



who was given the responsibility of developing the new plan. By 

monopoly. All of which was correct. What the country needed, 

his own admission, however, he had virtually no technical knowledge 

of banking. To provide that expertise and to actually write the 

which was not written by agents of the Money Trust and which 

Glass said, was an entirely fresh approach, a genuine reform bill 

bill he hired an economics teacher from Washington and Lee 

would truly meet the needs of the common man. That, too, was 

University, Henry Parker Willis. We should not be surprised to 

quite correct. Then he brought forth his own bill, drafted by Willis 

learn that Willis had been a former student and protege of 

and inspired by Laughlin, which in every important detail was 

Professor Laughlin and had been retained by the National Citizens' 

merely the old corpse of the Aldrich Bill pulled from its casket, 

League as a technical writer. Explaining the significance of this 

freshly perfumed, and dressed in a new suit. 

relationship, Kolko 

The Glass Bill was soon reconciled with a similar measure 

says: 

sponsored by Senator Robert L. Owen and it emerged as the 

Throughout the spring of 1912 Willis wrote Laughlin about his 

work for the Glass Committee, his relationship to his superior, and 

Glass-Owen Bill. Although there were initially some minor differences 

between Glass and Owen on the proper degree of govern- 

Washington gossip. The advice of the old professor was much 

revered "When you arrive," he wrote Laughlin concerning a 

ment control over banking, Owen was basically of identical mind to 

memorandum he had written, "I should like to show it to you for such 

Willis and Laughlin. While serving in the Senate, he also was the 

criticisms as occur to you." The student-teacher relationship between 

president of a bank in Oklahoma. Like Aldrich, he had made 

the two men was still prominent ... 

several trips to Europe to study the central banks of England and 

Laughlin, Colonel House, and Glass were to frequently consult 

Germany, 

with major bankers about reform, and provided an importantand 

and these were the models for his legislation. 

continuous bridge for their ideas while bills were being drafted.... 

The less technically minded members of the cartel became 

Colonel House, in addition, was talked to by Frick, Otto Kahn, and 

nervous over the anti-Wall Street rhetoric of the Bill's sponsors. 

others in late February, and the following month also met Vanderlip, 

Warburg, in an attempt to quell their fears and, at the same time, 

J 

P Morgan, Jr., and other bankers to discuss currency reform.... To 

strengthen his private boast that he had been the real author, 

make sure the reform was more to the liking of bankers, a steady 

published a side-by-side comparison of the Aldrich and Glass 

barrage of personal, unobtrusive communications with Glass, House, 

proposals. The analysis showed that, not only were the two bills in 

and Wilson was kept up throughout February and March^... The 

agreement 

[Citizens'] league was fulsome in its praise of Glass, and bankers on all essential provisions, but they even contained 

felt 

greater and greater confidence as Colonel House began visiting Glass 

entire sections that were identical in their wording. He wrote: 

and showing interest in his currency measure.. "Brushing aside, then, the external differences affecting the 'shells/ 

. 

The new President admitted "he knew nothing" about banking we find the 'kernels' of the two systems very closely resembling 

theory or practice. Glass made the same confession to Colonel House 

and related to one another." 

in November, and this vacuum is of the utmost significance. The entire 

It was important for the success of the Glass Bill to create the 

banking reform movement, at all crucial stages, was centralized in the 

hands of a few men who for years were linked, ideologically and 

impression it was in response to the views of a broad cross section 

of the financial community. To this end, Glass and his committee 

personally with one another. 

staged public hearings for the announced purpose of giving 

THE GLASS-OWEN BILL EMERGES 

everyone a chance for input to the process. It was, of course, a 

In his Committee House Report in 1913, Glass objected to the 

sham. The first draft of the Bill had already been completed in 

Aldrich Bill on the following grounds: It lacked government 

secret several months before the hearings were held. And, as was 

control, he said; it concentrated power into the hands of the larger 

customary in such matters, Congressman Lindbergh and other 

New York banks; it opened the door to inflation; it was dishonest in 

witnesses opposing the Jekyll Island plan were not allowed to 

its estimate of cost to the taxpayer; and it established a banking 

'1. Warburg, Vol. I, p. 98. 

1 . Kolko, Triumph, pp. 219-28. 2. Md., p. 41Z


speak. 1 

The hearings were widely reported in the press, and the 

public was given the impression that the favorable testimony was 

truly representative of expert opinion. Kolko summarizes: 

keep the contents of their work 

Although they were careful to 

confidential to aid the passage of any bill that might be agreed upon 

Glass deemed it desirable to hold public hearings on the topic and to 

make sure the course of these hearings was not left to chance... The 

public assumption of the hearing was that no bills had been drafted, 

and Willis' draft was never mentioned, much less revealed.... The 

hearings of Glass' subcommittee in January and February, 1913, were 

nothing less than a love feast. 

BANKERS BECOME DIVIDED 

The public was not the only victim of deception- The bankers 

themselves were also targeted—at least the lesser ones who were 

not part of the Wall Street power center. As early as February, 1911, 

a group of twenty-two of the country's most powerful bankers met 

for three days behind closed doors in Atlantic City to work out a 

strategy for 

getting the smaller banks to support the concept of 

using the government to authorize and maintain their own cartel. 

The objective frankly discussed among those present was that the 

proposed cartel would bring the smaller banks under control of the 

larger ones, but that this fact had to be obscured when presenting it 

to them for endorsement. 

The annual meeting of the American Bankers Association was 

held a few months later, and a resolution endorsing the Aldrich Bill 

was steam rollered through the plenary session, much to the 

dismay of many of those present. Andrew Frame was one of them. 

Representing a group of Western bankers, he testified at the 

hearings of the Glass subcommittee, mentioned previously, and 

described the hoax: 

When that monetary bill was given to the country, it was but a few 

days previous to the meeting of the American Bankers Association in 

New Orleans in 1911. There was not one banker in a hundred who had 

read that bill. We had twelve addresses in favor of it. General Hamby 

of Austin, Texas, wrote a letter to President Watts asking for a hearing 

against the bill. He did not get a very courteous answer. I refused to 

1. Lindbergh, p. 129. 


3. Rothbard, Crisis, p. 101. Also Kolko, Triumph, p. 186. 


vote on it, and a great many other bankers did likewise.. . . They would 

not allow anyone on the program who was not in favor of the bill. 

It is interesting that during Frame's testimony, Congressman 

Glass refrained 

from commenting on the unfairness of allowing 

only one side of an issue to be heard in a public forum. He could 

hardly afford to. That is exactly what he was then doing with his 

own agenda. 

As the Federal Reserve Act moved closer to its birth in the form 

of the Glass-Owen Bill (Owen was the co-sponsor in the Senate), 

both Aldrich and Vanderlip threw themselves into a great public 

display of opposition. No opportunity was overlooked to make a 

statement to the press—or anyone else of public prominence 

expressing their eternal animosity to this monstrous legislation. 

Vanderlip warned against the evils of fiat money and rampant 

inflation. Aldrich charged that the Glass-Owen Bill was inimical to 

sound banking and good government. Vanderlip predicted speculation 

and instability in the stock market. Aldrich sourly complained 

that the bill was "revolutionary in its character" (implying 

Bolshevistic) and "will be the first and most important step toward 

changing our form of government from a democracy to an autocracy." 

THE PRETENSE IS DROPPED 

That all of this was merely high-level showmanship was made 

clear when Vanderlip accepted a debate with Congressman Glass 

before the New York Economic Society on November 13. There 

were eleven hundred bankers and businessmen present, and 

Vanderlip was under pressure to make a good showing before this 

impressive group. The debate was going badly for him and, in a 

moment of desperation, he finally dropped the pretense. "For 

years/ he said, "bankers have been almost the sole advocates of 

just this sort of legislation that it is now hoped we will have, and it 

is unfair to accuse them of being in opposition to sound legislation/' 

Twenty-two years later, when the need for pretense had 

long passed, Vanderlip was even more candid. Writing in the 

I Quoted by Mullins, p. 13. 

2- Aldrich to John A. Sleicher, July 16, 1913; Aldrich to William Howard Taft, 

Oct. 3, 1913, Nelson Aldrich Papers, Library of Congress. 

3- Frank A. Vanderlip, Address Before the Economics Club of New York, November 13, 

1913, (New York: 1913), pp. 6, 11 ff. Also see Glass, pp. 125, 168-76.


THE CREATURE SWALLOWS CONGRESS 

2. pp. 3. Seymour, Vol. I, p. 173, 

465 

Saturday Evening Post, he said: "Although the Aldrich Federal 

the original intent. The goal was to get the bill passed and perfect it 

Reserve Plan was defeated when it bore the name Aldrich, nevertheless 

later. 

its essential points were all contained in the plan that finally 

House and Warburg feared that, if they waited until they had 

was adopted." 

everything they wanted, they would get nothing at all or, worse, 

In his autobiography, Treasury Secretary William McAdoo 

that opponents of a central bank would be able to muster their 

offers this view: 

forces and pass a reform bill of their own; a real one. Willis was 

quick to agree. In a letter to 

Bankers fought the Federal Reserve legislation—and 

his 

every 

former professor, he wrote: "It is 

provision of the Federal Reserve Act—with the tireless energy of men 

much better to take a half a loaf rather than to be absolutely 

fighting a forest fire. They said it was populistic, socialistic, half-baked, 

deprived of a chance of getting any bread whatsoever.... The 

destructive, infantile, badly conceived, and unworkable.. so-called 'progressive' 

. 

element—such as Lindbergh and his supporters—will 

be encouraged to enact dangerous legislation." 1 

Glass 

These interviews with bankers led me to an interesting conclusion. 

1 perceived gradually, through all the haze and smoke of controversy, 

echoed the sentiment. Directing his remarks at those smaller banks 

that the banking world was not really as opposed to the bill as it 

which were resisting domination by the New York banks, he said: 

pretended to be. 

"Unless the conservative bankers of the country are willing to yield 

That is the key to this entire episode: mass psychology. Since 

something and get behind the bill, we shall get legislation very 

Aldrich was recognized as associated with the Morgan interests much less to be desired, or have nothing done at all." 

and Vanderlip was President of Rockefeller's National City Bank, 

the public was skillfully led to believe that the "Money Trust" was 

BRYAN MAKES AN ULTIMATUM 

The Populist, William Jennings Bryan, was considered at that 

mortally afraid of the proposed Federal Reserve Act. The Nation 

time to be the most influential Democrat in Congress, and it was 

was the only prominent publication to point out that every one of 

clear from the start that the Federal Reserve Act could never be 

the horrors described by Aldrich and Vanderlip could have been 

passed without his approval and support. As Charles Seymour 

equally ascribed to the Aldrich Bill as well. But this lone voice was 

observed: "The Commoner's sense of loyalty [to the Party] had 

easily drowned by the great cacophony of deception and propaganda 

would appear, 

kept him from an attack upon the Federal Reserve Act which, it 

. 

he never entirely understood.... With his influence 

The Glass Bill was a flexible document which was designed 

in the Party, he could have destroyed the measure which failed to 

from the beginning to be altered in non-essential matters in order to 

accord with his personal doctrines." 3 

appear as though compromises were being made to satisfy the 

Bryan had said that he would not support any bill that resulted 

in 

various 

private 

political factions. Since very few understood central-bank 

money being issued by private banks. The money supply, 

he 

technicalities, the ploy was easy to execute. The basic strategy was 

insisted, must be government issue. When he finally saw an 

actual draft of the bill in 

to focus debate on such relatively unimportant items as the number 

midsummer of 1913, he was dismayed to 

find that, not only was the 

of regional banks, the structure of the governing board, and money to 

the 

be privately issued, but the 

entire governing body of the central 

process by which that board was 

bank 

to be selected. When was to be 

truly crucial 

composed of 

private bankers. His ultimatum was not long in 

matters 

coming. 

could not be avoided, the response was to agree to almost 

He hotly 

demanded (1) that the Federal-Reserve notes must be Treasury 

anything but to write the provisions in vague language. In that 

currency, issued and guaranteed by the government; and 

way, the back door would be left ajar for later implementation (2) that 

of 

I Letters from Willis to Laughlin, J. Laurence Laughlin Papers, Library of Congress, 

July 14 &.18, 1912. 

1. "From Farm Boy to Financier/' by Frank A. Vanderlip, Saturday Evening Post, 

February 9, 1935, p. 72. 

2. From a letter to Fesrus Wade. Quoted by Kolko, Triumph, p. 234. 

McAdoo, 213, 225-26.


the governing body must be appointed by the President and 

approved by the Senate. 

Colonel House and the other monetary scientists were reasonably 

sure that these provisions eventually would be required for 

final approval of the bill but, being master strategists, they deliberately 

withheld them from early drafts so they could be used as 

bargaining points and added later as concessions in a show of 

compromise. Furthermore, since practically no one really understood 

the technical aspects of the measure, they knew it would be 

easy to fool their opponents by creating the appearance of compromise 

when, in actual operation, the originally intended features 

would remain. 

AN AMAZING REVELATION 

The nature of this deception was spelled out years later by 

Carter Glass in his book, Adventures in 

Constructive Finance. From 

this source we learn that, after Bryan had delivered his ultimatum, 

Glass was summoned to the White House and told by Wilson that 

the decision had been made to make the Federal Reserve notes 

obligations of the United States government. "I was for an instant 

speechless!" wrote Glass who then explained how he reminded the 

President that the only backing for the new currency would be a 

small amount of gold, a large amount of government and commercial 

debt, and the private assets of the individual banks themselves. 

"It would be a pretense on its face," he said. "Was there ever a 

government note based primarily on the property of banking 

institutions? Was there ever a government issue not one dollar of 

which could be put out except by demand of a bank? The 

suggested government obligation is so remote it could never be 

discovered." 

To which the President replied: "Exactly so, Glass. Every word 

you say is true; the government liability is a mere thought. And so, 

if we can hold the substance of the thing and give the other fellow 

the shadow, why not do it, if thereby we may save our bill?" 

Years later, Paul Warburg would explain further: 

While technically and legally the Federal Reserve note is an 

obligation of the United States Government, in reality it is an 

obligation, the sole actual responsibility for which rests on the reserve 

1. Glass, pp. 124-25. 


banks.... The government could only be called upon to take them up 

after the reserve banks had failed. l 

Warburg's explanation should be carefully analyzed. It is an 

incredibly important statement. The man who masterminded the 

Federal Reserve System is telling us that Federal Reserve notes 

constitute privately issued money with the taxpayers standing by to cover 

the potential losses of those banks which issue it. One of the more 

controversial assertions of this book is that the objectives set forth 

at the Jekyll Island 

meeting included the shifting of the cartel's 

losses from the owners of the banks to the taxpayers. Warburg 

himself has confirmed it. 

But let us return to the great deceit of 1913. The second demand 

made by Bryan—political control over the System, not banker 

control—was met with an equally beguiling "compromise." In 

addition to 

the governing board of regional bankers previously 

proposed, there now would be a central regulatory commission, to 

be called the Federal Reserve Board, appointed by the President 

with the advice and consent of the Senate. 2 Thus, the public was to 

be protected through a sharing of power, a melding of interests, a 

system of checks and balances. In this way, said Wilson, "the banks 

may be instruments, not the masters, of business and of individual 

enterprise and initiative." 3 

The arrangement was heralded as a bold, new experiment in 

representative government. In reality, it was but the return of the 

ancient partnership between the monetary and political scientists. 

The only thing new was that power was now to be shared openly in 

plain view of the public. But, of course, there would not be much to 

see. All the deliberations and most of the decisions were to happen 

behind closed doors. Furthermore, the division of power and 

responsibility between these groups was left 

deliberately vague. 

Without a detailed line of command or even a clear concept of 

function, it was inevitable that, as with the drafting of the bill itself, 

real power would gravitate into the hands of those with technical 

[knowledge and Wall Street connections. To the monetary scientists 

drafting the bill and engineering the compromises, the eventual 

i- Warburg, Vol. I, p. 409. 

i The original plan called for the Secretary of the Treasury and the Comptroller 

or the Currency to be on the board also, but this was later dropped 

6 

- Quoted by Greider, p. 277.


concentration of effective control into their hands was never in 

serious doubt. And, as we shall see in the next chapter, subsequent 

events have proved the soundness of that strategy. 

BRYAN ENDORSES THE BILL 

Bryan was no match for the Jekyll Island strategists and he 

accepted the "compromises" at face value. Had there been any 

lingering doubts in his mind, they were swept away by gratitude 

for his appointment as Wilson's Secretary of State. Now that he was 

on the team, he declared: 

I 

appreciate so profoundly the service rendered by the President 

to the people in the stand he has taken on the fundamental principles 

involved in currency reform, that 1 am with him in all the details.... 

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.... I am glad to endorse earnestly and unreservedly the 

currency bill as a much better measure than I supposed it possible to 

secure at this time.. . . Conflicting opinions have been reconciled with a 

success hardly to have been expected. 

With the conversion of Bryan, there was no longer any doubt 

about the final outcome. The Federal Reserve Act was released 

from the joint House and Senate conference committee on December 

22, 1913, just as Congress was preoccupied with departure for 

the Christmas recess and in no mood for debate. It quickly passed 

by a vote of 282 to 60 in the House and 43 to 23 in the Senate. The 

President signed it into law the next day. 

The Creature had swallowed Congress. 

SUMMARY 

President Taft, although a Republican spokesman for big 

business, refused to champion the Aldrich Bill 

This marked him for political extinction. The Money Trust wanted 

a President who would aggressively promote the bill, and the man 

selected was Woodrow Wilson who had already publicly declared 

for a central bank. 

his allegiance. Wilson's nomination at the Democratic national 

convention was secured by Colonel House, a close associate 

Morgan and Warburg. To make sure that Taft did not win his bid 

for reelection, the Money Trust encouraged the former Republican 

President, Teddy Roosevelt, to run on the Progressive ticket. The 

of 


result, as planned, was that Roosevelt pulled away Republican 

support from Taft, and Wilson won the election with less than a 

majority vote. Wilson and Roosevelt campaigned vigorously 

against the evils of the Money Trust while, all along, being 

dependent upon that same Trust for campaign funding. 

When Wilson was elected, Colonel House literally moved into 

the White House and became the unseen President of the United 

States. Under his guidance, the Aldrich Bill was given cosmetic 

surgery and emerged as the Glass-Owen Bill. Although sponsored 

by Democrats, in all essential features it was still the Jekyll Island 

plan. Aldrich, Vanderlip, and others identified with Wall Street put 

on a pretense of opposing the Glass-Owen Bill to convince 

Congress and the public that big bankers were fearful of it. The 

final bill was written with many sound features which were 

included to make it palatable during Congressional debate but 

which were predesigned to be dropped in later years. To win the 

support of the Populists under the leadership of William Jennings 

Bryan, the Jekyll Island team also engineered what appeared to be 

compromises but which in actual operation were, as Wilson called 

them, mere "shadows" while the "substance" remained. In short, 

Congress was outflanked, outfoxed, and outclassed by a deceptive, 

but brilliant, psycho-political attack. The result is that, on December 

23, 1913, America once again had a central bank. 

1. Glass, pp. 139-42.

Chapter Twenty-Three 

THE GREAT 

DUCK DINNER 

Haw Federal-Reserve policies led to 

the crash of 

1929; the expansion of the money supply as a 

means of helping the economy of England; the 

resulting wave of speculation in stocks and real 

estate; evidence that the Federal-Reserve Board 

had foreknowledge of the crash and even executed 

the events that were designed to trigger it. 

II 

The story is told of a New England farmer with a small pond in 

his pasture. Each summer, a group of wild ducks would frequent 

that pond but try as he would, the farmer could never catch one. 

No matter how early in the morning he approached, or how 

carefully he constructed a blind, or what kind of duck call he tried, 

somehow those crafty birds sensed the danger and managed to be 

out of range. Of course, when fall arrived, the ducks headed South, 

and the farmer's craving for a duck dinner only intensified. 

Then he got an idea. Early in the spring, he started scattering 

corn along the edge of the pond. The ducks liked the corn and, 

since it was always there, they soon gave up dipping and foraging 

for food of their own. After a while, they became used to the farmer 

and began to trust him. They could see he was their benefactor and 

they now walked close to him with no sense of fear. Life was so 

easy, they forgot how to fly. But that was unimportant, because 

they were now so fat they couldn't have gotten off the water even if 

they had tried- 

Fall came, and the ducks stayed. Winter came, and the pond 

. froze. The farmer built a shelter to keep them warm. The ducks 

I were happy because they didn't have to fly. And the farmer was 

l especially happy because, each week all winter long, he had a 

I delicious duck dinner. 

That is the story of America's Great Depression of the 1930s.


THE GREAT DUCK DINNER 473 

CONSOLIDATION OF POWER 

When the Federal Reserve Act was submitted to Congress, 

was head of the New York branch of the System which represented 

the nation's largest banks, the "money trust" itself. From the outset, 

many of its most important features were written in vague language. 

Some details were omitted entirely. That was a tactical move 

the national board and the regional branches were dominated by 

the New York branch. Strong ruled as an autocrat, determining Fed 

to avoid debate over fine points and to allow flexibility for future 

policy often without even consulting with the Federal Reserve 

interpretation. The goal was to get the bill passed and perfect it later. 

Since then, the Act has been amended 195 times, expanding the 

power and scope of the System to the point where, today, it would 

Board in Washington. 

The United States entry into World War I provided the impetus 

for increasing the power of the Fed. The System became the sole 

be almost unrecognizable to the Congressmen and Senators who 

fiscal agent of the Treasury, Federal Reserve Notes were issued, 

voted for 

virtually all of the 

it. 

gold reserves of the nation's commercial banks' 

In 1913, public distaste for concentration of financial power in 

were gathered together into the vaults of the Federal System, and 

the hands of a few Wall Street banks helped to fuel the fire for many of the legislative restraints placed into the original Act were 

passage of the Federal Reserve Act. To make it appear that the new 

abandoned. Voters ask fewer questions when their nation is at war. 

System would put an end to the New York "money trust," as it was 

The concentration of power into the hands of the very "money 

called, the public was told that the Federal Reserve would not 

trust" the Fed was supposed to defeat, is described by Ferdinand 

represent any one group or one region. Instead, it would have its 

Lundberg, author of America's Sixty Families: 

power diffused over twelve regional Federal Reserve Banks, and 

In practice, the Federal Reserve Bank of New York became the 

none would be able to dominate. As Galbraith pointed out, 

fountainhead of the system of twelve regional banks, for New York 

however, the regional design was "admirable for serving local 

was the money market of the nation. The other eleven banks were so 

pride and architectural ambition and for lulling the suspicions of 

many expensive mausoleums erected to salve the local pride and quell 

the 

the agrarians/' 

Jacksonian fears 

But that was not what the planners had in mind for 

of the hinterland. Benjamin Strong,... president of 

the Bankers Trust 

the long 

Company 

haul. 

[J.P. Morgan] was selected as the first 

Governor of the New York Reserve Bank. 

In the beginning, the regional branches took their autonomy 

An adept in high finance, 

Strong for many years manipulated the country's monetary system at 

seriously, and that led to conflict with members of the national 

the discretion of directors representing the leading New York banks. 

board. The Board of Governors was composed of political appointees 

representing diverse segments of the economy. They were 

brought into interlocking relations with the Bank of England and the 

Under Strong the Reserve System, unsuspected by the nation, was 

outclassed by the heads of the regional branches of the System who 

Bank of France. 

were bankers with bankers / experience. 

BAILING OUT EUROPE 

RETURN OF THE NEW YORK "MONEY TRUST" 

It will be recalled from Chapters Twelve and Twenty that it was 

The greatest power struggle arose from the New York Reserve 

this interlock during World War I that was responsible for the 

Bank which was headed by Benjamin Strong. Strong had the 

confiscation from American taxpayers of billions of dollars which 

contacts and the experience. It will be recalled that he was one of were given to the central banks of England and France. Much of 

the seven who drafted the cartel's structure at Jekyll Island. He had 

that money found its way to the associates of J.P. Morgan as 

been head of J.P. Morgan's Bankers Trust Company and was 

interest payments on war bonds and as fees for supplying munitions 

and other war materials. 

closely associated with Edward Mandell House. He had become a 

personal friend of Montagu Norman, head of the Bank of England; 

Seventy per cent of the cost of World War I was paid by 

and of Charles Rist, head of the Bank of France. Not least of all, he 

inflation rather than taxes, a process that was orchestrated by the 

Lundberg, p. 122.


Federal Reserve System. This was considered by the Fed's supporters 

as its first real test, and it passed with flying colors. American 

inflation during that period was only slightly less than in England, 

which had been more deeply committed to war and for a longer 

period of time. That is not surprising inasmuch as a large portion of 

Europe's war costs had been transferred to the American taxpayers. 

After the war was over, the transfusion of American dollars 

continued as part of a plan to pull England out of depression. The 

methods chosen for that transfer were artificially low interest rates 

and a deliberate inflation of the American money supply. That was 

calculated to weaken the value of the dollar relative to the English 

pound and cause gold reserves to move from America to England. 

Both operations were directed by Benjamin Strong and executed by 

the Federal Reserve. It was not hyperbole when President Herbert 

Hoover described Strong as "a mental annex to Europe/' 

Before Alan Greenspan was appointed as Chairman of the 

Federal Reserve by President Reagan in 1987, he had served on the 

Board of the J.P. Morgan Company. Before that however, he had 

been an outspoken champion of the gold standard and a critic of 

the System's subservience to the banking cartel. In 1966 he wrote: 

When business in the United States underwent a mild contraction 

in 1927, the Federal Reserve created more paper reserves in the hope 

of forestalling any possible bank reserve shortage. More disastrous, 

however, was the Federal Reserve's attempt to assist Great Britain 

who had been losing gold to us„ . . The ''Fed" succeeded: it stopped the 

gold loss, but it nearly destroyed the economies of the world in the 

process. The excess credit which the Fed pumped into the economy 

spilled over into the stock market—triggering a fantastic speculative 

boom.... As a result, the American economy collapsed. 

After his appointment to the Fed , Greenspan became silent on 

these issues and did nothing to anger the Creature he now served. 

AGENTS OF A HIGHER POWER 

When reviewing this aspect of the Fed's history, questions arise 

about the patriotic loyalty of men like Benjamin Strong. How is it 

possible for a man who enjoys the best that his nation can 

offer—security, wealth, prestige—to conspire to plunder his fellow 

citizens in order to assist politicians of other governments to 

1. Gaibraith, p. 180. 

2. Greenspan, pp. 99-100, 


continue plundering theirs? The first part of the answer was 

illustrated in earlier sections of this book. International money 

managers may be citizens of a particular country but, to many of 

them, that is a meaningless accident of birth. They consider 

themselves to be citizens of the world first. They speak of affection 

for all mankind, but their highest loyalty is to themselves and their 

profession. 

That is only half the answer. It must be remembered that the 

men who pulled the financial levers on this doomsday machine, the 

governors of the Bank of England and the Federal Reserve, were 

themselves tied to strings which were pulled by others above them. 

Their minds were not obsessed with concepts of nationalism or 

even internationalism. Their loyalties were to men. Professor 

Quigley reminds us: 

It must not be felt that these heads of the world's chief central 

banks were themselves substantive powers in 

world finance. They 

were not. Rather, they were the technicians and agents of the 

dominant investment bankers of their own countries, who had raised 

them up and were perfectly capable of throwing them down. The 

substantive financial powers of the world were in the hands of these 

investment bankers (also called "international" or "merchant" 

bankers) who remained largely behind the scenes in their own 

unincorporated private banks. These formed a system of international 

cooperation and national dominance which was more private, more 

powerful, and more secret than that of their agents in the central 

banks. 

So, we are not dealing with the actions of men who perceive 

themselves as betraying their nation, but technicians who are loyal 

to the monetary scientists and the political scientists who raised 

them up. Of the two groups, the financiers are dominant. Politicians 

come and go, but those who wield the power of money 

remain to pick their successors. 

FARMERS BECOME DUCK DINNER 

During the war, prices for agricultural products rose to an 

all-time high, and so did profits. Farmers had put part of that 

feioney into war bonds, but much of it had been placed into savings 

accounts at banks within the farming communities, which is to say, 

mostly in the Midwest and South. That was unacceptable to the 

Quigley, Tragedy, pp. 326-27.

. 

| 

Under 


New York banks which saw their share of the nation's deposits 

begin to decline. A way had to be devised to reclaim that money. 

The Federal Reserve System, which by then was the captive of the 

New York banks, was pressed into service to accomplish the deed. 

Few of those country banks had chosen to become members of 

the Federal Reserve System. That added insult to injury, and it also 

provided an excuse for the Fed to wage economic war against 

them. The plan was neither complex nor original; it had been used 

many times before by central bankers. It was (1) extend easy credit 

to the farmers to lure them into heavy debt, and then (2) create a 

recession which would decrease their income to the point where 

they could not make payments. The country banks then would find 

themselves holding non-performing loans and foreclosed property 

which they could not sell without tremendous losses. In the end, 

both the farmers and the banks would be wiped out. The banks 

were the target. Too bad about the farmers. 

Congressman Charles Lindbergh, Sr., father of the man who 

made the world's first solo transatlantic flight, explained it this 

way: "Under the Federal Reserve Act, panics are scientifically 

created; the present panic is the first scientifically created one, 

worked out as we figure a mathematical problem." 

The details of how this panic was created were explained in 

1939 by Senator Robert Owen, Chairman of the Senate Banking and 

Currency Committee. Owen, a banker himself, had been a coauthor 

of the Federal Reserve Act, a role he later regretted. Owen 

said: 

In May 1920 ... the farmers were exceedingly prosperous.. . . 

They 

were paying off their mortgages. They had bought a lot of new land, at 

the instance of the government—had borrowed money to do it—and 

then they were bankrupted by a sudden contraction of credit and 

currency, which took place in 1920.. . 

The Federal Reserve Board met in a meeting which was not 

was a 

disclosed to the public—they met on the 18th of May 1920; it 

secret meeting—and they spent all day; the minutes made 60 printed 

pages, and it appears in Senate Document 310 of February 10, 1923... 

Under action taken by the Reserve Board on May 18, 1920, there 

resulted a violent contraction of credit. . . . This contraction of credit and 

currency had the effect, the next year, of diminishing the national 


production $15,000,000,000; it had the effect of throwing millions of 

people out of employment; it had the effect of reducing the value of 

lands and ranches $20,000,000,000. l 

The contraction of credit had a disastrous effect on the nation as 

U. whole, not just farmers. But the farmers were more deeply 

involved, because the recently created Federal Farm Loan Board 

had lured them with easy credit—like ducks at the pond—into 

extreme debt ratios. Furthermore, the large-city banks which were 

members of the System were given support by the Fed during the 

summer of 1920 to enable them to extend credit to manufacturers 

and merchants. That allowed many of them to ride out the slump. 

There was no such support for the farmers or the country banks 

which, by 1921, were falling like dominoes. History books refer to 

this event as the Agricultural Depression of 1920-21. A better name 

would have been Country-Duck Dinner in New York. 

BUILDING THE MANDRAKE MECHANISM 

In Chapter Ten, we examined the three methods by which the 

Federal Reserve is able to create or extinguish money. Of the three, 

the purchase and sale of debt-related securities in the open market 

is the one that provides the greatest effect on the money supply. 

The purchase of securities by the Fed (with checks that have no 

money to back them) creates money; the sale of those securities 

extinguishes money. Although the Fed is authorized to buy and sell 

almost any kind of security that exists in the world, it is obligated to 

show preference for bonds and notes of the federal government. 

That is the way the monetary scientists discharge the commitment 

to create money for their partners, the political scientists. Without 

that service, the partnership would dissolve, and Congress would 

abolish the Fed. 

When the System was created in 1913, it was anticipated that 

the primary way to manipulate the money supply would be to 

control the "reserve ratios" and the "discount window." That is 

banker language for setting the level of mandatory bank reserves 

(as a percentage of deposits) and also setting the interest rate on 

loans made by the Fed to the banks themselves. The reserve ratio 

the old National Bank Act had been 25%. Under the Federal 

Reserve Act of 1913, it was reduced to 18% for the large New York 

1. Charles A. Lindbergh, Sr. The Economic Pinch (1923 rpt. Hawthorne, California: 

Omni Publications, 1968), p. 95. 

1 . U.S. Cong., Senate, Special Committee on the Investigation of Silver, Silver, Part 

5, 76th Cong., 1st sess. (Washington, DC: GPO, 1939), April 7, 1939, pp. 196-97.


banks, a drop of 28%. In 1917, just four years later, the reserve 

requirements for Central Reserve-City Banks were further dropped 

from 18% to 13% (with slightly lesser reductions for smaller banks). 

That was an additional 28% cut. 

It 

quickly became apparent that setting reserve ratios was an 

inefficient tool. The latitude of control was too small, and the 

amount of public attention too great. The second method, influencing 

the interest rate on commercial loans, was more useful. Here is 

how that works: 

Under a fractional-reserve banking system, a bank can create 

new money merely by issuing a loan. The amount of new money it 

creates is limited by the reserve ratio or "fraction" it is required to 

maintain to cover its cash-flow needs. If the reserve ratio is 10%, 

then each $10 it lends includes $9 that never existed before. A 

commercial bank, therefore, can create a sizable amount of money 

merely by making loans. But, once the bank is "loaned up," that is 

to say, once the bank has already loaned $9 for every $1 it holds in 

reserve, it must stop and wait for some of the old loans to be paid 

back before it 

can issue new ones. The only way to expand that 

process is to make the reserves larger. That can be accomplished in 

one of three ways: (1) use some of the bank's profits, (2) sell 

additional stock to investors, or (3) borrow money from the Fed. 

WHEN BANKS BORROW FROM THE FED 

The third option is the most popular and is called going to the 

"discount window." When banks go to the Fed's discount window 

to obtain a loan, they are expected to put up collateral. This can be 

almost any debt contract held by the bank, including government 

bonds, but it commonly consists of commercial loans. The Fed then 

grants credit to the bank in an amount equal to those contracts. In 

essence, this allows the bank to convert its old loans into new 

"reserves." Every dollar of those new reserves then can be used as 

the basis for lending nine more dollars in checkbook money! 

The process does not stop there. Once the new loans are made,, 

they, too, can be used as collateral at the Fed for still more reserves. 

The music goes 'round and 'round, with each new level of debt 

1. In 1980, statutory limits on reserve ratios were eliminated altogether. The 

Federal Reserve Board now has the option to lower the ratio to zero, which means 

the power to create unlimited quantities of money. It is the ultimate dream of central 

bankers. 

§1- 


becoming "reserves" for yet a higher level of loans, until it 

finally 

plays itself out at about twenty-eight times. That process is 

was one of 

commonly called "discounting commercial paper." It 

the means by which the Fed was able to flood the nation with new 

money prior to the Great Dam Rupture of 1929. 

But, there is a problem with that method, at least as far as the 

Fed is concerned. Even though interest rates at the discount 

window can be made so low that most bankers will line up like 

ducks looking for free corn, some of them — particularly those 

"hicks" in the country banks—have been known to resist the 

temptation. There is no way to force the banks to participate. 

Furthermore, the banks themselves are dependent upon the whims 

tof their customers who, for reasons known only to themselves, may 

not want to borrow as much as the bank wants to lend. If the 

customers stop borrowing, then the banks have no new loans to 

convert into further reserves. 

That left the third mechanism as the preferred option: the 

purchase and sale of bonds and other debt obligations in the open 

^market With the discount window, banks have to be enticed to 

borrow money which later must be repaid, and sometimes they are 

reluctant to do that. But with the open market, all the Fed has to do 

is write a fiat check to pay for the securities. When that check is 

cashed, the new money it created moves directly into the economy 

without any concurrence required from the recalcitrant banks. 

But, there was a problem with this method also. Before World 

War I, there were few government bonds available on the open 

market. Even after the war, the supply was limited. Which means 

the vast inflation that preceded the Crash of 1929 was not caused by 

deficit spending. In each year from 1920 through 1930 there was a 

surplus of government revenue over expenses. Surprising as it may 

be, on the eve of the depression, America was getting out of debt. 

As a consequence, there were few government bonds for the Fed to 

buy. Without government bonds, the open-market engine was 

constantly running out of gas. 

The solution to all these problems was to create a new market 

tailor-made to the Fed's needs, a kind of half-way house between 

See chapter ten for details. 

2- See Robert T. Patterson, The Great Boom and Panic; 1921-1929 (Chicago: Henry 

Regnery Company, 1965), p. 223.


the discount window and the open market. It was called the 

"acceptance window," and it was through that imagery that the 

System purchased a unique type of debt-related security called 

bankers acceptances. 

BANKER'S ACCEPTANCES 

Banker's acceptances are contracts promising payment for 

commercial goods scheduled for later delivery. They usually 

involve international trade where delays of three to six months are 

common. They are a means by which a seller in one country can 

ship goods to an unknown buyer in another country with confidence 

that he will be paid upon delivery. That is accomplished 

through guarantees made by the banks of both buyer and seller. 

First, the buyer's bank issues a letter of credit guaranteeing 

payment for the goods, even if the buyer should default. When the 

seller's bank receives this, one of its officers writes the word 

"accepted" on the contract and pays the seller the amount of the 

sale. The accepting bank, therefore, advances the money to the 

seller in expectation of receiving future payment from the buyer's 

bank. For this service, both banks charge a fee expressed as a 

percentage of the contract. Thus, the buyer pays a little more than 

the amount of the sales contract, and the seller receives a little less. 

Historically, these contracts have been safe, because the banks 

are careful to guarantee payment only for financially sound firms. 

But, in times of economic panic, even sound firms may be unable to 

honor their contracts. It was underwriting that kind of business that 

nearly bankrupted George Peabody and J.P. Morgan in London 

during the panic of 1857, and would have done so had they not 

been bailed out by the Bank of England. 

Acceptances, like commercial loan contracts, are negotiable 

instruments that can be traded in the securities market. The 

accepting banks have a choice of holding them until maturity or 

selling them. If they hold them, their profit will be realized when 

the underlying contract is eventually paid off and it will be equal to 

the amount of its "discount," which is banker language for its fee. 

Acceptances are said to be "rediscounted" when they are sold by 

the original discounter, the underwriter. The advantage of doing 

that is 

that they do not have to wait three to six months for their 

profit. They can acquire immediate capital which can be invested to 

earn interest. 

I 


The sale price of an acceptance is always less than the value of 

the underlying contracts; otherwise no one would buy them. The 

difference represents the potential profit to the buyer. It is expressed 

as a percentage and is called the "rate" of discount—or, in 

this case, rediscount. But the rate given by the seller must be lower 

than what he expects to earn with the money he receives, otherwise 

he will be better off not selling. 

Although bankers' acceptances were commonly traded in 

Europe, they were not popular in the United States. 

Before the 

Federal Reserve Act was passed, national banks had been prohibited 

from purchasing them. A market, therefore, had to be created. 

The Fed accomplished this by setting the discount rate on acceptances 

so low that underwriters would have been foolish not to take 

advantage of it. At a very low discount, they could acquire 

short-term funds which then could be invested at a higher rate of 

return. Thus, acceptances quickly became plentiful on the open 

market in the United States. 

But who would want to buy them at a low return? No one, of 

course. So, to create that market, not only did the Federal Reserve 

set the discount rate artificially low, it also pledged to buy all of the 

acceptances that were offered. The Fed, therefore, became the 

principal buyer of these securities. Banks also came into the market 

as buyers, but only because they knew that, at any time they 

wanted to sell, the Fed was pledged to buy. 

Since the money was being created out of nothing, the cost did 

not really matter, nor did the low profit potential. The Fed's goal 

was not to make a profit on investment. It was to increase the 

nation's money supply. 

WARBURG AND FRIENDS MAKE A LITTLE PROFIT 

The man who benefited most from this artificially created 

market was none other than Paul Warburg, a partner with Kuhn, 

Loeb and Co. Warburg was in attendance at the Jekyll Island 

meeting at which the Federal Reserve System was conceived. He 

was considered by all to have been the master theoretician who led 

the others in their deliberations. He was one of the most influential 

voices in the public debates that followed. He had been appointed 

as one of the first members of the Federal Reserve Board and later 

became its Vice Governor until outbreak of war, at which time he


German banking. He was a director of American I.G. Chemical 

Corp. and Agfa Ansco, Inc., firms that were controlled by I.G. 

Farben, the infamous German cartel that, only a few years later, 

would sponsor the rise to power of Adolph Hitler. He was also a 

director of the CFR (Council on Foreign Relations). It should not be 

surprising, therefore, to learn that he was able to position himself at 

the center of the huge cash flow resulting from the Fed's purchase 

of acceptances. 

Warburg was the founder and Chairman of the International 

Acceptance Bank of New York, the world's largest acceptance 

bank. He was also a director of several smaller "competitors," 

including the prestigious Westinghouse Acceptance Bank. He was 

founder and Chairman of the American Acceptance Council. 

Warburg was the acceptance market in America. But he was not 

without friends who also swam in the river of money. Men who 

controlled America's largest financial institutions became directors 

or officers of the various acceptance banks. The list of companies 

that became part of the interlocking directorate included Kuhn, 

Loeb and Co.; New York Trust Co.; Bank of Manhattan Trust Co.; 

American Trust Co.; New York Title and Mortgage Co.; Chase 

National Bank; Metropolitan Life Insurance Co.; American Express 

Co.; the Carnegie Corp.; Guaranty Trust Co.; Mutual Life Insurance 

Co.; the Equitable Life Assurance Society of New York; and the 

First National Banks of Boston, St. Louis, and Los Angeles, to name 

just a few. The world of acceptance banking was the private 

domain of the financial elite of Wall Street 

Behind the American image, however, was a full partnership 

with investors from Europe. Total capital of the IAB's American 

shareholders was $276 million compared with $271 million from 

foreign investors. A significant portion of that was divided between 

the Warburgs in Germany and the Rothschilds in England. 

Just how large and free-flowing was that river of acceptance 

money? In 1929, it was 1.7 trillion-dollars wide. Throughout the 

1920s, it was over half of all the new money created by the Federal 

Reserve—greater than all the other purchases on the open market 

1. For a detailed account of this episode, see Part Two of the author's book, World 

without Cancer: The Story of Vitamin B17 (Westlake Village, California: American 

Media, 1974). 

2. Larry Schweikart, ed. The Encyclopedia of American History and Biography (New 

York: Facts on File, 1990), p. 448. 


plus all the loans to all the banks standing in line at the discount 

window. 

The monetary scientists who created the Federal Reserve, and 

their close business associates, were well-rewarded for their efforts. 

Profit-taking by insiders, however, is not the issue. Far more 

important is the fact that the consequence of this self-serving 

mechanism was the massive expansion of the money supply that 

made the Great Depression inevitable. And that is the topic which 

impelled us to look at acceptances in the first place. 

CONGRESS SUSPICIOUS BUT AFRAID TO TINKER 

By 1920, suspicions and resentment were growing in the halls 

of Congress. Politicians were not getting their share. It is possible 

that many of them failed to realize that, as partners in the scheme, 

they were entitled to a share. Nevertheless, they were dazzled by 

banker language and accounting tricks and were afraid to tinker 

with the System lest they accidentally push the wrong button. 

Watching with amusement from London was Fabian Socialist 

John Maynard Keynes. Speaking of the Federal Reserve's manipulation 

of the value of the dollar, he wrote: 

That is the way by which a rich country is able to combine new 

wisdom with old prejudice. It can enjoy the latest scientific 

improvements, devised in the economic laboratory of Harvard, whilst 

leaving Congress to believe that no rash departure will be 

permitted.. . . But there is in all such fictions a certain instability.. . . The 

suspicions of Congressmen may be aroused. One cannot be quite 

certain that some Senator might not read and understand this book. 

There was not much danger of that! By then, American politicians 

had acquired a taste for the heady wine of war funding and 

stopped asking questions. World War I had created enormous 

demands for money, and the Fed provided it. By the end of the 

war, Congressional hostility to the Federal Reserve became history. 

PAYING FOR WORLD WAR I 

Much of the war debt was absorbed by the public which 

responded to patriotic instincts and purchased war bonds. The 

Treasury launched a massive publicity campaign for "Liberty 

Loans" to reinforce that sentiment These small-denomination 

1- Ibid., p. 448; also Murray N. Rothbard, America's Great Depression (Kansas City: 

Sheed and Ward, 1963), p. 11 7. 

2. Keynes, A Tract on Monetary Reform, pp. 198-99-



bonds did not expand the money supply and did not cause 

the government did not pay off those bonds when they came due. 

inflation, because the money came from savings. It already existed. 

Instead, it rolled them over by offering new bonds to replace the 

However, many people who thought it was their patriotic duty to 

old. Why? Was it because Congress needed more money? No. The 

support the war effort went to their banks and borrowed money so 

bonds had become the basis for money in circulation and, if they 

they could buy bonds. The bank created most of that money out of 

had been redeemed, the money supply would have decreased. A 

nothing, drawing upon credits and bookkeeping entries from the 

decrease in the money supply is viewed by politicians and central 

Federal Reserve, so those purchases did inflate the money supply. 

bankers as a threat to economic stability. Thus, the government 

The same result could have been obtained more simply and less 

ifcund itself unable to get out of debt even when it had the money 

expensively by getting the money directly from the Fed, but the 

to do so, a dilemma that continues to this day. 

government encouraged the trend anyway, because of its psychological 

value in generating popular support for the war. When 

There is an apparent contradiction here. In his book, The Great 

Boom and Panic, Robert Patterson says that, on the eve of depression, 

America was getting out of debt. Yet, Rothbard tells us there 

people make sacrifices for an endeavor, it reinforces their belief that 

it must be worthy. 

were more government bonds held by the banking system than 

Although the war was financed partly by taxes and partly by 

during the war! The only way both statements can be true is if there 

Liberty Bonds purchased by the public, a significant portion was 

were, in fact, more bonds outstanding during the war but they 

covered by the sale of Treasury bonds to the Federal Reserve in the 

were held by the public, not by the banking system. That would 

open market. Benjamin Strong's biographer, Lester Chandler, 

make it possible for there to be fewer total bonds in 1928 and yet 

explains: 

the System could still hold more of them than previously. That 

The Federal Reserve System became an integral part of the war would be the expected result of the Fed's growing role in the open 

financing machinery. The System's overriding objective, both as a 

market. As the publicly-held bonds matured, the Treasury rolled 

creator of money and as fiscal agent, was to insure that the Treasury 

them over, and the Fed picked them up. Bonds purchased by the 

would be supplied with all the money it needed, and on terms fixed by 

Congress and the Treasury.... A grateful nation now hailed it as a 

public do not increase the money supply whereas those purchased 

major contributor to the winning of the war, an efficient fiscal agent for by banks do. Therefore, conditions in 1928 would have been far 

the Treasury, a great source of currency and reserve funds, and a 

jnore inflationary than during the war—even though the government 

was getting out of debt. 

permanent and indispensable part of the banking system. 

Before 1922, the Federal Reserve bought Treasury bonds primarily 

for three purposes: (1) for income to operate the system, (2) 

THE EMERGENCE OF GOVERNMENT DEBT 

The war years were largely a period of testing new strategies 

to pay for the newly issued Federal Reserve Notes which were 

and consolidating power. Ironically, it was not until after the 

replacing silver certificates, and 

war—when there was no longer a justification for deficit spending—that 

government debt became plentiful. Up until World War 

(3) to push down interest rates. The 

iriotive for manipulating interest rates was to encourage borrowing 

I, annual federal expenses had been running about $750 million. By 

from abroad in the United States (where rates were low). It also 

the end of the war, it was running $18 and-a-half billion, an increase 

encouraged investment from the United States into Europe (where 

of 2,466%. Approximately 70% of the cost of war had been financed 

rates were higher). By making it possible to borrow American 

by debt. Murray Rothbard reminds us that, on the eve of depression 

in 1928, ten years after the end of war, the banking system held 

Fed was deliberately moving money out of the United States, with 

dollars at one rate and invest them elsewhere at a higher rate, the 

more government bonds than during the war itself. That means 

gold reserves following behind. As President Kennedy had said in 

f. 

1. Chandler, pp. 101-102. 

Page 223. 

2. 

2. Depression, p. 125. Chandler, p. 211; also Rothbard, Depression, p. 127.

I 


his 1963 address at the IMF, the outflow of American gold "did not 

come about by chance/' 

THE "DISCOVERY" OF THE OPEN MARKET 

It is commonly asserted by writers on this topic that the power 

of the open-market mechanism to manipulate the money supply 

was "discovered" by the Fed in the early 1920s and that it came as a 

total surprise. Martin Mayer, for example, in his book, The Bankers, 

writes: 

Now, through an accident as startling as those which produced 

the discovery of X-Rays or penicillin, the central bank learned that 

"open market operations" could have a significant effect on the 

behavior of the banks. 

This makes the story interesting, but it is difficult to believe that 

Benjamin Strong, Paul Warburg, Montagu Norman, and the other 

monetary scientists who were pulling the levers at that time were 

taken by surprise. These men could not possibly have been 

ignorant of the effect of creating money out of nothing and pouring 

it into the economy. The open market was merely a differentfunnel 

If there was any element of surprise, it likely was only in the ease 

with which the mechanism could be activated. It is not important 

whether that part of the story is fact or fiction, except that it 

perpetuates the "accidental" view of history, the myth that no one 

is 

responsible for political or economic chaos: Things just happen. 

There was no master plan. No one is to blame. Everything is under 

control Relax, pay your taxes, and go back to sleep! 

In any event, by the end of the war, Congress had awakened to 

the fact that it could use the Federal Reserve System to obtain 

revenue without taxes. From that point forward, deficit spending 

became institutionalized. A gradually increasing issuance of Treasury 

bonds was encouraging to the Fed because it provided still one 

more source of debt to convert into money, a source that eventually 

would become far more reliable than either bank loans or banker's 

acceptances. Best of all, now that Congress was becoming dependent 

on the free corn, there was little chance it would find its wings 

and fly away. The more dependent it became, the more secure the 

System itself became. 

1. See Chapter six. 

2. Mayer, p. 401. 

j 

f 


In 1921, the twelve regional Reserve banks were separately 

buying and selling in the open market. But motives varied. Some 

merely needed income to cover their 

operating overhead, while 

others—notably the New York branch under Benjamin Strong 

were more interested in sending American gold to England. Strong 

began immediately to gather control of all open-market operations 

into the hands of his own bank. In June of 1922, the "Open-Market 

Committee" was formed to coordinate activities among the 

regional Governors. In April of the next year, however, the national 

board in Washington replaced the Governor's group with one of its 

own creation, the "Open-Market Investments Committee." Benjamin 

Strong was its chairman. The powers of that group were 

enhanced ten years later by legislation which made it mandatory 

for the regional branches to follow the Open-Market Committee's 

directives, but that was a mere formality, for the die had been cast 

much earlier. From 1923 forward, the Fed's open-market operations 

have been carried out by the New York Federal Reserve Bank. 

The money trust has always been in control. 

DROWNING IN CREDIT 

Actions have consequences, and one of the consequences of 

purchasing Treasury bonds and other debt-related securities in the 

open market is that the money created to purchase them eventually 

ends up in the commercial banks where it is used for the expansion 

of bank credit. "Credit" is another of those weasely words that 

have different meanings to different people. In banker language, 

the expansion of credit means the banks have "excess reserves" 

(bookkeeping entries) which can be multiplied by nine and earn 

interest for them—if only someone would be kind enough to 

borrow. It is money waiting to be created. The message is: "Come on 

to the bank, folks. Don't be bashful. We've got plenty of money to 

lend. You have credit you didn't even know you had." 

In the 1920s, the greater share of bank credit was bestowed 

upon business firms, wealthy investors, and other high rollers, but 

the little man was not ignored. In 1910, consumer credit accounted 

for only 10% of the nation's retail sales. By 1929, credit transactions 

were responsible for half of the $60 billion retail market. In his 

book, Money and Man, Elgin Groseclose says: "By 1929 the United 

itates was overwhelmed by a flood of credit. It had covered the 

—



Each cycle was at a higher level than the previous one. That is 

Groseclose, America's Money Machine, p. 154. 

land. It was pouring into every nook and cranny of the national 

1. 

and the boom returned. 

economy." 

because the busts that followed the booms were not allowed to play 

The impact of expanding credit was compounded by artificially 

themselves out. The monetary scientists now had so many mechanisms 

at their command they were able to initiate new expansions 

low interest rates—the other side of the same coin—which were 

intended to help the governments of Europe. But they also stimulated 

to cancel out the downward adjustments. It was like prescribing 

borrowing here at home. Since borrowing is what causes 

increasing doses of narcotics to postpone the awareness of an 

money to be created under fractional-reserve banking, the money 

supply in America began to expand. From 1921 through June of 

advancing disease. It increased the prestige of the doctor, but it did 

not bode well for the patient. 

1929, the quantity of dollars increased by 61.8%, substantially more THE ROLLER COASTER 

than the increase in national product. During that same time, the 

Between 1920 and 1929, there were three distinct business 

amount of currency in circulation remained virtually unchanged. 

cycles with several minor ones within them. For the average 

That means the expansion was comprised entirely of money 

American, it was confusing and destructive. For the investor, it was 

substitutes, such as bonds and loan contracts. 

a roller-coaster ride to oblivion: 

BOOMS AND BUSTS MADE WORSE 

UP! The Fed had inflated the money supply to pay for World 

The forces of the free market are amazingly flexible. Like the 

War I. The resulting boom caused prices to rise. 

black market, they manage to exert themselves in unexpected ways 

DOWN! In 1920, the Fed raised interest rates to cool off the 

in spite of political decree. That had been the case throughout most 

inflation. That caused a recession, and prices tumbled. 

of American history. Prior to the creation of the Federal Reserve, 

banking had been coddled and hobbled by government. Banks 

Farmers were hit 

banks were closed. 

the hardest, and hundreds of country 

were chartered by government, protected by government, and 

UP! In 1921, the Fed lowered interest rates to stop the recession 

regulated by government. They had been forced to serve the 

and to help the governments of Europe. Inflation and 

political agendas of those in power. Consequently, the landscape 

expanding debt resulted. 

was strewn with the tombstones of dead banks which had taken to 

DOWN! In 1923, the Fed tightened credit to put the brakes on 

their graves the life savings of their hapless depositors. But these 

inflation. 

were mostly regional tragedies that were offset by growth and 

UP! But that was offset by its simultaneous policy of lowering 

prosperity in other areas. Even within the communities most 

the rate at the discount window, thus encouraging banks to 

severely affected, recovery was swift. 

borrow new reserves to expand the money supply. 

Now that the cartel had firm control over the nation's money 

UP! In 1924, the Fed suddenly created $500 million dollars in 

supply, the pattern began to change. The corrective forces of the 

new money. Within one year, the commercial banks 

free market were more firmly straight-jacketed than ever. All banks 

parlayed that into more than $4 billion, an expansion of 

in the entire country were in lock step with each other. What 

eight-to-one. The boom that followed took on the character 

happened in one region is what happened in all regions. Banks 

of speculation rather than investment. Prices in the stock 

were not allowed to die, so there could be no adjustments after 

market rose drastically. 

their demise. Their illness was sustained and carried like a deadly 

DOWN! In 1926, the Florida land boom collapsed, and the 

virus to the others. 

The expansion of the money supply in the 1920s clearly shows 

that effect. It was not a steady advance but a series of convulsions. 

economy began to contract once again. 

UP! In 1927, Montagu Norman of the Bank of England visited 

the United States to consult with Benjamin Strong. Shortly 

after his visit, the Fed pumped new money into the system,


DOWN! In the spring of 1928, the Fed contracted credit to halt 

the boom. 

UP! But the banks shifted their reserves into time deposits 

(where customers agree to wait before withdrawing their 

money). Since time deposits require a smaller reserve ratio 

than demand deposits, the banks were able to issue more 

loans than before. That offset the Fed's contraction of credit. 

UP! By that time, the British government had consumed its 

previous subsidy which was used to maintain its 

state. 

welfare 

In the spring of 1928, the pound sterling was again 

sagging on the international market, and gold began to flow 

back into the United States. Once again, the fledgling 

Creature came to the aid of the Bank of England, its ailing 

parent. The Fed bought a huge volume of banker's 

acceptances to depress interest rates and halt the flow of 

gold. The money supply suddenly increased by almost 

$2 billion. 

DOWN! In August, the Fed reversed its expansionist policy by 

selling Treasury bonds in the open market and raising 

interest rates. The money supply began to contract. 

It was the final bubble. 

SIXTH REASON TO ABOLISH THE FED 

One of the myths about the Federal Reserve is that it is needed 

to stabilize the economy. Yet, it has achieved just the opposite. 

Destabilization is dramatically clear in the years prior to the Crash, 

but the same cause-and-effeet continues to this day. As long as men 

are given the power to tinker with the money supply, they will 

strive to circumvent the natural laws of supply and demand. No 

matter how high their intentions or pure their motives, they will 

cause disruptions in the natural flow. When these disruptions are 

perceived, they will try to compensate by causing opposite disruptions. 

But, long before they act, there will already be new forces at 

work which they cannot, in all their wisdom, perceive until they are 

already manifest. It is the height of egotistical folly for "experts" to 

think they can outsmart or do better than the combined, interactive 

decisions of hundreds of millions of people all acting in response to 

their own best judgment. Thus, the Fed is doomed to failure by its 

nature and its mission. That is the sixth reason it should be 

abolished: It destabilizes the economy. 


TULIPOMANIA 

Easy credit was not the only problem in this period. Equally 

important was the effect 

that had on the behavior patterns of the 

populace. Responding to herd instinct and a belief in the possibility 

of something-for-nothing, men were driven to the most bizarre 

form of investment speculation. 

This was not the first time such hysteria had seized a population. 

One of the most graphic examples occurred in Holland 

between the years 1634 and 1636. It came to pass that a new, rare 

flower, called the tulip, was discovered in the gardens of some of 

the more wealthy inhabitants of Constantinople, now known as 

Istanbul. When the root bulbs of these exotic blossoms were 

brought into Holland, they rapidly became a status symbol among 

the wealthy—much as race horses or rare breeds of dogs are today 

in our own society—and those with surplus funds found that an 

investment in tulips brought them significant social recognition. 

The price of tulip bulbs climbed steadily until they became, not 

merely symbols of status, but speculative investments as well. At 

one point, prices doubled every few days, and speculators were 

seen everywhere amassing great fortunes with no input of either 

labor or service. Many otherwise prudent people found themselves 

infected by the hysteria. They borrowed against their homes and 

invested their life savings to get in on the anticipated windfall. This 

pushed up prices even further and tended to create the fulfillment 

of its own prophecy. Contracts for the future delivery of tulip 

bulbs—a form of today's commodity market—became a dominant 

feature of Holland's stock market 

Tulip bulbs eventually became more precious than gemstones. 

As new varieties were developed, the market became more complex, 

requiring experts to certify their origin and their grade. Prices 

soared, and the herd went insane. One bulb of the species called 

Admiral Liefken was valued at 4,400 florins; a Semper Augustus, 

Worth 5,500 florins, was purchased for a new carriage, two gray 

horses, and a complete set of harnesses. It was recorded that, at one 

sale, a single Viceroy brought two lasts of wheat, four lasts of rye, 

four fat oxen, eight fat swine, twelve fat sheep, two hogsheads of 

wine, four casks of butter, one-thousand pounds of cheese, a bed 

and mattress, a suit of clothes, and a silver drinking cup.


Then, one day without warning, reality returned from her 

two-year vacation. By that time, everyone knew deep in their hearts 

that the spiralling prices bore no honest relationship to the value of 

the tulips and that, sooner or later, someone was going to get hurt. 

But they continued to speculate for fear of being too quick in their 

timing and losing out on profits yet to come. Everyone was 

confident they would sell out precisely at the top of the market. In 

any herd, however, there are always a few who will take the lead 

and, by 1636, all it took was one or two prominent merchants to sell 

out their stock. Overnight, there were no buyers whatsoever, at any 

price. The tulip market vanished, and speculators by the thousands 

saw their dreams of easy wealth—and, in many cases, their life 

savings also—disappear with it. Tulipomania, as it was called at the 

time, had come to an end. 

Or did it? As we have seen, the Federal Reserve can create large 

amounts of money simply by going into the open market and 

buying debt contracts. But, once it is in the mainstream of the 

economy, commercial banks can multiply that money by up to a 

factor of nine, and that is where the real inflationary action is. To 

protect that privilege is one of the reasons the banks formed this 

cartel in the first place. Nevertheless, the public still 

has the final 

say. If no one wants to borrow their money, the game is over. 

That possibility is more theoretical than real. Although men 

may be hesitant to go into debt for legitimate business ventures in 

times of economic uncertainty, they can be lured by easy credit to 

take a long shot. Dreams of instant wealth are powerful motivaters. 

Gaming casinos, poker parlors, race tracks, lottery windows, and 

other forms of tulipomania are convincing evidence that the lust for 

gambling is embedded in generic code. The public has always been 

interested in free corn. 

TULIPS IN THE STOCK MARKET 

During the final phase of America's credit expansion of the 

1920s, the rise in prices on the stock market was entirely speculative. 

Buyers did not care if their stocks were overpriced compared 

to the dividends they paid. Commonly traded issues were selling 

for 20 to 50 times their earnings; some traded at 100. Speculators 

acquired stock merely to hold for a while and then sell at a profit. It 

1. See Charles Mackay, LL.D., Extraordinary Popular Delusions and the Madness of 

Crowds (1841 rpt. New York: L.C Page & Company, 1932), pp. 89-97. 


was the "Greater-Fool" strategy. No matter how high the price is 

today, there will be a greater fool tomorrow who will buy at an 

even higher price. For a while, that strategy seemed to work. 

To make the game even more exciting, it was common for 

investors to purchase their stocks on margin. That means the buyer 

puts up a small amount of money as a deposit (the margin) and 

borrows the rest from his stockbroker—who gets it from the bank, 

which gets it from the Fed. In the 1920s, the margin for small 

investors was as low as 10%. Although the average stock yielded a 

modest 3% annual dividend, speculators were willing to pay over 

12% interest on their loans, meaning their stock had to appreciate 

about 9% per year just to break even. 

These margin accounts are sometimes referred to as "call loans" 

because the broker has the right to "call 

them in" on very short 

notice, often as short as twenty-four hours, If the broker calls the 

loan, the investor must produce the money immediately. If he 

cannot, the broker will obtain the money by selling the stock. In 

theory, the sale of the stock will be sufficient to cover the loan. But, 

in practice, about the only time brokers call their loans is when the 

market is 

tumbling. Under those conditions, the stock cannot be 

sold except at a loss: a total loss of the investor's margin; and a 

variable loss to the broker, depending on the severity of the price 

fall. To obtain even more leverage, investors sometimes use the 

stocks they already own as collateral for a margin loan on new 

stocks. Therefore, if they cannot cover a margin call on their new 

stocks, they will lose their old stocks as well. 

In any event, such silly concerns were not in vogue in the 1920s. 

From August of 1921 to September of 1929, the Dow-Jones industrial 

stock-price average went from 63.9 to 381.17, a rise of 597%. 

Credit was abundant, loans were cheap, profits were big. 

BANKS BECOME SPECULATORS 

The commercial banks were the middlemen in this giddy game. 

By the end of the decade, they were functioning more like 

speculators than banks. Instead of serving as dependable clearing 

houses for money, they also had become players in the market. 

Loans to commercial enterprises for the production of goods and 

services—which normally are the backbone of sound banking 

practice—were losing ground to loans for speculating in the stock 

market and in urban real estate. Between 1921 and 1929, while



commercial loans remained constant, total 

bank loans increased 

from $24,121 million to $35,711 million. Loans on securities and real 

estate rose nearly $8 billion. Thus, about 70% of the increase during 

this period was in speculative investments. And that money was 

created by the banks. 

New York banks and trust companies had over $7 billion 

loaned to brokers at the New York Stock Exchange for use in 

margin accounts. Before the war, there were 250 securities dealers. 

By 1929, the number had grown to 6,500. 

The banks not only generated the money for speculation, they 

became speculators themselves by purchasing large blocks of 

high-yield bonds, many of which were of dubious quality. Those 

were the kinds of securities that are difficult to liquidate in a 

declining market. Borrowing money on short term and investing 

on long term, the banks were maneuvering themselves into a 

precarious position. 

Did the Federal Reserve cause the speculation in the stock 

market? Of course not. Speculators did that. The Fed undoubtedly 

had other objects in mind, but that did not cancel its responsibility. 

It was acutely aware of the psychological effect of easy credit and 

had consciously used that knowledge to manipulate public behavior 

on numerous occasions. Behavioral psychology is 

a necessary 

tool of the trade. So it could claim neither ignorance nor innocence. 

In the unfolding of this tragedy, it was about as innocent as a spider 

whose web "accidentally" caught the fly. 

THE FINAL BUBBLE 

In the Spring of 1928, the Federal Reserve expressed concern 

over speculation in the stock market and raised interest rates 

curb the expansion of credit. The growth in the money supply 

began to slow down, and so did the rise in stock prices. It is 

conceivable that the soaring economy could have been brought in 

for a "soft landing"—except that there were other agendas to be 

considered. Professor Quigley had said that the central bankers 

were not substantive powers unto themselves but were as marionettes 

whose strings were pulled by others. Just as the speculation 

spree appeared to be coming under control, those strings were 

yanked, and the Federal Reserve flip-flopped once again. 

The strings originated in London. Even after seven years of 

subsidy by the Federal Reserve, the British economy was sagging 

to 

from the weight of its socialist system, and gold was moving back 

into the United States. The Fed, in spite of its own public condemnation 

of excessive speculation, reversed itself at the brink of 

success and purchased over $300 million of banker's acceptances in 

the last half of 1928, which caused an increase in the money supply 

of almost $2 billion. Professor Rothbard says: 

Europe, as we have noted, had found the benefits from the 1927 

inflation dissipated, and European opinion now clamored against any 

tighter money in the U.S. The easing in late 1928 prevented gold 

inflows into the UjS. from getting very large. Great Britain was again 

losing gold, and sterling was weak once more. The United States 

bowed once again to its overriding wish to see Europe avoid the 

inevitable consequences of its own inflationary policies. 1 

Prior to the Fed's reversal of policy, stock prices had actually 

declined by five per cent. Now, they went through the roof, rising 

twenty per cent from July to December. The boom had returned in 

spades. 

Then, in February of 1929, a curious event occurred. Montagu 

Norman travelled to the United States once again to confer 

privately with the officers of the Federal Reserve. He also met with 

Andrew Mellon, Secretary of the Treasury. There is no detailed 

public record of what transpired at these closed meetings, but we 

can be certain of three things: it was important; it concerned the 

economies of America and Great Britain; and it was thought best 

not to tell the public what was going on. It is not unreasonable to 

surmise that the central bankers had come to the conclusion that 

the bubble—not only in America, but in Europe—was probably 

going to rupture very soon. Rather than fight it, as they had in the 

past, it was time to stand back and let it happen, clear out the 

speculators, and return the markets to reality. As Galbraith put it: 

"How much better, as seen from the Federal Reserve, to let nature 

take its course and thus allow nature to take the blame." 2 

Mellon was even more emphatic. Herbert Hoover described 

Mellon's views as follows: 

Mr. Mellon had only one formula: "liquidate labor, liquidate 

stocks, liquidate the farmers, liquidate real estate." He insisted that, 

when the people get an inflation brainstorm, the only way to get it out 

1- Rothbard, Depression, p. 147. 

2- Galbraith, p. 181.



of their blood is 

to let it collapse. He held that even a panic was not 

altogether a bad thing. He said: "It will purge the rottenness out of the 

system. High costs of living and high living will come down. People 

will work harder, live a moral life. Values will be adjusted, and 

enterprising people will pick up the wrecks from less competent 

people." 

If this had been the mindset between Mellon and Norman and 

the Federal Reserve Board, the purpose of their meetings would 

have been to make sure that, when the implosion happened, the 

central banks could coordinate their policies. Rather than be 

overwhelmed by it, they should direct it as best they can and turn it 

ultimately to their advantage. Perhaps we shall never know if that 

scenario is accurate, but the events that followed strongly support 

such a view. 

ADVANCE WARNING FOR MEMBERS ONLY 

Immediately after the meetings, the monetary scientists began 

to issue warnings to their colleagues in the financial fraternity to get 

out of the market. On February 6, the Federal Reserve issued an 

advisory to its 

member banks to liquidate their holdings in the 

stock market. The following month, Paul Warburg gave the same 

advice in the annual report to the stockholders of his International 

Acceptance Bank. He explained the reason for that advice: 

If the orgies of unrestrained speculation are permitted to spread, 

the ultimate collapse is certain not only to affect the speculators 

themselves, but to bring about a general depression involving the 

entire country. 

Paul Warburg was a partner with Kuhn, Loeb & Co. which 

maintained a list of preferred customers. These were fellow bankers, 

wealthy industrialists, prominent politicians, and high officials 

in foreign governments. A similar list was maintained at J.P. 

Morgan Co. It was customary to give these men advance notice on 

important stock issues and an opportunity to purchase them at two 

to fifteen points below their price to the public. That was one of the 

means by which investment bankers maintained influence over the 

1. Quoted by Burton Hersh, The Melton Family: A Fortune in History (New York: 

William Morrow and Co., 1978), p. 290. 

2. This advice was reprinted in the Commercial ai\d Financial Chronicle, March 9, 

1929, p. 1444. 

affairs of the world. The men on these lists 

were notified of the 

coming crash. 

John D. Rockefeller, J.P. Morgan, Joseph P. Kennedy, Bernard 

Baruch, Henry Morganthau, Douglas Dillon—the biographies of all 

the Wall Street giants at that time boast that these men were "wise" 

enough to get out of the stock market just before the Crash. And it 

is true. Virtually all of the inner club was rescued. There is no 

record of any member of the interlocking directorate between the 

Federal Reserve, the major New York banks, and their prime 

customers having been caught by surprise. Wisdom, apparently, 

was greatly affected by whose list one was on. 

A MESSAGE OF COMFORT TO THE PUBLIC 

it 

While the crew was abandoning ship, the passengers were told 

was a lovely cruise. President Coolidge and Treasury Secretary 

Mellon had been vociferous in their public utterances that the 

economy was in better shape than ever. From his socialist perch in 

London, John Maynard Keynes exclaimed that the management of 

the dollar by the Federal Reserve Board was a "triumph" of man 

over money. And, from the plush offices of his New York Federal 

Reserve Bank, Benjamin Strong boasted: 

The very existence of the Federal Reserve System is a safeguard 

against anything like a calamity growing out of money rates.... In 

former days the psychology was different, because the facts of the 

banking situation were different. Mob panic, and consequently mob 

disaster, is less likely to arise. 

The public was comforted, and the balloon continued to 

expand. It was now time to sharpen the pin. On April 19, the Fed 

held an emergency meeting under cloak of great secrecy. The 

following day, the New York Times reported as follows: 

RESERVE COUNCIL CONFERS IN HASTE 

Atmosphere of Mystery Is Thrown 

about Its Meeting in Washington 

An atmosphere of deep mystery was thrown about the 

proceedings both by the board and the council. No advance 

announcement had been made that an extraordinary session 

of the council was contemplated, and the fact that the 

members were in the city became known only when 

I. Quoted by Greider, p. 298.

. 


newspaper correspondents happened to see some of them 

entering the Treasury Department building. Even after that, 

evasive replies were given.... While the joint meeting was 

in progress at the Treasury Department, every effort was 

made to guard the proceedings, and a group of newspaper 

correspondents were asked to leave the corridor. 

Let us return briefly to Montagu Norman. His biographer tells 

us that, after he became head of the Bank of England, his custom 

was to journey to the United States several times each year, 

although his arrival was seldom noted by the press. He travelled in 

disguise, wearing a long, black cloak and a large, broad-brimmed 

hat, and he used the pseudonym of Professor Skinner. It was on 

one of those unpublicized trips that he ran into a young Australian 

by the name of W.C. Wentworth. Sixty years later, Wentworth 

wrote a letter to The Australian, a newspaper in Sydney, and told of 

his encounter: 

In 1929 I 

was a member of the Oxford and Cambridge athletic 

team, visiting America to run against American Universities. Late in 

July we split up to return, and I, together with some other members, 

boarded a smallish passenger vessel in New York. (There were, of 

course, no aeroplanes in those days.) 

A fellow passenger was "Mr. Skinner," and a member of our team 

recognLzed him. He was Montagu Norman, returning to London, after 

a secret visit to the US Central Bank, travelling incognito. 

When we told him we knew who he was, he asked us not to blow 

his cover, because if the details of his movement were made public, it 

could have serious financial consequences. Naturally, we agreed, and 

on the days following, as we crossed the Atlantic, he talked to us very 

frankly. 

He said, "In the next few months there is going to be a shake-out 

But don't worry—it won't last for long." 

On August 9, just a few weeks after that ship-board encounter, 

the Federal Reserve Board reversed its easy-credit policy and raised 

the discount rate to six per cent. A few days later, the Bank of 

England raised its rate also. Bank reserves in both countries began 

to shrink and, along with them, so did the money supply. Simulta- 

1 

"Reserve Council Confers in Haste," New York Times, April 20, 1929, p. 89. 

2. Hargrave, p. 1. 

3. "Letters to the editor," The Australian (GPO Box 4162, Sydney, NSW. 2001), 

February 7, 1989. 


neously, the System began to sell securities in the open market, a 

maneuver that also contracts the money supply. Call rates on 

margin loans had jumped to fifteen, then twenty per cent. The pin 

had been inserted. 

THE DUCK DINNER BEGINS 

The securities market reached its high point on September 19. 

Then, it began to slide. The public was not yet aware that the end 

had arrived. The roller coaster had dipped before. Surely it would 

shoot upward again. For five more weeks, the public bought 

heavily on the way down. More than a million shares were traded 

during that period. Then, on Thursday, October 24, like a giant 

school of fish suddenly turning direction in response to an unseen 

signal, thousands of investors stampeded to sell The ticker tape 

was hopelessly overloaded. Prices tumbled. Thirteen million shares 

exchanged hands. Everyone said the bottom had dropped out of 

the market. They were wrong. Five days later, it did. 

On Tuesday, October 29, the exchanges were crushed by an 

avalanche of selling. At times there were no buyers at all. By the 

end of the trading session, over sixteen million shares had been 

dumped, in most cases at any price that was offered. Within a single 

day, millions of investors were wiped out. Within a few weeks of 

further decline, $3 billion of wealth had disappeared. Within 

twelve months, $40 billion had vanished. People who had counted 

their paper profits and thought they were rich suddenly found 

themselves to be very poor. 

The other side of the coin is that, for every seller, there was a 

buyer. The insiders who had moved their investments into cash 

and gold were the buyers. It must be remembered that falling stock 

prices didn't necessarily mean that there was anything wrong with 

the stocks. Those representing solid companies were still 

paying 

dividends and were good investments—at a realistic price. In the 

panic, prices had tumbled far below their natural levels. Those who 

had the cash picked them up for a small fraction of their true worth. 

Giant holding companies were formed for that task, such as Marine 

Midland Corporation, the Lehman Corporation, and the Equity 

Corporation. J.P. Morgan set up the food trust called Standard 

Brands. Like the shark swallowing the mackerel, the big speculators 

devoured the small.


There is no evidence that the Crash was planned for the 

purpose of profit taking. In fact, there is much to show that the 

monetary scientists tried mightily to avert it, and might have done 

so had not their higher-priority agendas gotten in the way. Yet, 

once they realized the inevitability of a collapse in the market, they 

were not bashful about using their privileged position to take full 

advantage of it. 

In that sense, FDR's son-in-law, Curtis Dall, was 

right when he wrote: 'It was the calculated 'shearing' of the public 

by the World Money Powers." 


Here is another of those "natural laws" of economics that needs 

to be added to our list: 

LESSON: It is human nature for man to place persona] 

priorities ahead of all others. Even the best of men cannot long 

resist the temptation to benefit at the expense of their neighbors 

if the occasion is placed squarely before them. This is especially 

true when the means by which they benefit is obscure and not 

likely to be perceived as such. There may be exceptional men 

from time to time who can resist that temptation, but their 

numbers are small. The general rule will prevail in the long run. 

A managed economy presents men with precisely that kind 

of opportunity. The power to create and extinguish the nation's 

money supply provides unlimited potential for personal gain. 

Throughout history the granting of that power has been 

justified as being necessary to protect the public, but the results 

have always been the opposite. It 

has been used against the 

public and for the personal gain of those who control. Therefore, 

LAW: When men are entrusted with the power to control 

the money supply, they will eventually use that power to 

confiscate the wealth of their neighbors. 

There is no better illustration of that law than the Crash of 1929 

and the lingering depression that followed. 

1. Curtis B. Dall, FDR: My Exploited Father-In-Laiv (Tulsa, Oklahoma: Christian 

Crusade Publications, 1967), p. 49. 


FROM CRASH TO DEPRESSION 

The lingering depression is an important part of the story. The 

speculators had been ruined, but what they lost was money 

acquired without effort. There were some unfortunate souls who 

also lost their life 

savings on call 

savings, but only because they gambled those 

loans. Those who bought stock with money they 

actually possessed did not have to sell, 

and they did quite well in 

the long run. For the most part, something-for-nothing had merely 

been converted back into nothing. The price of stocks had plummeted, 

but the companies behind them were still producing 

products, still employing people, and still paying dividends. No 

jDne lost his job just because the market fell. The tulips were gone, 

but the wheat crop remained. 

So, where was the problem? In truth, there was none—at least 

not yet. The crash, as devastating as it was to the speculators, had 

little effect on the average American. Unemployment didn't 

become rampant until the depression years which came later and 

were caused by continued government restraint of the free market. 

The drop of prices in the stock market was really a long-overdue 

knd healthy adjustment to the economy. The stage was now set for 

recovery and sound economic growth, as always had happened in 

the past. 

It did not happen this time. The monetary and political 

scientists who had created the problem now were in full charge of 

the rescue. They saw the crash as a golden opportunity to justify 

even more controls than before. Herbert Hoover launched a 

multitude of government programs to bolster wage rates, prevent 

prices from dropping, prop up failing firms, stimulate construction, 

guarantee home loans, protect the depositors, rescue the banks, 

subsidize the farmers, and provide public works. FDR was swept 

into office by promising even more of the same under the slogan of 

a New Deal, And the Federal Reserve launched a series of "banking 

reforms," all 

over the money supply. 

of which were measures to further extend its power 

In 1931, fresh money was pumped into the economy to restart 

the cycle, but this time the rocket would not lift off. The dead 

Weight of new bureaucracies and government regulations and 

subsidies and taxes and welfare benefits and deficit spending and 

tinkering with prices had kept it on the launching pad.



Eventually, the productive foundation of the country also 

began to crumble under the weight. Taxes and regulatory agencies 

forced companies out of business. Those that remained had to 

curtail production. Unemployment began to spread. By every 

economic measure, the economy was no better or worse in 1939 

than it was in 1930 when the rescue began. It wasn't until the 

outbreak of World War II, and the tooling up for war production 

that followed, that the depression was finally brought to an end. 

It was a dubious save. In almost every way, it was a repeat of 

the drama played out with World War I, even to the names of two 

of its most important players. FDR and Churchill worked together 

behind the scenes to bring America into the conflict—Churchill 

wanting American assistance in a war England was losing and 

could not afford, FDR wanting a jolt to the economy for political 

reasons, and the financiers, gathered behind J.P. Morgan, wanting 

the profits of war. But that is another chapter, and this book is long 

enough. 

What happened after World War II was the focus of the first six 

chapters. That brings us to the end of historical record. It's time, 

now, to reset the coordinates on our time machine and return to the 

present. 

SUMMARY 

Congress had been assured that the Federal Reserve Act would 

decentralize banking power away from Wall Street. However, 

within a few years of its inception, the System was controlled by 

the New York Reserve Bank under the leadership of Benjamin 

Strong whose name was synonymous with the Wall Street money 

trust. 

During the nine years before the crash of 1929, 

the Federal 

Reserve was responsible for a massive expansion of the money 

supply. A primary motive for that policy was to assist the government 

of Great Britain to pay for its socialist programs which, by 

then, had drained its treasury. By devaluing the dollar and 

depressing interest rates in America, investors would move their 

money to England where rates and values were higher. That 

strategy succeeded in helping Great Britain for a while, but it set in 

motion the forces that made the stock-market crash inevitable. 

The money supply expanded throughout this period, but the 

trend was interspersed with short spasms of contraction which 

were the result of attempts to halt the expansions. Each resolve to 

use restraint was broken by the higher political agenda of helping 

the governments of Europe. In the long view, the result of plentiful 

money and easy credit was a wave of speculation in the stock 

market and urban real estate that intensified with each passing 

month. 

There is circumstantial evidence that the Bank of England and 

the Federal Reserve had concluded, at a secret meeting in February 

of 1929, that a collapse in the market was inevitable and that the 

best action was to let nature take its course. Immediately after that 

meeting, the financiers sent advisory warnings to lists of preferred 

customers—wealthy industrialists, prominent politicians, and high 

officials 

in foreign governments—to get out of the stock market. 

Meanwhile, the American people were being assured that the 

economy was in sound condition. 

On August 9, the Federal Reserve applied the pin to the bubble. 

It increased the bank-loan rate and began to sell securities in the 

open market. Both actions have the effect of reducing the money 

supply. Rates on brokers' loans jumped to 20%. On October 29, the 

stock market collapsed. Thousands of investors were wiped out in 

a single day. The insiders who were forewarned had converted 

their stocks into cash while prices were still high. They now became 

the buyers. Some of the greatest fortunes in America were made in 

that fashion.

Section VI 

TIME TRAVEL 

INTO THE FUTURE 

In the previous sections of this book, we have 

travelled through time. We began our journey by 

stepping into the past. As we crisscrossed the 

centuries, we observed wars, treachery, 

profiteering, and political deception. That has 

brought us to the present. Now we are prepared 

to ride our time machine into the future. It will be 

a hair-raising trip, and much of what lies ahead 

will be unpleasant. But it has not yet come to pass. 

It is merely the projection of present forces. If we 

do not like what we see, we still 

have an 

opportunity to change those forces. The future 

will be what we choose to make it.

1 

Chapter Twenty-Four 

DOOMSDAY 

MECHANISMS 

The decline of American prosperity; the increase 

in the size ofgovernment; the decrease in personal 

freedom; the growth of taxes; evidence that this is 

according to plan by an elite riding group which 

hopes to merge the United States into world 

government on the basis of "equality'' with lessdeveloped 

nations; the environmentalist 

movement shown to be an outgrowth of that plan. 

That's enough history for one book. It will soon be time to reset 

the coordinates on our time machine and jump into the future. 

Before activating that switch, however, let's take one last look 

around us. The future is molded by the present. Where we are now 

will greatly affect where we are going to be. 

MIRED IN DEBT 

One of the most obvious characteristics of our present time is 

the extent to which Americans and their government have become 

mired in debt. Annual federal deficits have grown steadily since 

1950, and the rate of growth is now in a vertical climb. It had taken 

198 years for the federal government to borrow the first trillion 

dollars. Then, in just twelve years—mostly under the Reagan 

Administration—it borrowed another three trillion. By the end of 

1995, after three years of the Clinton Administration, the debt had 

grown to about $5 trillion. 

It is difficult to comprehend numbers of that size or to translate 

them into their effect upon each of us. $5 trillion represents about 

80% of all the goods sold and all the services rendered in America 

throughout the entire year. If you had a stack of $100 bills 40 inches 

high, you would be a millionaire. $5 trillion would rise 3,350 miles 

into space.


By 1993, net interest payments on that debt were running $214 

billion per year- That consumed about 14% of all federal revenue. 

It now represents the government's largest single expense; greater 

than defense; larger than the combined cost of the departments of 

Agriculture, Education, Energy, Housing and Urban Development, 

Interior, Justice, Labor, State, Transportation, and Veterans' Affairs. 

These charges are not paid by the government; they are paid by 

you. You provide the money through taxes and inflation. The cost 

currently is 

about $4,500 for each family of four. All families pay 

through inflation but not all pay taxes. The cost to each taxpaying 

family, therefore, is higher. On average, over $5,000 is extracted 

from your family each year, not to provide government services or 

even to pay off previous debt. Nothing is produced by it, not even 

roads or government buildings. No welfare or medical benefits 

come out of it. No salaries are paid by it. The nation's standard of 

living is not raised by it. It does nothing except pay interest. 

Furthermore, the interest is compounded, which means, even if 

the government were to completely stop its 

deficit spending, the 

total debt would continue to grow as a result of interest on that 

portion which already exists. In 1995, interest on the national debt 

was already consuming 57% of all the revenue collected by income 

taxes. At the present rate of expansion, it will consume 100% by the 

year 2010. That includes corporate taxes. Interest will consume 

100% of our personal income taxes much sooner. 

Amazing isn't it? Without interest on the national debt, we 

would save enough to reduce corporate taxes and eliminate 

personal income taxes altogether. Unfortunately, under present 

policies and programs, that is not going to happen, because 

Congress does not live within its income. Many expenses are paid, 

not from taxes, but from selling government bonds and going 

deeper into debt each year. So, even though we could save enough 

to eliminate personal income taxes, it would not be enough. The 

1. The gross interest was running $300 billion. Some of that money, however, is 

paid to federal agencies which hold some of the debt, so it is a case of the government 

paying itself. Furthermore, the Federal Reserve returns to the Treasury some 

of the interest it receives—the amount left over after the cost of operating the 

system. 

2, See Harry Figgie, Jr., Bankruptcy 1995: The Coming Collapse ofAmerica and How to 

Stop It (Boston: Little, Brown and Company, 1992), pp. 24, 68. Also "Historical 

Tables," Budget oftte United States; Fiscal Year 1996, pp. 22, 103. 

DOOMSDAY MECHANISMS 509 

government would still go into the red to keep up its present life 

style. However, if a reduction in the size and scope of the 

bureaucracy were accomplished at the same time, then personal 

and corporate income taxes could be entirely eliminated, and the 

government would have an annual surplus. 

THE DOOMSDAY MECHANISM 

Unfortunately, the locomotive is running in the opposite direction. 

The size of government is growing larger, not smaller. There 

are more people working for government than for all manufacturing 

companies in the private sector. There are more bank regulators 

than bankers, more farm-bureau workers than farmers, more 

welfare administrators than recipients. There are more citizens 

receiving government checks than there are paying income taxes. 

By 1996, welfare benefits in 29 states were higher than the 

average secretary's wage; and in 6 states, they were more than the 

entry-level wage for computer programmers. When it is possible 

for people to vote on issues involving the transfer of wealth to 

themselves from others, the ballot box becomes a weapon with 

which the majority plunders the minority. That is the point of no 

return, the point where the doomsday mechanism begins to 

accelerates until the system self-destructs. The plundered grow 

weary of carrying the load and eventually join the plunderers. The 

productive base of the economy diminishes further and further 

until only the state remains. 

The doomsday mechanism is also operating within government 

itself. By 1992, more than half of all federal outlays went for what 

are called entitlements. Those are expenses—such as Medicare, 

Social Security, and government retirement programs—which are 

based on promises of future payments. Many of them are contractual 

obligations, and millions of people depend on them. 

That does not mean they cannot be eliminated. For example, 

entitlements include $24 billion per year for food stamps. There is 

no contractual obligation to continue those, only political expediency. 

By now, most Americans have stood in grocery lines and 

J- The federal government derives substantial revenue from sources other than 

income taxes, such as excise taxes and import taxes. These, plus occasional assessments 

to the states, were the only taxes which the founding fathers intended for the 

federal government. The arrangement worked well for 135 years until the incometax 

was adopted in 1913.


watched the well-dressed customer in front of them use food 

stamps for ice cream, pretzels, candy, and wine and then drive 

away in a late-model car. The political function of the food stamp 

program is not to help the hungry but to buy votes. 

The programs that do involve contractual obligations—such as 

Social Security and Medicare—could be turned over to private 

firms which would not only operate them more efficiently but also 

would pay out higher benefits. Congress, however, does not dare 

to touch any of these entitlements for fear of losing votes. 

Normally, with contracts for future obligations of this kind, the 

issuer is required by law to accumulate money into a fund to make 

sure that there will be enough available when future payments 

become due. The federal government does not abide by those laws. 

The funds exist on paper only. The money that comes in for future 

obligations is immediately spent and replaced by a government 

IOU. So, as those future payments come due, all of the money must 

come from revenue being collected at that time. 

Herein lies the doomsday mechanism. These obligations will be 

paid out of future taxes or inflation. Entitlements currently represent 

52% of all federal outlays, and they are growing at the rate of 

12% each year. When this is added to the 14% that is now being 

spent for interest payments on the national debt, we come to the 

startling conclusion that two-thirds of all federal expenses are now 

entirely automatic, and that percentage is growing each month. 

Even if Congress were to stop all of the spending programs in 

the normal budget—dismantle the armed forces, close down all of 

its agencies and bureaus, stop all of its subsidies, and board up all 

of its buildings, including the White House—it would be able to 

reduce its present spending by only one-third. And even that small 

amount is shrinking by 10 to 12% per year. That is a best-case 

scenario. The real-case is that Congress is accelerating its discretionary 

spending, not canceling it. One does not have to be a 

statistical analyst to figure out where this trend is headed. 

The biggest doomsday mechanism of all, however, is the 

Federal Reserve System. It will be recalled that every cent of our 

money supply—including coins, currency, and checkbook 

money—came into being for the purpose of being loaned to 

someone. These dollars will disappear when those loans are paid 

back. They exist only so long as the debt behind them exists. 

Underneath the pyramid of money, supporting the entire structure, 


are the so-called reserves which represent the Fed's monetization of 

debt. If we tried to pay off the national debt, those reserves would 

also start to disappear, and our money supply would be undermined. 

The Federal Reserve would have to scramble into the 

money markets of the world and replace U.S. securities with bonds 

from corporations and other countries. Technically, that can be 

done, but the transition could be devastating. Under the Federal 

Reserve System, therefore, Congress would be fearful to eliminate 

the national debt even if it wanted to. 

These are the doomsday mechanisms already in operation. If 

we do not understand how they function, we will not be prepared 

for our trip into the future. The scenes that will unfold there will 

appear too bizarre, 

the events too shocking. We would be convinced 

that something surely had gone wrong with our time 

machine. 

WHO OWNS THE NATIONAL DEBT? 

It has been said that we need not worry about interest on the 

national debt because "We owe it to ourselves." Let's take a look at 

who owes what to whom. 

It may come as a surprise to learn that the Federal Reserve 

holds but a small portion of the national debt, only about 8%. 

Foreign investors own approximately 27%, and agencies of 

federal government have 28% (the lOUs that replaced money taken 

from the funds such as the Social Security Fund). Private-sector 

investors in the U.S. hold the largest share of about 37%. It is partly 

true, therefore, that "We owe it to ourselves" or at least that all of us 

owe it to some of us. The some of us who receive the interest are 

private investors seeking income that is exempt from state income 

taxes, and large institutions such as banks, corporations, insurance 

companies, and investment funds. With institutions, 

the 

the money 

represents pooled assets belonging to thousands of small investors. 

So, a major portion of the interest on the national debt does, indeed, 

accrue to the benefit of a large sector of the American people. 

That's the good news. The bad news is that the government 

obtains every cent of the money it pays to us by confiscating it from 

us in the first place. If it is true that we owe it to ourselves, then it is 

also true that we pay it to ourselves. The money goes out of one 

pocket back into the other—minus a handling fee. The government


takes $1000 from us in taxes and inflation and gives us back $350. 

The so-called "benefit" to the public is but a giant scam. 

And more bad news: When people purchase government 

bonds, there is less money available for investment in private 

industry. It is well known that government credit "crowds out" 

private credit. The result is that the productive side of the nation is 

handicapped by unfair competition for investment capital. To 

obtain new money for growth, private companies must pay higher 

interest rates. These are passed on to the consumer in the form of 

higher prices. Many companies are forced to curtail their plans for 

expansion, and potentially new jobs are never created. Some 

companies are forced out of business altogether, and their employees 

are put out of work. The economy is always retarded by 

government debt. The larger the debt, the greater the damage. 

The 27% portion of the national debt held by foreign investors 

may not seem like a large percentage, but it represents a huge 

amount of money nevertheless. A trillion dollars cannot be ignored. 

These bonds could become a great problem down the line as they 

mature. So far, they have been a partial blessing because they were 

purchased with money that already existed. Therefore, they were 

not inflationary. But it is not difficult to imagine future conditions 

under which the bond holders would decide not to renew. In order 

to pay off those bonds on maturity, the Treasury would have to 

issue new ones. The Federal Reserve then would have to purchase 

the new bonds with fiat 

money. Therefore, foreign-held federal 

debt is a ticking time bomb. If it should ever have to be picked up 

by the Fed, the inflationary impact on our country would be 

staggering. 

WHAT DIFFERENCE DOES IT MAKE? 

There is a tendency to read about these trends with a kind of 

detached fascination; Isn't that interesting* But where is the relevance? 

Why get excited over such technicalities and abstractions? 

So what if the government is mired in debt? Who cares if the 

interest will never be paid? What of it if we have a world currency 

or a world government? What difference will any of it make to me? 

The first step toward answering those questions is to see what 

difference it 

already has made. Our upcoming trip into the future 

will merely extend those lines. 

J 


As illustrated in previous sections of this book, there has been a 

long-term policy at the highest levels of government to shift 

economic resources away from the United States. That policy has 

been successful. Based on doomsday predictions of environmental 

disaster, government has saddled private companies with such 

burdensome expenses for eliminating waste products that heavy 

industry, once the mainstay of American prosperity, has fled our 

shores. Because of concern over the natural habitat of the spotted 

owl and the desert kangaroo rat, millions of acres of timber and 

agricultural land have been taken out of production. High taxes, 

rules beyond reason for safety devices in the work place, so-called 

fair-employment practices, and mandatory health insurance are 

rapidly destroying what is left of America's private industry. The 

result is unemployment and dislocation for millions of American 

workers. 

Federal taxes, including social-security, now take more than 

40% of our private incomes. State, county, and local taxes are on top 

of that. Inflation feeds on what is left. We spend half of each year 

working for the government. 

A study by the AFL-CIO in 1977 revealed that, in spite of wage 

increases in terms of dollars, the real wages of the average 

American—in terms of what he can buy with those dollars—were 

going down. That trend was confirmed in 1980 by the U.S. Census 

Bureau. In 1992, the Consumers' Union analyzed how many hours 

one had to work to buy common items compared to thirty years 

previously. Some low-priced items—such as long-distance phone 

calls, gasoline, food products, and wrist-watches—were cheaper in 

1992 in terms of hours worked to acquire them. But the higherpriced 

items—such as housing, college educations, and health 

care—were far more costly than ever. The report concludes: 

The average U.S. household has maintained its 

living standard 

largely because families are working more hours. Millions of women 

entered the work force in the past 25 years. In 1970, about 21 million 

women worked full time. Now that figure is over 36 million. That has 

helped to keep family buying power fairly stable. But for many 

families, it now represents the labor of two earners rather than one. 

The message here is that real wages in America have declined. 

Young couples with a single income now have a lower standard of 

r l- "Has Our Living Standard Stalled?" Consumer Reports, June, 1992, p. 392,


living than their parents did. In spite of two incomes, the real net 

worth of the average household is falling. The amount of leisure 

time is shrinking. The percentage of Americans who own their 

homes is dropping. Tne age at which a family acquires a first home 

is rising. The number of families counted among the middle class is 

falling. The size of the family savings is smaller. The number of 

people living below the officially defined poverty level is rising. 

The rate of personal bankruptcy is triple of what it was in the 1960s. 

Over 90% of all Americans are broke at age 65. 

THE NEW WORLD ORDER 

None of this is happening by accident. Chapters five and six 

documented the currently unfolding plan to create a functional 

world government within the framework of the United Nations, 

Often referred to as Tlie New World Order by its advocates, the 

proposed global government is designed upon the principles of 

socialism. It is the dream-come-true for the world's socialist 

theoreticians, politicians, and technicians who see it as the ultimate 

laboratory for their social experiments upon mankind. 

There are two weapons of control now being readied at the UN. 

One is a world military command which eventually will control all 

national armies and super weapons. That is being accomplished 

under the slogans of peace and disarmament. The other is a world 

central bank, now called the IMF /World Bank, with the ability to 

issue a common money which all nations must accept. That is being 

accomplished under the slogans of international trade and economic 

growth. 

Of the two weapons, monetary control is the most important. 

The use of military force is viewed as a crude weapon in the arsenal 

of world government to be used only as a last resort. The effect of 

monetary control is more powerful than mega-tons of atomic 

energy. It reaches into every shop and home, a feat that could never 

be accomplished by standing armies. It can be used with precision 

against one nation, one group, or even one person while sparing or 

benefiting all others. Military force may be irresistible but it causes 

resentment and political unrest that can smolder for decades. Since 

monetary manipulation is seldom understood by its victims, it does 

not incur their wrath. In fact, 

the manipulators enjoy high social 

status and financial reward. For these reasons, monetary control is 

the weapon of choice in The New World Order. 


A future world parliament based upon the concept of minimum 

coercion and maximum freedom could be a wonderful advent for 

mankind. Without trying to cram all nations into a centrallydirected 

beehive, it would welcome cultural and religious variety. 

Instead of trying to place the world into a collectivist straight-jacket 

of rules, regulations, quotas, and subsidies, it would encourage 

diversity and freedom-to-choose. 

Instead of levying ever-larger 

taxes on every conceivable economic activity and destroying 

human incentive in the process, it would encourage member 

nations to reduce the taxes that already exist and thereby stimulate 

production and creativity. 

A world parliament, dedicated to the concept of freedom, 

would have to withhold membership from any government that 

violated the basic rights of its citizens. It could be the means by 

which totalitarian governments would be encouraged to abandon 

their oppressive policies in order to obtain the economic and 

political advantages of acceptance in the world body. It could 

become the greatest force for peace and prosperity and freedom we 

have ever known. 

But The New World Order that is now incubating at the United 

Nations is an entirely different creature. Its members represent just 

about every dictator and warlord in the world. Its philosophy is 

built upon the socialist doctrine that all good flows from the state. 

Those who do not conform must be bent to the government's will 

or be eliminated. It 

reason that it is totalitarianism. 

cannot oppose totalitarianism for the simple 

AMERICA IS THE TARGET 

The New World Order cannot become a functional reality so 

long as the United States remains able to go it alone. America is 

viewed as a potential bull in the china shop. Right now, it is safely 

under control, but the world planners are worried it might break 

loose in the future. If the American people were to awaken to the 

realities of world politics and regain control over their government, 

they still would have the military and economic power to break 

away. Among the world planners, therefore, it has become the 

prime directive to weaken the United States both militarily and 

economically. And this directive has come from American leaders, 

not those of other countries. CFR members sitting in the White 

House, the State Department, the Defense Department, and the


Treasury are now working to finalize that part of the plan. It ls yet 

one more doomsday mechanism that, once it gains sufficient 

momentum, will pass the critical point of no return. 

The Korean War was the first time American soldiers fought 

under UN authority. That trend has accelerated and already 

includes military actions in Iraq, Yugoslavia, Bosnia, Somalia, and 

Haiti. By the time this book gets to print, there undoubtedly will be 

more. While the American military is being absorbed into the UN, 

steps are also underway to hand over American atomic weapons. 

When that happens, the doomsday mechanism will become activated. 

It will be too late to escape. 

Likewise, the IMF/World Bank is already functioning—in 

conjunction with the Federal Reserve System—as a world central 

bank. The American economy is being deliberately exhausted 

through foreign giveaways and domestic boondoggles. The object 

is, not to help those in need or to preserve the environment, but to 

bring the system dawn. When once-proud and independent Americans 

are standing in soup lines, they will be ready to accept the 

carefully arranged "rescue" by the world bank. A world currency is 

already designed, awaiting only an appropriate crisis to justify its 

introduction. From that, too, there will be no escape. 

THE REPORT FROM IRON MOUNTAIN 

The substance of these stratagems can be traced to a think-tank 

study released in 1966 called the Report from Iron Mountain. 

Although the origin of the report is highly debated, the document 

itself hints that it was commissioned by the Department of Defense 

under Defense Secretary, Robert McNamara and was produced by 

the Hudson Institute located at the base of Iron Mountain in 

Croton-on-Hudson, New York. The Hudson Institute was founded 

and directed by Herman Kahn, formerly of the Rand Corporation. 

Both McNamara and Kahn were members of the CFR. 

The self-proclaimed purpose of the study was to explore 

various ways to "stabilize society." Praiseworthy as that may 

sound, a reading of the Report soon reveals that the word society is 

used synonymously with the word government. Furthermore, the 

word stabilize is used as meaning to preserve and to perpetuate, It is 

clear from the start that the nature of the study was to analyze the. 

different ways a government can perpetuate itself in power, ways 

to control its citizens and prevent them from rebelling. 


It was stated at the beginning of the report that morality was 

not an issue. The study did not address questions of right or wrong; 

nor did it deal with such concepts as freedom or human rights. 

Ideology was not an issue, nor patriotism, nor religious precepts. 

Its sole concern was how to perpetuate the existing government. 

The report said: 

Previous studies have taken the desirability of peace, the 

importance of human life, the superiority of democratic institutions, 

the greatest "good" for the greatest number, the "dignity" of the 

individual, the desirability of maximum health and longevity, and 

other such wishful premises as axiomatic values necessary for the 

justification of a study of peace issues. We have not found them so. We 

have attempted to apply the standards of physical science to our 

thinking, the principal characteristic of which is not quantification, as 

is popularly believed, but that, in Whitehead's words, "... it ignores all 

judgments of value; for instance, all esthetic and moral judgments." 

The major conclusion of the report was that, in the past, war has 

been the only reliable means to achieve that goal. It contends that 

only during times of war or the threat of war are the masses 

compliant enough to carry the yoke of government without complaint. 

Fear of conquest and pillage by an enemy can make almost 

any burden seem acceptable by comparison. War can be used to 

arouse human passion and patriotic feelings of loyalty to the 

nation's leaders. No amount of sacrifice in the name of victory will 

be rejected. Resistance is viewed as treason. But, in times of peace, 

people become resentful of high taxes, shortages, and bureaucratic 

intervention. When they become disrespectful of their leaders, they 

become dangerous. No government has long survived without 

enemies and armed conflict. War, therefore, has been an indispensable 

condition for "stabilizing society." These are the report's exact 

words: 

The war system not only has been essential to the existence of 

nations as independent political entities, but has been equally 

indispensable to their stable political structure. Without it, no 

government has ever been able to obtain acquiescence in its 

"legitimacy," or right to rule its society. The possibility of war 

provides the sense of external necessity without which no government 

can long remain in power. The historical record reveals one instance 

1 Leonard Lew in, ed ., Reportfrom Iron Mountain on the Possibility and Desirability of 

Peace (New York: Dell Publishing, 1967), pp. 13-14.

. 



after another where the failure of a regime to maintain the credibility 

of a war threat led to its dissolution, by the forces of private interest, of 

reactions to social injustice, or of other disintegrative elements. The 

organization of society for the possibility of war is its principal 

political stabilizer.... It has enabled societies to maintain necessary 

class distinctions, and it has insured the subordination of the citizens 

to the state by virtue of the residual war powers inherent in the 

concept of nationhood. 

A NEW DEFINITION OF PEACE 

The report then explains that we are approaching a point in 

history where the old formulas may no longer work. Why? Because 

it may now be possible to create a world government in which all 

nations will be disarmed and disciplined by a world army, a 

condition which will be called peace. The report says: "The word 

peace, as we have used it in the following pages,... implies total and 

general disarmament/ 7 

Under that scenario, independent nations 

will no longer exist and governments will not have the capability to 

wage war. There could be military action by the world army 

against renegade political subdivisions, but these would be called 

peace-keeping operations, and soldiers would be called peace 

keepers. No matter how much property is destroyed or how much 

blood is spilled, the bullets will be "peaceful" bullets and the 

bombs—even atomic bombs, if necessary—will be "peaceful" 

bombs. 

The report then raises the question of whether there can ever be 

a suitable substitute for war? What else could the regional governments 

use—and what could the world government itself use—to 

legitimize and perpetuate itself? To provide an answer to that 

question was the stated purpose of the study. 

The Report from Iron Mountain concludes that there can be no 

substitute for war unless it possesses three properties. It must (1) be 

economically wasteful, (2) represent a credible threat of great 

magnitude, and (3) provide a logical excuse for compulsory service 

to the government. 

A SOPHISTICATED FORM OF SLAVERY 

On the subject of compulsory service, the report explains that 

one of the advantages of standing armies is that they provide a 

1. Ibid., pp. 39, 81. 

2. Ibid., p. 9. 

place for the government to put antisocial and dissident elements 

of society. In the absence of war, these forced-labor battalions 

would be told they are fighting poverty or cleaning up the planet or 

bolstering the economy or serving the common good in some other 

fashion. Every teenager would be required to serveêspecially 

during those years in which young people are most rebellious 

against authority. Older people, too, would be drafted as a means 

of working off tax payments and fines. Dissidents would face 

heavy fines for "hate crimes" and politically incorrect attitudes so 

eventually, they would all be in the forced-labor battalions. The 

report says: 

We will examine ... 

the time-honored use of military institutions 

to provide anti-social elements with an acceptable role in the social 

structure.. . The current 

. euphemistic cliches—"juvenile delinquency" 

and "alienation"—have had their counterparts in every age. In earlier 

days these conditions were dealt with directly by the military without 

the complications of due process, 

usually through press eanes or 

outright enslavement. 

. 

Most proposals that address themselves, explicitly or otherwise to 

the postwar problem of controlling the socially alienated turn to some 

variant of the Peace Corps or the soiled Job Corps for a solution. 

The socially disaffected, the economically unprepared, the 

psychologically uncomfortable, the hard-core "delinquents/' the 

incorrigible "subversives," and the rest of the unemployable are seen 

as somehow transformed by the disciplines of a service modeled on 

military precedent into more or less dedicated social service 

workers.... 

Another possible surrogate for the control of potential enemies of 

society is 

the rein traduction, in some form consistent with modern 

technology and political processes, of slavery.. . . It is entirely possible 

that the development of a sophisticated form of slavery may be an 

absolute prerequisite for social control in a world at peace. As a 

practical matter, conversion of the code of military discipline to a 

euphemized form of enslavement would entail surprisingly little 

revision; the logical first step would be the adoption of some form of 

"universal" military service. 

BLOOD GAMES 

The report considered ways in which the public could be 

preoccupied with non-important activities so that it would not 

fcave time to participate in political debate or resistance. Recreation, 

l- M* v pp. 41^12, 68, 70.

j 



trivial game shows, pornography, and situation comedies could 

play an important role, but blood games were considered to be the 

most promising of all the options. Blood games are competitive 

events between individuals or teams that are sufficiently violent in 

nature to enable the spectators to vicariously work off their 

frustrations. As a minimum, these events must evoke a passionate 

team loyalty on the part of the fans and must include the expectation 

of pain and injury on the part of the players. Even better for 

their purpose is 

the spilling of blood and the possibility of death. 

The common man has a morbid fascination for violence and blood. 

Crowds gather to chant "Jump! Jump!" at the suicidal figure on the 

hotel roof. Cars slow to a near stop on the highway to gawk at 

broken bodies next to a collision. A schoolyard fight instantly 

draws a circle of spectators. Boxing matches and football games 

and hockey games and automobile races are telecast daily, attracting 

millions of cheering fans who give rapt attention to each 

moment of danger, each angry blow to the face, each broken bone, 

each knockout, each carrying away of the unconscious or possibly 

dying contestant. In this fashion, their anger at "society" is defused 

and focused, instead, on the opposing team. The emperors of Rome 

devised the Circuses and gladiator contests and public executions 

by wild beasts for precisely that purpose. 

Before jumping to the conclusion that such concepts are absurd 

in modern times, recall that during the 1985 European soccer 

championship in Belgium, the spectators became so emotionally 

involved in the contest that a bloody riot broke out in the bleachers 

leaving behind 38 dead and more that 400 injured. U.S. Neius & 

World Report gives this account: 

The root of the trouble: A tribal loyalty to home teams that 

surpasses an obsession and, say some experts, has become a substitute 

religion for many. The worst offenders include members of gangs such 

as Chelsea's Anti-Personnel Firm, made up of ill-educated young 

males who find in soccer rivalry an escape from boredom. 

Still, the British do not have a patent on soccer violence. On May 

26, eight people were killed and more than 50 injured in Mexico City, - 

a 1964 stadium riot in Lima, Peru, killed more than 300—and a hotly 

disputed 1969 match between El Salvador and Honduras led to a 

week-long shooting war between the two countries, causing hundreds 

of casualties. 

The U.S. is criticized for the gridiron violence of its favorite sport 

football, but outbursts in the bleachers are rare because loyalties are 

spread among many sports and national pride is not at stake. Said 

Thomas Tutko, professor of psychology at California's San Jose State 

University: "In these other countries, it used to be their armies. Now 

it's their competitive teams that stir passions." 1 

Having considered all 

the ramifications of blood games, the 

Report from Iron Mountain concluded that they were not an adequate 

substitute for war. It is true that violent sports are useful 

distracters and do, in fact, allow an outlet for boredom and fierce 

group loyalty, but their effect on the nation's psyche could not 

match the intensity of war hysteria. Until a better alternative could 

be found, world government would have to be postponed so that 

nations could continue to wage war. 

FINDING A CREDIBLE GLOBAL THREAT 

In time of war, most citizens uncomplainingly accept their low 

quality of life and remain fiercely loyal to their leaders. If a suitable 

substitute for war is to be found, then it must also elicit that same 

reaction. Therefore, a new enemy must be found that threatens the 

entire world, and the prospects of being overcome by that enemy 

must be just as terrifying as war itself. The report is emphatic on 

that point: 

Allegiance requires a cause; a cause requires an enemy. This much 

is obvious; the critical point is that the enemy that defines the cause 

must seem genuinely formidable. Roughly speaking, the presumed 

power of the "enemy" sufficient to warrant an individual sense of 

allegiance to a society must be proportionate to the size and 

complexity of the society. Today, of course, that power must be one of 

unprecedented magnitude and Mghtfulness. 2 

The first consideration in finding a suitable threat to serve as a 

global enemy was that it did not have to be real. A real one would 

be better, of course, but an invented one would work just as well, 

provided the masses could be convinced it was real. The public will 

more readily believe some fictions than others. Credibility would 

be more important than truth. 

Poverty was examined as a potential global enemy but rejected 

as not fearful enough. Most of the world was already in poverty. 

Only those who had never experienced poverty would see it as a 

global threat. For the rest, it was simply a fact of everyday life. 

1- "British Soccer's Day of Shame/' U.S. News & World Report.june 10, 1985, p. 11. 

U. Lewin, Report, p. 44.

i 

only 

. 


An invasion by aliens from outer space was given serious 

consideration. The report said that experiments along those lines 

already may have been tried. Public reaction, however, was not 

sufficiently predictable, because the threat was not "credible." Here 

is what the report had to say: 

Credibility, in fact, lies at the heart of the problem of developing a 

political substitute for war. This is where the space-race proposals, in 

many ways so well suited as economic substitutes for war, fall short 

The most ambitious and unrealistic space project cannot of itself 

generate a believable external menace. It has been hotly argued that 

such a menace would offer the "last best hope of peace," etc., by 

uniting mankind against the danger of destruction by "creatures" 

from other planets or from outer space. Experiments have been 

proposed to test the credibility of an out-of-our-world invasion threat; 

it is possible that a few of the more difficult-to-explain "flying saucer" 

incidents of recent years were in fact early experiments of this kind. If 

so, they could hardly have been judged encouraging. 

This report was released 

in 1966 when the idea of an alien 

presence seemed far fetched to the average person. In the ensuing 

years, however, that perception has changed. A growing segment 

of the population now believes that intelligent life forms may exist 

beyond our planet and could be monitoring our own civilization. 

Whether that belief is right or wrong is not the issue here. The point 

is that a dramatic encounter with aliens shown on network 

television—even if it were to be entirely fabricated by high-tech 

computer graphics or laser shows in the sky—could be used to 

stampede all nations into world government supposedly to defend 

the Earth from invasion. On the other hand, if the aliens were 

perceived to have peaceful intent, an alternative scenario would be 

to form world government to represent a unified human species 

speaking with a single voice in some kind of galactic federation- 

Either scenario would be far more credible today than in 1966. 

THE ENVIRONMENTAL-POLLUTION MODEL 

The final candidate for a useful global threat was pollution of 

the environment. This was viewed as the most likely to succeed 

because it could be related to observable conditions such as smog 

and water pollution—in other words, it would be based partly on 

fact and, therefore, be credible. Predictions could be made showing 


end-of-earth scenarios just as horrible as atomic warfare. Accuracy 

in these predictions would not be important. Their purpose would 

be to frighten, not to inform. It might even be necessary to 

deliberately poison the environment to make the predictions more 

convincing and to focus the public mind on fighting a new enemy, 

more fearful than any invader from another nation—or even from 

outer space. The masses would more willingly accept a falling 

standard of living, tax increases, and bureaucratic intervention in 

their lives as simply "the price we must pay to save Mother Earth." 

If a vision of death and destruction from pollution could be 

implanted into the public subconscious mind, then the global battle 

against it could, indeed, replace war as the mechanism for control. 

Did the Report from Iron Mountain really say that? It certainly 

did—and much more. Here are just a few of the pertinent passages: 

When it comes to postulating a credible substitute for war ... the 

"alternate enemy" must imply a more immediate, tangible, and 

directly felt threat of destruction. It must justify the need for taking 

and paying a "blood price" in wide areas of human concern. In this 

respect, the possible substitute enemies noted earlier would be 

insufficient. One exception might be the environmental-pollution 

model, if the danger to society it posed was genuinely imminent. The 

fictive models would have to carry the weight of extraordinary 

conviction, underscored with a not inconsiderable actual sacrifice of 

life.... It may be, for instance, that gross pollution of the environment 

can eventually replace the possibility of mass destruction by nuclear 

weapons as the principal apparent threat to the survival of the species. 

Poisoning of the air, and of the principal sources of food and water 

supply, is already well advanced, and at first glance would seem 

promising in this respect; it constitutes a threat that can be dealt with 

through social organization and political power. . . 

It is true that the rate of pollution could be increased selectively for 

this purpose.... But the pollution problem has been so widely 

publicized in recent years that it seems highly improbable that a 

program of deliberate environmental poisoning could be 

implemented in a politically acceptable manner. 

However unlikely some of the possible alternative enemies we 

have mentioned may seem, we must emphasize that one must be 

found of credible quality and magnitude, if a transition to peace is ever 

to come about without social disintegration. It is more probable, in our 

judgment, that such a threat will have to be invented. 

1. Ibid., p. 66. 

I. Ibid., pp. 66-67, 70-71.

i 


— 


AUTHENTICITY OF THE REPORT 

Tlie Report from Iron Mountain states that it was produced by a 

Special Study Group of fifteen men whose identities were to remain 

secret and that it was not intended to be made public. One member 

of the group, however, felt the report was too important to be kept 

under wraps. He was not in disagreement with its conclusions. He 

merely believed that more people should read it. He delivered his 

personal copy to Leonard Lewin, a well-known author and columnist 

who, in turn, negotiated its publication by Dial Press. It was 

then reprinted by Dell Publishing. 

This was during the lohnson Administration, and the President's 

Special Assistant for National Security Affairs was CFR 

member Walt Rostow. Rostow was quick to announce that the 

report was a spurious work. Herman Kahn, CFR director of the 

Hudson Institute, said it was not authentic. The Washington Post— 

which is owned and run by CFR member Katharine Graham 

called it "a delightful satire." Time magazine, founded by 

CFR-member Henry Luce, said it was a skillful hoax. Then, on 

November 26, 1967, the report was reviewed in the book section of 

the Washington Post by Herschel McLandress, which was the pen 

name for Harvard professor John Kenneth Galbraith. Galbraith, 

who also had been a member of the CFR, said that he knew 

firsthand of the report's authenticity because he had been invited to 

participate in it. 

Although he was unable to be part of the official 

group, he was consulted from time to time and had been asked to 

keep the project a secret. Furthermore, while he doubted the 

wisdom of letting the public know about the report, he agreed 

totally with its conclusions. He wrote: 

As I would put my personal repute behind the authenticity of this 

document, so would I testify to the validity of its conclusions. My 

reservations relate only to the wisdom of releasing it to an obviously 

unconditioned public. 

Six weeks later, in an Associated Press dispatch from London, 

Galbraith went even further and jokingly admitted that he was "a 

member of the conspiracy ,,2 

1. "News of War and Peace You're Not Ready For/' by Herschel McLandress, Book 

World, in The Washington Post, November 26, 1967, p. 5. 

2. "The Times Diary/' London Times, February 5, 1 968, p 

. 

8. 

That, however, did not settle the issue. The following day, 

Galbraith backed off. When asked about his "conspiracy" statement, 

he replied: "For the first time since Charles II The Times has 

been guilty of a misquotation. . . . Nothing shakes my conviction that 

,it was written by either Dean Rusk or Mrs. Clare Booth Luce." 

The reporter who conducted the original interview was embarassed 

by the allegation and did further research. Six days later, 

this is what he reported: 

Misquoting seems to be a hazard to which Professor Galbraith is 

prone. The latest edition of the Cambridge newspaper Varsity quotes 

the following (tape recorded) interchange: 

Interviewer: "Are you aware of the identity of the author of Report 

from Iron Mountain?" 

Galbraith: "I was in general a member of the conspiracy but I was 

not the author. I have always assumed that it was the man who wrote 

the foreword—Mr. Lewin/' 

So, on at least three occasions, Galbraith publicly endorsed the 

authenticity of the report but denied that he wrote it. Then who 

did? Was it Leonard Lewin, after all? In 1967 he said he did not. In 

1972 he said that he did. Writing in the New York Times Book Review 

Lewin explained: "I wrote the 'Report/ all of it.... What I intended 

was simply to pose the issues of war and peace in a provocative 

way. 

But wait! A few years before that, columnist William F, Buckley 

told the New York Times that he was the author. That statement was 

undoubtedly made tongue-in-cheek, but who—and what are we to 

believe? Was it written by Herman Kahn, John Kenneth Galbraith, 

[Dean Rusk, Clare Booth Luce, Leonard Lewin, or William F. 

Buckley? 

In the final analysis, it make little difference. The important 

point is 

that The Report from Iron Mountain, whether written as a 

think-tank study or a political satire, explains the reality that 

surrounds us. Regardless of its origin, the concepts presented in it 

âre now being implemented in almost every detail. All one has to 

po is hold the Report in one hand and the daily newspaper in the 

bther to realize that every major trend in American life is conform- 

1. "Galbraith Says He Was Misquoted,"London Times, February 6, 1968, p. 3. 

K "Touche, Vrofessor/'London Times, February 12, 1968, p. 8. 

3. "Report from Iron Mountain/'Nea; York Times, March 19, 1968, p. 8.

. 


ing to the blueprint. So many things that otherwise are incomprehensible 

suddenly become clear: foreign aid, wasteful spending / 

the destruction of American industry, a job corps, gun control, a 

national police force, the apparent demise of Soviet power, a UN 

army, disarmament, a world bank, a world money, the surrender of 

national independence through treaties, and the ecology hysteria. 

The Report from Iron Mountain is an accurate summary of the plan 

that has already created our present. It is now shaping our future. 

ENVIRONMENTALISM A SUBSTITUTE FOR WAR 

It is beyond the scope of this study to prove that currently 

accepted predictions of environmental doom are based on exaggerated 

and fraudulent "scientific studies/' But such proof is easily 

found if one is willing to look at the raw data and the assumptions 

upon which the projections are based. More important, however, is 

the question of why end-of-world scenarios based on phony 

scientific studies—or no studies at all—are uncritically publicized 

by the CFR-controlled media; or why radical environmental groups 

advocating socialist doctrine and anti-business programs are lavishly 

funded by CFR-dominated foundations/ banks, and corporations, 

the very groups that would appear to have the most to lose. 

The Reportfrom Iron Mountain answers those questions. 

As the Report pointed out, truth is not important in these 

matters. It's what people can be made to believe that counts. 

"Credibility" is the key, not reality. There is just enough truth in the 

fact of environmental pollution to make predictions of planetary 

doom in the year two-thousand-something seem believable. All 

that is required is media cooperation and repetition. The plan has 

apparently worked. People of the industrialized nations have been 

subjected to a barrage of documentaries, dramas, feature films, 

ballads, poems, bumper stickers, posters, marches, speeches, seminars, 

conferences, and concerts. The result has been phenomenal. 

Politicians are now elected to office on platforms consisting of 

nothing more than an expressed concern for the environment and a 

promise to clamp down on those nasty industries. No one questions 

the damage done to the economy or the nation. It makes no 

difference when the very planet on which we live is sick and dying- 

Not one in a thousand will question that underlying premise. How 

could it be false? Look at all the movie celebrities and rock stars 

who have joined the movement. 


While the followers of the environmental movement are preoccupied 

with visions of planetary doom, let us see what the leaders 

are thinking. The first Earth Day was proclaimed on April 22, 1970, 

at a "Summit" meeting in Rio de Janeiro, attended by environmentalists 

and politicians from all over the world. A publication widely 

circulated at that meeting was entitled the Environmental Handbook. 

The main theme of the book was summarized by a quotation from 

Princeton Professor Richard A. Falk, a member of the CFR. Falk 

wrote that there are four interconnected threats to the planet—wars 

of mass destruction, overpopulation, pollution, and the depletion 

of resources. Then he said: "The basis of all four problems is the 

inadequacy of the sovereign states to manage the affairs of mankind 

in the twentieth century." 1 

The Handbook continued the CFR 

line by asking these rhetorical questions: "Are nation-states actually 

feasible, now that they have power to destroy each other in a 

t 

single afternoon?... What price would most people be willing to 

pay for a more durable kind of human organization—more taxes, 

giving up national flags, perhaps the sacrifice of some of our 

hard-won liberties?" 

In 1989, the CFR-owned Washington Post published an article 

written by CFR member George Kennan in which he said: "We 

must prepare instead for . . . an age where the great enemy is not the 

Soviet Union, but the rapid deterioration of our planet as a 

supporting structure for civilized life." 3 

On March 27, 1990, in the CFR-controiled New York Times, CFR 

member Michael Oppenheimer wrote: "Global warming, ozone 

depletion, deforestation and overpopulation are the four horsemen 

of a looming 21st century apocalypse As the cold war recedes, 

the environment is becoming the No. 1 international security 

concern." 

1. Garrett de Bell, ed v The Environmental Handbook (New York: Ballantine/Friends 

of the Earth, 1970), p. 138. 

2. Ibid.,p.U5. 

3. "A Europe Now Free from A Confining Cold War Vision/' by George Kennan, 

Washington Post syndication, Sacramento Bee, November 14, 1989, p. B7. 

The New York Times has been one of the principal means by which CFR policies 

are inserted into the mainstream of public opinion. The paper was purchased in 

1896 by Alfred Ochs, with financial backing from CFR pioneer J.P. Morgan, Rothschild 

agent August Belmont, and Jacob Schiff, a partner in Kuhn, Loeb & Co. It is 

now owned by CFR member Arthur Sulzberger, who is also the publisher, and it is 

staffed by numerous CFR editors and columnists. See Perloff, p. 181

. 


CFR member, Lester Brown, heads up another think tank called 

the Worldwatch Institute. In the Institute's annual report, entitled 

State of the World 1991, Brown said that "the battle to save the planet 

will replace the battle over ideology as the organizing theme of the 

new world order." 

In the official publication of the 1992 Earth Summit, we find 

this: "The world community now faces together greater risks to our 

common security through our impacts on the environment than 

from traditional military conflicts with one another." 

How many times does it have to be explained? The environmental 

movement was created by the CFR. It is a substitute for war 

that they hope will become the emotional and psychological 

foundation for world government 

HUMANITY ITSELF IS THE TARGET 

The Club of Rome is a group of global planners who annually 

release end-of-world scenarios based on predictions of overpopulation 

and famine. Their membership is international, but the American 

roster includes such well-known CFR members as Jimmy 

Carter, Harlan Cleveland, Claiburne Pell, and Sol Linowitz. Their 

solution to overpopulation? A world government to control birth 

rates and, if necessary, apply euthanasia. That is a gentle word for 

the deliberate killing of the old, the weak, and of course the 

uncooperative. Following the same reasoning advanced at Iron 

Mountain, the Club of Rome has concluded that fear of environmental 

disaster could be used as a substitute enemy for the purpose 

of unifying the masses behind their program. In their 1991 book 

entitled The First Global Revolution, we find this: 

In searching for a new enemy to unite us, we came up with the 

idea that pollution, the threat of global warming, water shortages, 

famine and the like would fit the bill..,. All these dangers are caused 

by human intervention.. . . The real enemy, then, is humanity itself. 

Socialist theoreticians have always been fascinated by the 

question of controlling population growth. It excites their imagination 

because it is the ultimate bureaucratic plan. If the real enemy is 

1. Lester R. Brown, "The New World Order/' in Lester R. Brown et aL, State of the 

World 1991: A Worldwatch Institute Report on Progress Toward a Sustainable Society 

(New York: W.W. Norton, 1991), p. 3. 

2. Alexander King and Bertrand Schneider, The First Global Revolution, A Report by 

the Council of the Club of Rome (New York: Pantheon Books, 1991), p. 115. 


humanity itself, as the Club of Rome says, then humanity itself 

must become the target. Fabian Socialist Bertrand Russell 1 

expressed it thus: 

I do not pretend that birth control is the only way in which 

population can be kept from increasing.... War, as I remarked a 

moment ago, has hitherto been disappointing in this respect, but 

perhaps bacteriological war may prove more effective. If a Black Death 

could be spread throughout the world once in every generation, 

survivors could procreate freely without making the world too full.. . 

A scientific world society cannot be stable unless there is world 

government... It will be necessary to find ways of preventing an 

increase in world population. If this is to be done otherwise than by 

wars, pestilences and famines, it will demand a powerful international 

authority. This authority should deal out the world's food to the 

various nations in proportion to their population at the time of the 

establishments of the authority. If any nation subsequently increased 

its population, it should not on that account receive any more food. 

The motive for not increasing population would therefore be very 

compelling. 

Very compelling, indeed. These quiet-spoken socialists are not 

kidding around. For example, one of the most visible "environmentalists" 

and advocate of population control is Jacques Cousteau. 

Interviewed by the United Nations UNESCO Courier in November 

fcOf 1991, Cousteau spelled it out. Speaking of death by cancer, he 

said: 

Should we eliminate suffering diseases? The idea is beautiful, but 

perhaps not a benefit for the long term. We should not allow our dread 

of diseases to endanger the future of our species. This is a terrible thing 

to say. In order to stabilize world population, we must eliminate 

350,000 people per day. It is a horrible thing to say, but it's just as bad 

not to say it. 

GORBACHEV BECOMES AN ECOLOGY WARRIOR 

We can now understand how Mikhail Gorbachev, formerly the 

leader of one of the most repressive governments the world has 

known, became head of a new organization called the International 

Creen Cross, which supposedly is dedicated to environmental 

1- See Martin, pp. 171, 325, 463-69. 

2. Bertrand Arthur William Russell, The Impact of Science on Society (New York: 

Simon and Schuster, 1953), pp. 103-104, 111. 

3. Interviewed by Bahgat Eluadi and Adel Rifaat, Courrier de l'Unescc, November 

1991, p. 13.

. 

. 


issues. Gorbachev has never denounced socialism, only the label of 

a particular brand of socialism called Communism. His real interest 

is not ecology but world government with himself assured a major 

position in the socialist power structure. In a public appearance in 

Fulton, Missouri, he praised the Club of Rome, of which he is a 

member, for its position on population control. Then he said: 

One of the worst of the new dangers is ecological.. . Today, 

global 

climatic shifts; the greenhouse effect; the "ozone hole"; acid rain; 

contamination of the atmosphere, soil and water by industrial and 

household waste; the destruction of the forests; etc. all threaten the 

stability of the planet. 

Gorbachev proclaimed that global government was the answer 

to these threats and that the use of government force was essential. 

He said: "I believe that the new world order will not be fully 

realized unless the United Nations and its Security Council create 

structures . . . authorized to impose sanctions and make use of other 

measures of compulsion." 

Here is an arch criminal who fought his way up through the 

ranks of the Soviet Communist Party, became the protege of Yuri 

Andropov, head of the dreaded KGB, was a member of the USSR's 

ruling Politburo throughout the Soviet invasion of Afghanistan, 

and who was selected by the Politburo in 1985 as the supreme 

leader of world Communism. All of this was during one of the 

Soviet's most dismal periods of human-rights violations and subversive 

activities against the free world. Furthermore, he ruled over 

a nation with one of the worst possible records of environmental 

destruction. At no time while he was in power did he ever say or do 

anything to show concern over planet Earth. 

All that is now forgotten. Gorbachev has been transformed by 

the CFR-dominated media into an ecology warrior. He is calling for 

world government and telling us that such a government will use 

environmental issues as justification for sanctions and other "measures 

of compulsion." We cannot say that we were not warned. 


U.S. BRANDED AS ECOLOGICAL AGGRESSOR 

The use of compulsion is an important point in these plans. 

People in the industrialized nations are not expected to cooperate 

in their own demise. They will have to be forced. They will not like 

it when their food is taken for global distribution. They will not 

approve when they are taxed by a world authority to finance 

foreign political 

projects. They will not voluntarily give up their 

cars or resettle into smaller houses or communal barracks to satisfy 

the resource-allocation quotas of a UN agency. Club-of-Rome 

member Maurice Strong states the problem: 

In effect, the United States is committing environmental 

aggression against the rest of the world.... At the military level, the 

United States is the custodian. At the environmental level, the United 

States is clearly the greatest risk.... One of the worst problems in the 

United States is energy prices—they're too low.. . 

It is clear that current lifestyles and consumption patterns of the 

affluent middle class ... involving high meat intake, consumption of 

large amounts of frozen and 'convenience' foods, ownership of 

motor-vehicles, numerous electric household appliances, home and 

work-place air-conditioning . . . expansive suburban housing . . . are not 

sustainable 

Mr. Strong's remarks were enthusiastically received by world 

environmental leaders, but they prompted this angry editorial 

response in the Arizona Republic: 

Translated from eco-speak, this means two things: (1) a reduction 

in the standard of living in Western nations through massive 

• 

new 

taxes and regulations, and (2) a wholesale transfer of wealth from 

industrialized to under-developed countries. The dubious premise 

here is that if the U.S. economy could be reduced to, say, the size of 

Malaysia's, the world would be a better place.... Most Americans 

probably would balk at the idea of the U.N. banning automobiles in 

the U.S. 

Who is this Maurice Strong who sees the United States as the 

[Environmental aggressor against the world? Does he live in poverty? 

Does he come from a backward country that is resentful of 

American prosperity? Does he himself live in modest circum- 

1 Michail Gorbachev, "The River o£ Time and the Necessity of Action/' 46th John 

Findley Green Foundation Lecture, Westminster College, Fulton, Missouri, May 6, 

1992, transcript from Westminster College Department of Press Relations, p. 6. 

2. Ibid., p. 9. 

1 "Ecology Remedy Costly," (AP), Sacramento Bee, March 12, 1992, p. A8. Also 

Maurice Strong, Introduction to Jim MacNeil, Pieter Winsemius, and Taizo 

Yakushiji, Beyond Interdependence (New York: Oxford University Press, 1991), p. ix. 

2. "Road to Ruin/' Arizona Republic, March 26, 1992.



stances, avoiding consumption in order to preserve our natural 

resources? None of the above. He is one of the wealthiest men in 

the world. He lives and travels in great comfort. He is a lavish 

entertainer. In addition to having great personal wealth derived 

from the oil industry in Canada—which he helped nationalize— 

Maurice Strong was the Secretary-General of the 1992 Earth Summit 

in Rio; head of the 1972 UN Conference on Human 

Environment in Stockholm; the first Secretary-General of the UN 

Environment Program; president of the World Federation of 

United Nations; co-chairman of the World Economic Forum; member 

of the Club of Rome; trustee of the Aspen Institute; and a 

director of the World Future Society. That is probably more than 

you wanted to know about this man, but it is necessary in order to 

appreciate the importance of what follows. 

A PLOT FOR ECONOMIC CRISIS 

Maurice Strong believes—or says that he believes—the world's 

ecosystems can be preserved only if the affluent nations of the 

world can be disciplined into lowering their standard of living. 

Production and consumption must be curtailed. To bring that 

about, those nations must submit to rationing, taxation, and 

political domination by world government. They will probably not 

do that voluntarily, he says, so they will have to be forced. To 

accomplish that, it will be necessary to engineer a global monetary 

crisis which will destroy their economic systems. Then they will 

have no choice but to accept assistance and control from the UN. 

This strategy was revealed in the May, 1990, issue of West 

magazine, published in Canada. In an article entitled "The Wizard 

of Baca Grande," journalist Daniel Wood described his week-long 

experience at 

Strong's private ranch in southern Colorado. This 

ranch has been visited by such CFR notables as David Rockefeller, 

Secretary-of-State Henry Kissinger, founder of the World Bank 

Robert McNamara, and the presidents of such organizations as 

IBM, Pan Am, and Harvard. 

During Wood's stay at the ranch, the tycoon talked freely about 

environmentalism and politics. To express his own world view, he 

said he was planning to write a 

novel about a group of world 

leaders who decided to save the planet. As the plot unfolded, it 

became obvious that it was based on real people and real events. 

Wood continues the story: 

Each year, he explains as background to the telling of the novel's 

plot, the World Economic Forum convenes in Davos, Switzerland. 

Over a thousand CEOs, prime ministers, finance ministers, and 

leading academics gather in February to attend meetings and set 

economic agendas for the year ahead. With this as a setting, he then 

says: "What if a small group of these world leaders were to conclude 

that the principal risk to the earth comes from the actions of the rich 

countries? And if the world is to survive, those rich countries would 

have to sign an agreement reducing their impact on the environment. 

Will they do it?... The group's conclusion is 'no.' the rich countries 

won't do it. They won't change. So, in order to save the planet, the 

group decides: Isn't the only hope for the planet that the industrialized 

civilizations collapse? Isn't it our responsibility to bring that about?." 

"This group of world leaders," he continues, "form a secret society 

to bring about an economic collapse. It's February. They're all at 

Davos. These aren't terrorists. They're world leaders. They have 

positioned themselves in the world's commodity and stock markets. 

They've engineered, using their access to stock exchanges and 

computers and gold supplies, a panic. Then, they prevent the world's 

stock markets from closing. They jam the gears. They hire mercenaries 

who hold the rest of the world leaders at Davos as hostages. The 

markets cant close. The rich countries..." And Strong makes a slight 

motion with his fingers as if he were flicking a cigarette butt out the 

window. 

I sit there spellbound. This is not any storyteller talking, this is 

Maurice Strong. He knows these world leaders. He is, in fact, 

co-chairman of the Council of the World Economic Forum. He sits at 

the fulcrum of power. He is in a position to do it. 

'T probably shouldn't be saying things like this," he says. 

Maurice Strong's fanciful plot probably shouldn't be taken too 

seriously, at least in terms of a literal reading of future events. It is 

unlikely they will unfold in exactly that manner—although it is not 

impossible. For one thing, it would not be necessary to hold the 

leaders of the industrialized nations at gun point. They would be 

the ones engineering this plot. Leaders from Third-World countries 

do not have the means to cause a global crisis. That would have to 

come from the money centers in New York, London, or Tokyo. 

(Furthermore, the masterminds behind this thrust for global government 

have always resided in the industrialized nations. They have 

come from the ranks of the CFR in America and from other 

p. 35. 

"The Wizard of Baca Grande," by Daniel Wood, West magazine, May, 1990,



branches of the International Roundtable in England, France, 

Belgium, Canada, Japan, and elsewhere. They are the ideological 

descendants of Cecil Rhodes and they are fulfilling his dream. 

It is not important whether or not Maurice Strong's plot for 

global economic collapse is to be taken literally. What is important 

is that men like him are thinking along those lines. As Wood 

pointed out, they are in a position to do it. Or something like it. If it 

is not this scenario, they will consider another one with similar 

consequences. If history has proven anything, it is that men with 

financial and political power are quite capable of heinous plots 

against their fellow men. They have launched wars, caused depressions, 

and created famines to suit their personal agendas. We have 

little reason to believe that the world leaders of today are more 

saintly than their predecessors. 

Furthermore, we must not be fooled by pretended concern for 

Mother Earth. The call-to-arms for saving the planet is a gigantic 

ruse. There is just enough truth to environmental pollution to make 

the show "credible/' as The Report from Iron Mountain phrased it, 

but the end-of-earth scenarios which drive the movement forward 

are bogus. The real objective in all of this is world government, the 

ultimate doomsday mechanism from which there can be no escape. 

Destruction of the economic strength of the industrialized nations 

is merely a necessary prerequisite for ensnaring them into the 

global web. The thrust of the current ecology movement is directed 

totally to that end. 

SUMMARY 

debt. 

The United States government is mired in a 5-trillion-dollar 

By 1993, net interest payments on that debt were running 

$214 billion per year. That consumes about 14% of all federal 

revenue and costs the average family over $5,000 each year. 

Nothing is purchased by it. It merely pays interest. It represents the 

government's largest single expense. Interest on the national debt is 

already consuming more than 57% of all the revenue collected from 

income taxes. At the present rate of expansion, it will consume 

100% in 1998. 

By 1992, there were more people working for government than 

for manufacturing companies in the private sector. There are more 

citizens receiving government checks than there are paying income 

taxes. When it is possible for people to vote on issues involving the 

transfer of wealth to themselves from others, the ballot box 

becomes a weapon whereby the majority plunders the minority. 

That is the point of no return. It is a doomsday mechanism. 

By 1992, more than half of all federal outlays went for what are 

called entitlements. Here is another doomsday mechanism. Entitlements 

are expenses—such as Social Security and Medicare—which 

are based on promises of future payments. Entitlements represent 

52% of federal outlays. When this is added to the 14% that is now 

being spent for interest payments on the national debt, we come to 

the startling conclusion that two-thirds of all federal expenses are 

now entirely automatic, and that percentage is growing each 

month. 

The biggest doomsday mechanism of all is the Federal Reserve 

System. Every cent of our money supply came into being for the 

purpose of being loaned to someone. Those dollars will disappear 

when the loans are paid back. If we tried to pay off the national 

debt, our money supply would be undermined. Under the Federal 

Reserve System, therefore, Congress would be fearful to eliminate 

the national debt even if it wanted to. 

Political environmentalism has caused millions of acres of 

timber and agricultural land to be taken out of production. Heavy 

industry has been chased from our shores by our own government. 

High taxes, rules beyond reason for safety devices in the work 

place, so-called fair-employment practices, and mandatory health 

insurance are rapidly destroying what is left of the private sector. 

The result is unemployment and dislocation for millions of American 

workers. Government moves in to fill the void it creates, and 

bureaucracy grows by the hour. 

Federal taxes now take more than 40% of our private incomes. 

State, county, and local taxes are on top of that. Inflation feeds on 

what is left. We spend half of each year working for the government. 

Real wages in America have declined. Young couples with a 

single income have a lower standard of living than their parents 

did. The net worth of the average household is falling. The amount 

of leisure time is shrinking. The percentage of Americans who own 

their homes is dropping. The age at which a family acquires a first 

home is rising. The number of families counted among the middle 

class is falling. The number of people living below the officially 

defined poverty level is rising. Over 90% of all Americans are broke 

at age 65.


None of this is accidental. It is the fulfillment of a plan by 

members of the CFR who comprise the hidden government of the 

United States. Their goal is the deliberate weakening of the 

industrialized nations as a prerequisite to bringing them into a 

world government built upon the principles of socialism, with 

themselves in control. 

The origin of many of the stratagems in this plan can be traced 

to a government-sponsored think-tank study released in 1966 

called the Report from Iron Mountain. The purpose of the study was 

to analyze methods by which a government can perpetuate itself in 

power—ways to control its citizens and prevent them from rebelling. 

The conclusion of the report was that, in the past, war has 

been the only reliable means to achieve that goal. Under world 

government, however, war technically would be impossible. So the 

main purpose of the study was to explore other methods for 

controlling populations and keeping them loyal to their leaders. It 

was concluded that a suitable substitute for war would require a 

new enemy which posed a frightful threat to survival. Neither the 

threat nor the enemy had to be real. They merely had to be 

believable. 

Several surrogates for war were considered, but the only one 

holding real promise was the environmental-pollution model. This 

was viewed as the most likely to succeed because (1) it could be 

related 

to observable conditions such as smog and water pollution—in 

other words, it would be based partly on fact and, 

therefore, believable—and (2) predictions could be made showing 

end-of-earth scenarios just as horrible as atomic warfare. Accuracy 

in these predictions would not be important. Their purpose would 

be to frighten, not to inform. 

While the followers of the current environmental movement are 

preoccupied with visions of planetary doom, the leaders have an 

entirely different agenda. It is world government. 

Chapter Twenty-Five 

A PESSIMISTIC 

SCENARIO 

Thefuture portrayed as a continuation of present 

trends including a hypothetical banking crisis, 

massive inflation, collapse of the economy, domestic 

violence, the issuance ofa new UN money, the 

arrival ofUN "Peacekeeping" forces, and thefinal 

merger into 

high-tech feudalism. 

The New World Order, a form of 

We are ready now for the final trip in our time machine. On the 

control panel in front of us are several selector switches. The one on 

Jthe left indicates Direction of Time. Set it to Future. The switch on the 

right indicates Primary Assumptions. Set it to the first notch which 

reads: Present trends unaltered. Leave the Secondary-Assumption 

switch where it is. The lever in the center is a throttle to determine 

speed of travel. Nudge it forward—and hang on tight! 

A BANKING CRISIS 

It is 4:05 in the morning. While New York City sleeps, the 

:omputers on the fourth floor at Citibank are aware that a 

full-blown crisis is underway. It started in London—five hours 

ahead of the East coast—and within minutes had spread like an 

electronic virus to Tokyo and Hong Kong. That was an hour ago. 

Alarms are now sounding on computer terminals in all the trading 

centers of the world, and automatic dialing devices are summoning 

money managers to their board rooms. 

The panic started from rumors that one of the large U.S. banks 

was in trouble because of the simultaneous default of its loan to 

Mexico and the bankruptcy of its second-largest corporate borrower. 

Yesterday afternoon, the bank's president held a press 

conference and denied that these were serious problems. To 

reinforce his optimism, he announced that, on Friday, the bank will 

be paying a higher-than-usual quarterly dividend. The professional


money managers were not convinced. They knew that writing off 

these loans would wipe out the bank's entire net worth. 

All American banks are now so intertwined in their operations 

that trouble for one affects them all. By 5 A.M., the money-center 

banks are facing heavy withdrawals from overseas depositors. By 

the time the sun peeks between the New York skyscrapers, 

Americans are also taking their money. These are not small 

transactions. They involve other banks, insurance companies, and 

investment funds. The average withdrawal is over $3 million. The 

reservoir is draining fast. 

It is now 7:45. The banks will soon be opening their doors, and 

already newspaper reporters and TV crews are arriving outside. A 

plan of unified action must be made quickly. 

The Chairman of the Federal Reserve has arranged an emergency 

conference call with the CEOs of all the major banks, 

including one who was located at great effort at his fishing lodge in 

northern Canada. The President is also tied into the telephone 

network but on a "silent-monitor" basis. Other than the Chairman, 

no one else knows he is listening. 

TO SAVE THE BANKS IS TO SAVE THE WORLD 

The CEO at Citibank quickly summarizes the problem. None of 

the banks will be able to sustain withdrawals of this magnitude for 

more than about forty-eight hours. Perhaps less. The money is not 

in their vaults. It has been put into interest-bearing loans. Even if 

the loans were performing, they would not have the money. Now 

that some of the larger loans are in default, the problem is even 

worse. If the Fed doesn't provide the money, the banks will have no 

choice but to close their doors and go out of business. That would 

cause a collapse of the economy and untold suffering Would follow. 

Americans would be thrown out of work; families would go 

hungry; national security would be weakened. And it would 

undoubtedly spread to the entire world. Who knows what dire 

consequences would follow—chaos, famine, and riots here at 

home? Revolution abroad? The return of a militaristic regime in 

Russia? Atomic war? 

The Chairman cuts the monologue short. He is well aware that 

the banks must not be allowed to fail. That, after all, was one of the 

reasons the Federal Reserve was created. He wants to get on with 

the details of how to do it. 

A PESSIMISTIC SCENARIO 539 

Yes, the FDIC is already broke, but don't worry about that. 

Congress will authorize a "loan" or some other mechanism for the 

Fed to create whatever amount of new money the FDIC might 

need. If Congress moves too slowly, the Fed has other technical 

means to accomplish the same result. In the meantime, unlimited 

funding will be available at the Fed's discount window by 8 A.M., 

Eastern Standard time. The printing presses are already running at 

full capacity to provide the currency. Heets of airplanes and 

armored cars are standing by to deliver it. Furthermore, don't give 

up on those defaulted loans. Congress will probably bailout the 

bankrupt American corporation. And the President has said he will 

ask for additional funding for the IMF/World Bank. That money 

will be created by the Fed and carry the stipulation that it must be 

used by Mexico and other defaulting countries to resume interest 

payments on their loans. 

The bankers are told to open their doors to the public and act 

calm. The press already knows that something is going on but not 

the seriousness of it. So tell them only what they already know. 

Nothing more. If people want to withdraw their money, give it to 

them. If lines should develop, call the police to maintain order, but 

continue paying out Offer to stay open after closing hours, if 

necessary, to accommodate everyone. Above all, 

have the tellers 

take their time. Check and double check each transaction, Move the 

lines slowly. 

The armored trucks will arrive at the busiest hours so the 

guards can carry sacks of money past the customers for visual 

confirmation that there is enough for everyone. A bank officer then 

should tell the crowd that a fresh delivery of money has just been 

made from the Federal Reserve System and that there is plenty 

more where that came from- Once people become convinced that 

the bank is able to pay, most of them will tire of the wait and go 

home. 

PANIC AVERTED 

It is now 6 P.M. of the following day. The plan was successful. 

Lines of anxious depositors had formed yesterday morning, mostly 

in the larger cities, and resumed again this morning. But there has 

been enough money for everyone. The news media treated 

story lightly, making sure to include sound bites from various 

experts that banks can no longer fail, thanks to the FDIC and the 

the


Federal Reserve System. More than half the video time is devoted 

to armored trucks and guards carrying sacks of money. The banks 

closed on schedule today, and there were no more lines. 

While everything appears calm to the passengers on deck, the 

fire still rages out of control in the boiler room. Over a billion 

dollars has already fled, mostly overseas, and the hemorrhage 

continues. The Fed is pumping in fresh money to replace it. Two of 

the banks have instructed their computer technicians to activate an 

incoming transactions. There is 

automatic two-hour delay on all 

talk of deliberately disabling the entire network and blaming the 

breakdown on overload, but the idea is abandoned. There are too 

many people in the system. Someone surely would leak the truth to 

the press. 

The danger of a run on the banks by private depositors used to 

be the nightmare of the Federal Reserve. Now it is nothing 

compared to the electronic run that is taking place involving 

institutional depositors around the world. These are professionals 

who are not impressed by armed guards carrying bags of currency. 

They want their money now—and they are getting it. Although 

they are receiving it in the form of electronic credits, they are 

immediately exchanging that for something more dependable, such 

as stocks, other currencies, and bullion. 

This is 

the Fed's finest hour. It is exercising its many powers, 

carefully accumulated over the years, to create money out of 

whatever is at hand: U.S. Treasury bonds, bonds from other 

governments, corporate debt obligations, even direct loans to 

individuals and partnerships. Billions of new dollars are springing 

into existence. They are spreading around the globe to fulfill 

banks' obligation to give people back their money. 

A REAL RUN ON THE BANKS 

It is now seven weeks later. Something happened, but no one 

knows what. Like a spark igniting a twig, spreading to a branch, 

and then engulfing the entire forest, the public has panicked. 

Responding to a primitive herd instinct, they are descending on the 

banks and the thrifts. They want their money. They want their 

savings. 

Perhaps it was the newly released statistics showing higher 

unemployment, or the continued rise in bankruptcies, or the 

Congressional vote to increase the national debt again, or the jump 

the 


in Social-Security taxes, or the loss of another 140,000 jobs to 

Mexico, or the riots in Chicago and Detroit for more food stamps 

and government housing, or the presence of 

• 

UN "Peacekeeping" 

troops to augment the National Guard, or the rumor that the Bank 

I of America was technically insolvent, or the UN World Court 

ruling that the number of American automobiles had to be cut by 

30% by December 31st, or the skeptical tone in the voice of the CBS 

news anchor as he quoted the latest prediction of renewed prosperity. 

Whatever it was, there are now long lines of sober-faced 

depositors outside every bank. There is not enough cash in the 

vaults to meet the demand. Most money is checkbook money, 

which means it consists merely of magnetic impulses in a computer. 

Only about five per cent of the monetary supply is in the 

form of coins or currency. Most of that is already outside the banks 

in cash registers, wallets, and mattresses. The amount inside the 

banks is only about one-half of one per cent. The Fed's emergency 

supply of currency—a large quantity warehoused for exactly this 

kind of crisis—is inadequate. This time, the printing presses cannot 

keep up. 

Spokesmen from the Treasury and the Federal Reserve appear 

on TV and assure the nation that there is no need for panic. 

Everything is under control. The only problem is the irrational 

behavior of alarmists who have no faith in their country. 

No one believes them. The lines grow longer, and the people 

become angry. Bank employees are jeered on their way to work. 

Bomb threats are made. Sporadic violence breaks out, and bank 

windows are smashed. The /nternational Guard is called up. The 

President declares a bank holiday. 

Since people cannot close out their bank accounts by withdrawing 

currency, they rush through the stores on checkbook-spending 

sprees. If they cannot get their money back, at least they can buy 

things with it. Garages and basements are filling up with canned 

goods, shoes, liquor, tires, ammunition. Goods are becoming 

scarce, pushing prices upward. The Dow Jones is going through the 

roof as investors empty their checking accounts to buy anything for 

sale. The Securities and Exchange Commission finally suspends 

trading. 

Nine months have now passed. The crisis has been a blessing

— 


because of it. It has given them an excuse to swarm through the 

country on fact-finding trips, to appear in shirt sleeves at town-hall 

meetings, to give speeches, and to be seen on television—all 

time expressing grave concern and appearing to take charge. It has 

legitimized their role and somehow made them seem more necessary 

than before. They have been converted in the public eye from 

oafs and bumpkins to serious-minded statesmen. 

The party in power said it inherited the mess. The previous 

party blamed the current one for dropping the ball. Both parties, 

however, agreed on the solution: more of exactly the same policies 

that created the crisis: expanded power to the Federal Reserve, 

more government control over the economy, more subsidies and 

benefits, and more international commitments. These were called 

"emergency reforms" and became law. The same men who created 

the problem prescribed the solution. The public was grateful to 

have leaders of such vision and wisdom. 

BANK BAILOUT AND MORE INFLATION 

The most important emergency reform was to bail out the 

banks with taxpayers' dollars. Defaulted foreign loans were taken 

over by the IMF/World Bank, and the failing corporate borrowers 

were given government grants disguised as loans—loans which 

everyone knew would never be paid back. 

Next, the banks were nationalized, at least in part. In return for 

the bailout money, they gave large blocks of stock to the government 

which now operates as an official business partner. This was 

not a drastic change. The banks were already heavily regulated by 

government, even to the point of determining their profits, dividends, 

and executive salaries. That is the way the cartel wanted it. 

It was the means by which competition was avoided and profits 

assured. Monetary scientists and political scientists have always 

worked as a hidden partnership. This merely made the relationship 

more visible. 

Technically, no bank was allowed to fail. The Fed kept its 

promise on that. When the troubled banks were taken over, all 

depositors with $100,000 or less were fully protected. If they 

wanted their money and the bank didn't have it, the Fed simply 

manufactured it. 

the 

No one was worried about the value of those 

dollars. They were just happy to have them. 


Ten more months have now passed. Those new dollars are 

flooding throughout the system. The money supply has increased 

by the amount of the bailout plus the amount of new spending for 

welfare, health care, interest on the national debt, and foreign aid, 

all of which are in a vertical climb. Inflation has become institutionalized. 

The dollar has been dethroned as the world's defacto currency. 

Foreign investors and central banks no longer have any use for 

dollars. They have sent them back to the United States from 

whence they came. Over a trillion of them have returned to our 

shores like a huge flock of homing pigeons that fills the sky from 

horizon to horizon. They are buying our refrigerators, automobiles, 

computers, airplanes, cargo ships, armored tanks, office buildings, 

factories, real estate — pushing prices to levels that would have 

seemed impossible a year ago. A single postage stamp costs as 

many dollars as once would have purchased a new TV set. 

Most stores have stopped accepting checks and credit cards. 

Workers are paid daily with bundles of paper money. People rush 

to the stores to purchase groceries before prices rise even further. 

Commerce is paralyzed. Bank loans and mortgages are unobtainable. 

Savings accounts have been destroyed, including the cash 

values of insurance policies. Factories are shutting down. Businesses 

are closing their doors. Barter is commonplace. Old silver 

coins come out of private hoards and a hundred-dollar bill is 

exchanged for one silver dime. 

Following the crash of 1929, the supply of paper money was 

limited because it was backed by silver, and the amount of silver 

itself was limited. Those who had money were able to buy up the 

assets of those who did not. Since prices were falling, 

the longer 

they held on to their dollars, the more they could buy. Now, things 

are exactly the opposite. There is nothing to back the money supply 

except politics. There is no limit to the amount of currency that can 

be created. It is just a question of printing and delivering it. Money 

is abundant, and prices are rising. Those who have money are 

spending it as soon as possible to prevent further loss of purchasing 

power. In the 1930s, everyone wanted dollars. Now, everyone 

wants to get rid of them. 

The Emergency Banking Regulation No. 1, originally issued in 

1961, empowered the Secretary of the Treasury 

without consent of 

Congress—to seize anyone's bank account, savings account, or


safe-deposit box. It also gave him the power to fix rents, prices, 

salaries, and hourly wages, and to impose rationing. This was to be 

done "in the event of attack on the United States/' That phrase now 

has been changed to read: "in the event of national emergency." 

The Federal Emergency Management Agency (FEMA) has been 

expanded to administer the directives of the Treasury. FEMA also 

has the power to detain and forcibly relocate any citizen "in the 

event of a national emergency." 

NEW MONEY 

Three more months have passed, and the President has declared 

a state of national emergency. Today, the Secretary of the 

Treasury announced that the nations of the world had ratified a 

multilateral treaty that would solve the inflationary problems of the 

United States. This will be accomplished through the issuance of a 

new world-wide monetary unit called the Bancor, the name 

proposed by John Maynard Keynes at the Bretton Woods Conference 

in 1944. This new money will restore our commerce and put a 

stop to inflation. At last said the Treasury Secretary, man will have 

total control over his economic destiny. Money will now become 

his servant instead of his master. 

The United States, he said, has agreed to accept the Bancor as 

legal tender for all debts, public and private. The old money will 

still be honored but will be phased out over a three-month period. 

After that date, Federal Reserve Notes will no longer be valid. 

During the transition period, the old money may be exchanged at 

any bank at the ratio of one Bancor for five-hundred dollars. All 

existing contracts expressed in dollars—including home mortgages—are 

now converted to Bancors in that same ratio. 

In the same announcement, the Secretary advised that the 

IMF/World Bank was backing this new money with something far 

more precious than gold. Instead, it will be backed by the assets of 

the world. These include bonds from the participating governments 

plus millions of acres of wilderness lands that have been 

deposited into the UN "Environmental Bank/' 1 

The National Parks 

1. "Debt-for-nature" swaps were proposed at the 4th World Wilderness Conference 

held in Denver, Colorado, in 1987 and they are being implemented right now. 

Costa Rica, Bolivia, and Ecuador have already agreed to swap their debt in exchange 

for a commitment to prevent wilderness areas from being developed. UN 

control over those lands is inevitable. 


and forests of the United States have been added to those reserves, 

and they will now be under the supervision of the UN Wilderness 

Asset Preservation and Enhancement Agency (WAPEA). From this 

date forward, the Federal Reserve System will operate as a subdivision 

of the IMF which is now the central bank of the world. 

Although the Secretary did not mention it in his public appearance, 

the UN treaty also obligated the government to put restrictions 

on the use of cash. Every citizen is to be issued an 

international ID card. The primary purpose of these machinereadable 

cards is to provide positive identification for all citizens at 

transportation depots and military checkpoints. They also can be 

used by the banks and stores to access checking accounts, which are 

now called debit accounts. 

Every citizen is being issued an account in a bank near his place 

of residence. All payments by employers or government agencies 

will be made by electronic transfer. Cash transactions larger than 

five Bancors will be illegal in three months. Most expenditures will 

be paid by debit card. That is the only way in which the UN 

Monetary Transaction Tracking Agency (MTTA) can combat counterfeiting 

and prevent money laundering by organized crime. That, 

of course, is camouflage. The government complex issuing the new 

money is the greatest perpetrator of counterfeiting and organized 

crime the world has ever seen. The real targets are political 

dissidents and those escaping taxes in the underground economy. 

No one will be allowed to earn or buy or sell without this ID 

card, nor will 

they be allowed to leave the country or even to 

migrate to another city. If any government agency has reason to 

red -flag an individual, his card will not clear, and he will be 

blocked from virtually all economic transactions and geographical 

movements. It is the ultimate control. 

The new money offers the Cabal yet one more benefit. There 

can never be another run on the banks, because it 

demand currency. 

is now illegal to 

1. That is not hyperbole. All fiat money is counterfeit. Furthermore, there is 

evidence that the CIA and the DEA have been deeply involved in the smuggling of 

illicit drugs. The money derived from those drugs was apparently laundered 

through Panamanian branches of U.S. banks and used to finance covert operations 

in Nicaragua and elsewhere. Virtually all governments have been involved in 

activities that would be criminal offenses if committed by ordinary citizens.


THE RISE OF REVOLUTIONARY MOVEMENTS 

Hyperinflation is fertile ground for the seeds of revolution. 

Economic despair led the masses to grasp at the promises of Lenin 

in Russia, Hitler in Germany, Mussolini in Italy, and Mao in China. 

It has now been three years since that fateful run on the banks in 

New York, and inflation has not abated, even with the introduction 

of the Bancor. Now we are witnessing massive public demonstrations 

in every major city for higher wages, more jobs, larger 

government benefits, and more stringent price controls. Since there 

are practically no goods in the stores at any price, the demonstrators 

are also calling for higher output from government factories. 

The demonstrations have been organized by radical organizations 

advocating the overthrow of the "decadent capitalist" system and 

the enthronement of socialism in its place. The participants in the 

street do not understand the words they chant. They are unaware 

that capitalism has been dead in America for many years and that it 

is socialism they already have. 

Nevertheless, there are tens of thousands of desperate people 

who are attracted to the rhetoric of revolution. Terrorism and 

revolutionary insurgency have become common occurrences in the 

major urban areas. The ranks of the revolutionaries are swelled by 

those who come solely for the looting that always follows. 

People are frightened by these violent events and demand the 

restoration of law and order. They are relieved when martial law is 

declared. They are happy to see the International Guard patrolling 

their neighborhoods. They are not resentful of being confined in 

their homes or arbitrarily detained by soldiers. They are actually 

grateful for the omni-presence of the police state. 

It is curious that the revolutionary groups behind this violence 

have not been inhibited by the government. To the contrary, they 

have been given grants from CFR organizations, and their leaders 

have been treated courteously by CFR politicians. The CFR media 

have given them extended coverage in the news and has presented 

their cause with sympathy. A few dissidents have begun to wonder 

if the revolutionaries are but the unknowing pawns of those in 

power and that their primary function is to frighten the population 

into accepting the constraints of a police state. 

Such voices, however, are quickly silenced. Those who question 

the government or the media are branded as extremists at the 


lunatic fringe. Authorities say that they are the cause of our present 

woes. They are remnants of the old system based on profit-seeking 

and race-hating. They are guilty of politically-incorrect attitudes 

and hate crimes. They are sentenced to attitude-correction centers 

for psychological treatment and rehabilitation. Those who do not 

immediately recant are never seen again. 

HOMES ARE NATIONALIZED 

One of the first industries to feel the raw power of "emergency 

measures" was the home industry. During the early stages of 

inflation, people were applying their increasingly worthless dollars 

to pay down their mortgages. That was devastating to the lenders. 

They were being paid back in dollars that were worth only a 

fraction of the ones they had loaned out. The banking crisis had 

caused the disappearance of savings and investment capital, 

they were unable to issue new loans to replace the old. Besides, 

people were afraid to sell their homes under such chaotic times 

and, if 

they did, very few were willing to buy with interest rates 

piat high. Old loans were being paid off, and new loans were not 

^replacing them. The S&Ls, which in the 1980s had been in trouble 

because home prices were falling, now were going broke because 

prices were rising. 

Congress applied the expected political fix by bailing them out 

and taking them over. But that did not stop the losses. It merely 

transferred them to the taxpayers. To put an end to the losses, 

Congress passed the Housing Fairness and Reform Act (HFRA). It 

converted all Bancor-denominated contracts to a new unit of 

value—called the "Fairness Value"— which is determined by the 

National Average Price Index (NAPI) on Fridays of the preceding 

week. This has nothing to do with interest rates. It relates to Bancor 

values. For the purpose of illustration, let us convert Bancors back 

to dollars. A $50,000 loan on Friday became a $920,000 loan on 

Monday. Few people could afford the payments. Thousands of 

angry voters stormed the Capitol building in protest. While the 

mob shouted obscenities outside, Congress hastily voted to declare 

a moratorium on all mortgage payments. By the end of the day, no 

one had to pay anything! The people returned to their homes with 

satisfaction and gratitude for their wise and generous leaders. 

That was only an "emergency" measure to be handled on a 

more sound basis later on. Many months have now passed, and 

so

| 

competition, 

I 

J 


Congress has not dared to tamper with the arrangement. The voters 

would throw them out of office if they tried. Millions of people 

have been living in their homes at no cost, except for county taxes, 

which were also beyond the ability of anyone to pay. Following the 

lead of Congress, the counties also declared a moratorium on their 

taxes—but not until the federal government agreed to make up 

their losses under terms of the newly passed Aid to Local Governments 

Act (ALGA). 

Renters are now in the same position, because virtually all 

rental property has been nationalized, even that which had been 

totally paid for by their owners. Under HFRA, it 

is not "fair" for 

those who are buying their homes to have an advantage over those 

who are renting. Rent controls made it impossible for apartment 

owners to keep pace with the rising costs of maintenance and 

especially their rising taxes. Virtually all rental units have been 

seized by county governments for back taxes. And since the 

counties themselves are now dependent on the federal government 

for most of their revenue, their real estate has been transferred to 

federal agencies in return for federal aid. 

All of this was pleasing to the voters who were gratified that 

their leaders were "doing something" to solve their problems. It 

gradually became clear, however, that the federal government was 

now the owner of all their homes and apartments. The reality is 

that people are living in them only at the pleasure of the government. 

They can be relocated to other quarters if that is what the 

government wants. 

WAGE-PRICE CONTROLS AND WORK ARMIES 

Meanwhile, the UN Wage and Price Stabilization Agency 

(WPSA) has instituted wage and price controls to combat inflation. 

What few businesses were able to survive the ravages of inflation 

are knocked out by these measures. Vital industries have been 

seized by the WPSA and prevented from closing. When employees 

refuse to work for low, fixed wages or to take the jobs assigned to 

them, they are placed under arrest and convicted of anti-democratic 

activities. Given a choice between prison or "volunteering" 

for the UN Full Employment and Environmental Restoration Army 

(FEERA), most of them chose the army. They are now doing the 

work prescribed for them in return for food and shelter. Many have 

been reassigned to new jobs, new cities, even new countries/ 

I 

I 

I 


depending on the employment quotas established by the UN 

International Human Resource Allocation Agency (IHRAA). Their 

families have been given living quarters which are appropriate to 

their work status and their willingness to cooperate. 

Automobiles are now used only by the ruling elite who hold 

government positions of authority. To the extent possible, workers 

have been relocated to barracks which were constructed within 

walking distance of major industries. Others use rapid-transit 

systems, which have been greatly expanded by FEERA. For middle 

management and the more skilled workers who are allowed to live 

in the suburbs, there are "Peoples' Van Pools" (PVPs) that shuttle 

them to and from assigned boarding areas. 

Last week, Maurice Strong, who is now the Director of IHRAA, 

toured the fifteen regional subdivisions that have been carved out 

of the North-American continent—including the former United 

States and Canada—and expressed gratification that America, at 

last, has ceased to be an aggressor against the world. 

Another twenty years have slipped by, and we now find 

ourselves in The New World Order. No one around us is sure 

exactly when it began. In fact, there was no official starting date, no 

announcement in the media, no ceremony with blaring of trumpets. 

Sometime during the past ten or fifteen years, it became 

obvious that it just was, and everyone accepted it as the natural 

evolution of political trends and necessities. Now, a whole genera- 

tion is in place that has no memory of another way of life. Many of 

the older folks have all but forgotten the details of their previous 

existence. And, of course, many of them have been eliminated. 

Schools and textbooks speak of the bygone era as one of unbridled 

selfishness, and injustice. Previously commonplace 

possessions such as automobiles and private homes and three pairs 

of shoes are hardly mentioned, and when they are, they are derided 

as wasteful artifacts of a decadent society that, fortunately, has 

ceased to exist 

NO TAXES OR INFLATION OR DEPRESSIONS 

The public is no longer concerned over high taxes. For the most 

part, there are none. Everyone works for the government—directly 

pr indirectly—and is paid by electronic transfer to a government- 

STegulated bank which controls all spending accounts. Even those 

large corporations which have been allowed to maintain the


appearance of private ownership are merely junior partners of 

government. They are totally regulated and, at the same time, 

totally protected from failure. The amount each citizen receives for 

his labor is determined by his technical usefulness and his political 

rank. His taxes are pleasantly low or non-existent. The cost of 

government now is derived almost totally from expansion of the 

money supply—and from the economic value of the work battalions. 

Each regional government of the world determines its spending 

needs and then offers to sell bonds in the open market to raise the 

money. The IMF/World Bank, acting as the UN's central bank, is 

the primary buyer. The Bank determines how much money to 

allow each regional government and then "purchases" that amount 

of bonds. It accomplishes that by making an electronic transfer of 

"credits" to one of its correspondent banks within the region 

receiving the money. Once that has happened, the local government 

can draw upon those credits to pay its bills. Not a single tax 

dollar is needed for any of that. The IMF/World bank simply 

creates the money and the regional governments spend it. 

In days gone by, this increase in the money supply would have 

caused prices and wages to go up almost immediately. Not 

anymore. Prices and wages are controlled. What does happen, 

however, is that the government is caught in its own trap. It needs 

to keep the workers happy by giving them wage increases, but it 

also needs to keep its factories functioning by allowing price 

increases as well. The wage-price spiral, therefore, is not eliminated. 

It is merely delayed a few months. And, instead of happening 

in response to the interplay of supply and demand in a free 

market, it is directed by bureaucratic formula. The end result is the 

same either way. The people of the world are still paying the cost of 

their international and local governments through the hidden 

taxation called inflation. 

In the chaotic past, the industrialized nations of the world went 

through phases of disruptive inflation often exceeding 1000% per 

year. That served a purpose in helping to destroy public faith in 

their existing national governments. It softened them up and made 

them more willing to accept drastic changes in their life styles and 

their political institutions. It paved the way to The New World 

Order. But now we have arrived, and extreme inflation rates—at 

least in the absence of war—would cause public dissatisfaction and 

be counterproductive. Inflation, 


therefore, has now been institutionalized 

at a fairly constant 5% per year. That has been determined 

to be the optimum level for generating the most revenue 

without causing public alarm. Five per cent, everyone agrees, is 

"moderate." They can live with that. But we tend to forget that it is 

5% per year, forever. 

A 5% devaluation applies, not only to the money earned this 

year, but to all that is left over from previous years. At the end of 

the first year, the original dollar is worth 95 cents. At the end of the 

second year, it is reduced again by 5% leaving its worth at 90 cents, 

and so on. After 20 years, the government will have confiscated 

64% of every dollar we saved at the beginning of our carreers. After 

working 45 years, the hidden tax on those dollars will be 90%. The 

government will take virtually all of them over our lifetime. Earned 

interest will partially offset this effect but it will not alter the 

underlying reality of government confiscation. 

EFFECT OF "MODEST" 5% INFLATION 

For the past forty years, all the published charts illustrating the 

decline of the dollar from such-and-such a date to the "present" 

show the following type of curve. 

PL 

$1.00. 

.90 

.80 

.70 

.60 

.50 

.40 

.30 

.20 

.10 

Years: 

TRCHASING POWER OF ONE DOLLAR 

DIMINISHED BY 5% EACH YEAR 

" ^/ 

A 1 

S^r A 1 n 

CZAGjL aaaI* 

III 

1 

Confiscates yuvo during 

working years 

- 

S f 

To 

tal 

confiscation 

over lifetime 

- J^ 

lO 20 30 40 50 60 70


— a 


These, of course, are averages. A few people in the middle class 

of the bureaucracy will have managed to place some of their dollars 

into tangible assets or income-producing securities—what few that 

remain—where they are somewhat protected from the effects of 

inflation. For the vast majority, however, inflation hedges constitute 

but a tiny fraction of all they have earned over a lifetime. 

And so we find that, in The New World Order, inflation has 

been institutionalized at a "modest" level of five per cent. Once in 

every five or six generations—as prices climb higher and higher— 

new monetary unit can be issued to replace the old in order to 

eliminate some of the zeros. But no one will live long enough to 

experience more than one devaluation. Each generation is unconcerned 

about the loss of the previous one. Young people come into 

the process without realizing it is circular instead of linear. They 

cannot comprehend the total 

because they were not alive at the 

beginning and will not be alive at the end. In fact, there need not 

even be an end. The process can be continued forever. 

By this mechanism—and with the output of work battalions 

government can operate entirely without taxes. The lifetime output 

of every human being is at its disposal. Workers are allowed a color 

TV, state-subsidized alcohol and recreational drugs, and violent 

sports to amuse them, but they have no other options. They cannot 

escape their class. Society is divided into the rulers and the ruled, 

with an administrative bureaucracy in between. Privilege is now 

largely a right of birth. The worker class and even most of the 

administrators serve masters whom they do not know by name. 

But serve they do. Their new lords are the monetary and political 

scientists who created and who now control The New World 

Order. All of mankind is in a condition of high-tech feudalism. 

HIGH-TECH FEUDALISM 

Inflation is not the only aspect of economic chaos that is now 

under control. Booms and busts in the business cycle are also a 

thing of the past Like direct taxes, there are no business cycles any 

more. Now that the government has firm control over every 

economic check point, business cycles simply are not allowed. 

There is no speculation in the market because no one has funds 

with which to speculate. There are no expansions of inventories or 

capital goods in order to maximize future profits, because inventories 

now are determined by formula. Besides, profits are also 

determined by formula and, although they are just large enough to 

keep pace with inflation, they are guaranteed. 

Chaos in the economy is now impossible because it is not 

tolerated. Neither is a depression. Yes, there are hundreds of 

millions of human beings living under conditions of extreme 

hardship, and thousands die of starvation every day, but depressions 

are outlawed. No politician, no author, no one in the media 

would dare to suggest that the system was a failure. Each month 

the government releases new statistics showing in some obscure 

way or another that the economy is steadily improving. Although 

people are starving everywhere, hunger does not exist anymore. 

Although work battalions are crammed into flimsy barracks and 

tents, and although older homes and apartment buildings are 

falling down for lack of maintenance, forcing more and more 

families to share their tiny, unheated dwellings—nevertheless, the 

housing shortage is officially being eliminated. There are no more 

problems in the economy, because they now are illegal. 

VOICES FROM THE PAST 

There is a message flashing on the front panel of our time 

machine. It reads: Duplicate sequence in memory bank Check years 

2826, 2832, 2904, and 1949, That tells us that the on-board computer 

has found a similarity between what we are now viewing in the 

future and something that was recorded in the past. We had better 

check it out. On your keyboard, type: Send data to printer and press 

the key labelled Execute. 

The first item is coming out of the printer now. It is a warning. 

In the year 1816, Thomas Jefferson wrote a letter to Sam Kercheval 

in which he said: 

We must make our election between economy and liberty, or 

profusion and servitude. If we run into such debts as that we must be 

taxed in our meat and in our drink, in our necessities and our 

comforts, in our labors and our amusements,... our people ... must 

come to labor sixteen hours in the twenty-four, give our earnings of 

fifteen of these to the government,... have no time to think, no means 

of calling our mis-managers to account; but be glad to obtain 

sustenance by hiring ourselves out to rivet their chains on the necks of 

our fellow-sufferers.... And this is the tendency of all human 

governments ... till the bulk of society is reduced to be mere 

automatons of misery.... And the forehorse of this frightful team is

. 

. 


public debt. Taxation follows that, and in its train wretchedness and 

oppression. 

Here is the second printout. It is a political commentary and a 

prophesy. In the year 1831, a young Frenchman, named Alexis de 

Tocqueville, toured the United States to prepare an official report to 

his government on the American prison system. His real interest, 

however, was the social and political environment in the New 

World. He found much to admire in America but he also observed 

what he thought were the seeds of its destruction. Upon his return 

to France the following year, he began work on a four-volume 

analysis of the strengths and weaknesses he found. His perceptivity 

was remarkable, and his work, entitled Democracy in America, has 

remained as one of the worlds classic works in political science. 

This is the part that our computer recognized: 

The Americans hold that in every state the supreme power ought 

to emanate from the people; but when once that power is constituted, 

they can conceive, as it were, no limits to it, and they are ready to 

admit that it has the right to do whatever it pleases.... The idea of 

rights inherent in certain individuals is rapidly disappearing from the 

minds of men; the idea of the omnipotence and sole authority of 

society at large rises to fill its place.. . 

The first thing that strikes the observation is an innumerable 

multitude of men, all equal and alike, incessantly endeavoring to 

procure the petty and paltry pleasures with which they glut their lives. 

Each of them, living apart, is a stranger to the fate of all the rest; his 

children and his private friends constitute to him the whole of 

mankind.... 

Above this race of men stands an immense and tutelary power, 

which takes upon itself alone to secure their gratifications and to 

watch over their fate. That power is absolute, minute, regular, 

provident, and mild. It would be like the authority of a parent ifV like 

that authority, its object was to prepare men for manhood; but it seeks, 

on the contrary, to keep them in perpetual childhood: it is well content 

that the people should rejoice, provided they think of nothing but 

rejoicing... 

After having thus successively taken each member of the 

community in its powerful grasp and fashioned him at will, the 

supreme power then extends its arm over the whole community. It 

covers the surface of society with a network of small, complicated 

rules, minute and uniform, through which the most original minds 

1. Basic Writings (New York: Willey Book Co., 1944), pp. 749-50. 


and the most energetic characters cannot penetrate, to rise above the 

crowd. The will of man is not shattered, but softened, bent, and 

guided; men are seldom forced by it to act, but they are constantly 

restrained from acting. Such a power does not destroy, but it prevents 

existence; it does not tyrannize, but it compresses, enervates, 

extinguishes, and stupefies a people, till each nation is reduced to 

nothing better than a flock of timid and industrious animals, of which 

the government is the shepherd.. . 

Our contemporaries are constantly excited by two conflicting 

passions: they want to be led, and they wish to remain free. As they 

cannot destroy either the one or the other of these contrary 

propensities, they strive to satisfy them both at once. They devise a 

sole, tutelary, and all-powerful form of government, but elected by the 

people. They combine the principle of centralization and that of 

popular sovereignty; this gives them a respite: they console 

themselves for being in tutelage by the reflection that they have chosen 

their own guardians. Every man allows himself to be put in 

leading-strings, because he sees that it is not a person or a class of 

persons, but the people at large who hold the end of his chain. By this 

system the people shake off their state of dependence just long enough 

to select their master and then relapse into it again. 

EDUCATION AS A TOOL FOR HUMAN ENGINEERING 

The third printout is dated 1904 and is a report issued by the 

General Education Board, one of the first foundations established 

by John D. Rockefeller, Sr.. The purpose of the foundation was to 

use the power of money, not to raise the level of education in 

America, as was widely believed at the time, but to influence the 

direction of that education. Specifically, it was to promote the 

ideology of collectivism and internationalism. The object was to use 

the classroom to teach attitudes that encourage people to be passive 

and submissive to their rulers. The goal was—and is—to create 

citizens who are educated enough for productive work under 

supervision but not enough to question authority or seek to rise 

above their class. True education was to be restricted to the sons 

and daughters of the elite. For the rest, it would be better to 

produce skilled workers with no particular aspirations other than 

to enjoy life. It was enough, as de Tocqueville phrased it, "that the 

people should rejoice, provided they think of nothing but rejoicing." 

1 . Alexis de Tocqueville, Democracy in America, Vol. II (New York: Alfred Knopf, 

1945), pp. 290-91, 318-19.

, 

and 

. 



In the first publication of the General Education Board, Fred 

Gates explained the plan: 

In our dreams we have limitless resources, and the people yield 

themselves with perfect docility to our molding hands. The present 

educational conventions fade from our minds, and unhampered by 

tradition, we work our own good upon a grateful and responsive rural 

folk. We shall not try to make these people or any of their children into 

philosophers of mental learning or of science. We have not to raise 

from among them authors, editors, poets, or men of letters. We shall 

not search for embryo great artists, painters, musicians, nor lawyers, 

doctors, preachers, politicians, 

statesmen of whom we have ample 

supply. The task we set before ourselves is very simple as well as a 

very beautiful one: To train these people as we find them to a perfectly 

ideal life just where they are.... in the homes, in the shop, and on the 

farm. 

BACK TO THE FUTURE 

Here is the fourth computer printout from the past. It is a 

satire—and a warning. In the year 1949, George Orwell wrote his 

classic novel entitled 2984. In it, he portrayed the same "futuristic" 

scenes that now lie before us as we sit in our time machine. His 

only error appears to have been the date that became the title of his 

book. If he were writing it today, it is likely he would call it 2054, 

Orwell described the world of our future as being divided into 

three regions called Oceania, Eurasia, and Eastasia. Oceania consists 

of the Americas plus England, Australia, and the Pacific 

Islands; Eurasia is 

Russia and continental Europe; Eastasia comprises 

China, Japan, Southeast Asia, & India. These superstates are 

constantly at war with each other. 

The wars are not fought to 

conquer the enemy, they are waged for the primary purpose of 

controlling the population. The people in all three territories 

tolerate their misery and oppression because sacrifices are necessary 

in time of war. Most of the stratagems outlined in The Report 

from Iron Mountain are to be found in Orwell's narrative, but Orwell 

described them first. The think-tank was even willing to credit 

Orwell as the source of some of its concepts. For example, on the 

subject of establishing a modern, sophisticated form of slavery, the 

group at Iron Mountain said: 

Up to now, this has been suggested only in fiction, notably in the 

works of Wells, Huxley, Orwell, and others engaged in the 

imaginative anticipation of the sociology of the future. But the 

fantasies projected in Brave New World and 1984 have seemed less and 

less implausible over the years since their publication. The traditional 

association of slavery with ancient preindustrial cultures should not 

blind us to its adaptability to advanced forms of social organization. 1 

From this we see that Orwell's work is far more than an 

entertaining novel. It is relevant to our present journey in time. Our 

would-be masters have studied him carefully. So should we. This is 

what he wrote: 

[ 

These three superstates are permanently at war, and have been so 

for the past twenty-five years. War, however, is no longer the 

desperate, annihilating struggle that it was in the early decades of the 

twentieth century.... This is not to say that either the conduct of the 

war, or the prevailing attitude toward it, has become less bloodthirsty 

or more chivalrous. On the contrary, war hysteria is continuous and 

universal in all countries, and such acts as raping, looting, the 

slaughter of children, the reduction of whole populations to slavery, 

reprisals against prisoners which extend even to boiling and' 

burying alive, are looked upon as normal.. . 

The primary aim of modern warfare ... is to use up the products of 

the machine without raising the general standard of living. [The 

"machine" is society's technical and industrial capacity to produce 

goods.] ... From the moment when the machine first made its 

appearance it was clear to all thinking people that the need for human 

drudgery, and therefore to a great extent for human inequality, had 

disappeared. If the machine were used deliberately for that end, 

hunger, overwork, dirt, illiteracy, and disease could be eliminated 

within a few generations.... 

But it was also clear that an all-around increase in wealth 

threatened the destruction—indeed in some cases was the 

destruction—of a hierarchical society. In a world in which everyone 

worked short hours, had enough to eat, lived in a house with a 

bathroom and a refrigerator, and possessed a motorcar or even an 

airplane, the most obvious and perhaps the most important form of 

inequality would already have disappeared. If it once became general, 

wealth would confer no distinction,... Such a society could not long 

remain stable. For if leisure and security were enjoyed by all alike, the 

great mass of human beings who are normally stupefied by poverty 

would become literate and would learn to think for themselves; and 

1. "Occasional Paper No. 1," General Education Board, 1904. 1 . Lewin, Report, p. 70.

. 

. 

. 

. 

. 


when once they had done this, they would sooner or later realize that 

the privileged minority had no function, and they would sweep it 

away. In the long run, a hierarchical society was only possible on a 

basis of poverty and ignorance. . 

. 

The essential act of war is destruction, not necessarily of human 

lives, but of the products of human labor. War is a way of shattering to 

pieces, or pouring into the stratosphere, or sinking into the depths of 

the sea, materials which might otherwise be used to make the masses 

too comfortable, and hence, in the long run, too intelligent.. . 

In practice the needs of the population are always underestimated, 

with the result that there is a chronic shortage of half the necessities of 

life; but this is looked on as an advantage. It is deliberate policy to keep 

even the favored groups somewhere near the brink of hardship, 

because a general state of scarcity increases the importance of small 

privileges and thus magnifies the distinction between one group and 

another.. . . The social atmosphere is that of a besieged city, where the 

possession of a lump of horseflesh makes the difference between 

wealth and poverty- And at the same time the consequences of being 

at war, and therefore in danger, makes the handing over of all power 

to a small caste seem the natural, unavoidable condition of survival. . 

War, it will be seen, not only accomplishes the necessary 

destruction, but accomplishes it in a psychologically acceptable way. 

In principle it would be quite simple to waste the surplus labor of the 

world by building temples and pyramids, by digging holes and filling 

them up again, or even by producing vast quantities of goods and then 

setting fire to them. But this would provide only the economic and not 

the emotional basis for a hierarchical society.. . 

War, it will be seen, is now a purely internal affair.... waged by 

each ruling group against its own subjects, and the object of the war is 

not to make or prevent conquests of territory, but to keep the structure 

of society intact. 

THE FUNCTION OF WASTE IN MODERN 

TOTALITARIANISM 

Once again, it is clear that Orwell's grim narrative was a 

primary model for The Report from Iron Mountain. The authors of 

that blueprint for our future spoke at length about the value of 

planned waste as a means of preventing the masses from improving 

their standard of living. They wrote: 

The production of weapons of mass destruction has always been 

associated with economic "waste." The term is pejorative, since it 

1. George Orwell, 1984 (New York: New American Library/Signet, 1949), pp 

153-164. 


implies a failure of function. But no human activity can properly be 

considered wasteful if it achieves its contextual objective.. . 

In the case of military "waste," there is indeed a larger social 

utility.. . . In advanced modern democratic societies, the war system . . 

has served as the last great safeguard against the elimination of 

necessary social classes. As economic productivity increases to a level 

further and further above that of minimum subsistence, it becomes 

more and more difficult for a society to maintain distribution patterns 

insuring the existence of "hewers of wood and drawers of water."... 

The arbitrary nature of war expenditures and of other military 

activities make them ideally suited to control these essential class 

relationships.. . . The continuance of the war system must be assured, if 

for no other reason, among others, than to preserve whatever quality 

and degree of poverty a society requires as an incentive, as well as to 

maintain the stability of its internal organization of power. 

These documents from the real past and the imagined future 

can help us to better understand our present. The spectacle of 

wasteful government spending suddenly becomes logical. It is not 

stupidity that pays farmers to destroy their crops, or that purchases 

trillion-dollar weapons systems that are never deployed or in some 

cases not even completed, or that provides funding for studies of 

the sex life of the tse-tse fly, or that gives grants to pornographers 

posing as artists. The overriding object behind most of these 

boondoggles is to waste the resources of the nation. It is obvious by 

now that the decline in living standards in the Western world is 

associated with a widening gap between the haves and the 

have-nots. What is not so obvious, however, is that this is according 

to plan. To that end, massive waste in government spending is not 

an unfortunate by-product, it is the goal. 

That brings us back to the question of finding an acceptable 

substitute for war. War is not only the ultimate waste, it is also the 

[ultimate motivation for human action. As Orwell said, waste in the 

(absence of war "would provide only the economic and not the 

'emotional basis for a hierarchical society." Will the environmentalpollution 

model be able to sufficiently motivate human action to be 

a substitute for war? 

That is 

not a safe assumption. The possibility of war in our 

future cannot be ruled out. The environmental-pollution model is 

not yet thoroughly proven. It is working well for limited purposes 

1. Lewiii, Report, pp. 34-35, 40-41.


and on a limited scale, but it is still doubtful that it will ever equal 

the hysteria potential of a physical war. The world planners will 

not abandon the use of war until the new model has been proven 

over many years. On that point, the Report from Iron Mountain was 

emphatic: 

When asked how best to prepare for the advent of peace, we must 

first reply, as strongly as we can, that the war system cannot 

responsibly be allowed to disappear until 1) we know exactly what it 

is we plan to put in its place, and 2) we are certain, beyond reasonable 

doubt, that these substitute institutions will serve their purposes in 

terms of the survival and stability of society.... It is uncertain, at this 

time, whether peace will ever be possible. It is far more questionable 

. . . that it would be desirable even if it were demonstrably attainable. 

REGIONALISM AS A TRANSITION TO WORLD 

GOVERNMENT 

The coalescing of the world's nations into three regional 

superstates was already visible even before we activated our time 

machine. The first steps had been strictly economic but were soon 

followed by political and military consolidation. The European 

Union (EU), including Russia, began with the issuance of a 

common money and eventually merged into a functional regional 

government. It was Orwell's Eurasia, even though it avoided 

calling itself by that name. Treaties binding Canada, the United 

States, 

Mexico, and South America formed the basic outline of 

Oceania, built around the Federal-Reserve Note as the regional 

money. Japan eventually became hostile to the West when trading 

was no longer to her sole advantage and, along with China which 

had been built up by Western aid and technology, and with India 

which had been given atomic technology by the West, became the 

political center of Eastasia. Even as far back as the 1980s, it was 

known as the "Greater East Asia Co-Prosperity Sphere/' Its monetary 

system was to be based upon the Yen. 

The people of the former nations were not yet ready for a giant 

leap into world government. They had to be led to that goal by a 

series of shorter and less frightening steps. They were more willing 

to surrender their economic and military independence to regional 

groupings of people who were closer in ethnic and cultural origin 

and who shared common borders. Only after several decades of 

1. Ibid., pp. 88-90. 

transition was it 


possible to make the final merger. In the meantime, 

the world was plunged alternately between war and peace. 

After each cycle of war, the population was more frightened, 

impoverished, and collectivised. In the end, world government was 

irresistible. By that time, the environmental-pollution model and 

the alien-invasion model had been perfected to provide high levels 

of human motivation. But, even then, regional uprisings were 

occasionally engineered when necessary to justify massive 

"peacekeeping" operations. War was never fully abandoned. It 

remained, as it always had been, a necessity for the stabilization of 

society. 

HOW FIXED IS THE FUTURE? 

Let us return now to the present from which we departed and 

reflect upon our journey. The first thing that strikes us is that we 

cannot be certain the future will unfold exactly as we have seen it. 

There are too many variables. When we originally set our Primary- 

Assumption selector to Present trends unaltered, we left the Secondary- 

Assumption selector where it was. It was pointing to Banking Crisis. 

Had we chosen the next position, No Banking Crisis, our journey 

would have been different. We would not have seen long lines of 

depositors or panic-buying in 

the stores or closing of the stock 

market. But we would still have witnessed the same scenes of 

despair in the more distant future. We merely would have travelled 

a different path of events to get there. 

The forces driving our society into global totalitarianism would 

not change one iota. We still would have the doomsday mechanisms 

at work. We would have the CFR in control of the power 

centers of government and the media. And we would have an 

electorate which is 

unaware of what is being done to them and, 

therefore, unable to resist. Through environmental and economic 

treaties and through military disarmament to the UN, we would 

witness the same emergence of a world central bank, a world 

government, and a world army to enforce its dictates. Inflation and 

wage/price controls would have progressed more or less the same, 

driving consumer goods out of existence and men into bondage. 

Instead of moving toward The New World Order in a series of 

economic spasms, we merely would have travelled a less violent 

path and arrived at exactly the same destination.

I who 



There is little doubt that the master planners would prefer to 

follow the more tranquil route. Patient gradualism is less risky. But 

not everything is within their control. Events can get out of hand, 

and powerful economic forces can become suddenly unleashed. 

Banking crises can occur even without being deliberately caused. 

On the other hand, the Cabal also knows that crises are useful 

in driving the masses into the corral faster than they would 

otherwise move. Therefore, the application of some kind of scientifically 

engineered crisis cannot be ruled out. It could take many 

forms: Ethnic violence, terrorism, plague, even war itself. But none 

of that makes any difference. It will not alter our direction of travel 

through time. It will only determine our specific route. Like a 

flowing river, it may be diverted this way or that by natural 

barriers or even by man-made channels, dikes, and dams, but it 

eventually will reach the sea. Our concluding reflection, therefore, 

is that it is relatively unimportant whether there will be a banking 

crisis or any other cataclysmic event These are all secondary 

assumptions which are meaningless. Our only real hope for 

averting the new feudalism of the future is to change the Primary 

assumption. We must change it to read: Present Trends Reversed. 

SUMMARY 

A pessimistic scenario of future events includes a banking 

crisis, followed by a government bailout and the eventual nationalization 

of all banks. The final cost is staggering and is paid with 

money created by the Federal Reserve. It is passed on to the public 

in the form of inflation. 

Further inflation is caused by the continual expansion of 

welfare programs, socialized medicine, entitlement programs, and 

interest on the national debt. The dollar is finally abandoned as the 

defacto currency of the world. Trillions of dollars are sent back to 

the United States by foreign investors to be converted as quickly as 

possible into tangible assets. That causes even greater inflation than 

before. So massive is the inflationary pressure that industry and 

commerce come to a halt. Barter becomes the means of exchange. 

America takes her place among the depressed nations of South 

America, Africa, and Asia—mired together in economic equality. 

Politicians seize upon the opportunity and offer bold reforms. 

The reforms are more of exactly what created the problem in the 

first place: expanded governmental power, new regulatory agen- 

I 

i 

cies, and more restrictions on freedom. But this time, the programs 

begin to take on an international flavor. The American dollar is 

replaced by a new UN money, and the Federal Reserve System 

becomes a branch operation of the IMF/World Bank. 

Electronic transfers gradually replace cash and checking accounts. 

This permits UN agencies to monitor the financial activities 

of every person. A machine-readable ID card is used for that 

purpose. If an individual is red flagged by any government agency, 

the card does not clear, and he is cut off from all economic 

transactions and travel. It is the ultimate control. 

Increasing violence in the streets from revolutionary movements 

and ethnic clashes provide an excuse for martial law. The 

public is happy to see UN soldiers checking ID cards. The 

police-state arrives in the name of public safety. 

Eventually all private dwellings are taken over by the government 

as a result of bailing out the home-mortgage industry. Rental 

property is also taken, as former landlords are unable to pay 

property taxes. People are allowed to live in these dwellings at 

reasonable cost, or no cost at all. It gradually becomes clear, 

however, that the government is now the owner of all homes and 

apartments. People are living in them only at the pleasure of the 

government. They can be reassigned at any time. 

Wages and prices are controlled. Dissidents are placed into 

work armies. There are no more autos except for the ruling elite. 

Public transportation is provided for the masses, and those with 

limited skills live in government housing within walking distance 

of their assigned jobs. Men have been reduced to the level of serfs 

are subservient to their masters. Their condition of life can 

only be described as high-tech feudalism. 

There is no certainty that the future will unfold in exactly that 

manner, because there are too many variables. For example, if we 

had assumed that there will not be a banking crisis, then our 

journey would be different. We would not see long lines of 

depositors or panic-buying in the stores or closing of the stock 

market But we would still witness the same scenes of despair in 

the more distant future. We merely would have travelled a 

different path of events to get there. That is because the forces 

driving our society into global totalitarianism would not have 

changed one iota. We still would have the doomsday mechanisms 

at work. We would have the CFR in control of the power centers of


government and the media. We would have an electorate which is 

unaware of what is being done to them and, therefore, unable to 

resist. Through environmental and economic treaties and through 

military disarmament to the UN, we would witness the same 

emergence of a world central bank, a world government, and a 

world army to enforce its dictates. Inflation and wage/price 

controls would have progressed more or less 

the same, driving 

consumer goods out of existence and men into bondage. Instead of 

moving toward The New World Order in a series of economic 

spasms, we merely would have travelled a less violent path and 

arrived at exactly tine same destination. 

Chapter Twenty-Six 

A REALISTIC 

SCENARIO 

What must be done if we are to avert the 

pessimistic scenario; a list of specific measures 

that must be taken to stop the monetary binge; an 

appraisal of how severe the economic hangover 

will be; a checklist for personal survival— and 

beyond. 

The pessimistic scenario presented in the previous chapter is 

the kind of narrative that turns people off. No one wants to hear 

those things, even if 

they are true—or we should say especially if 

they are true. As Adlai Stevenson said when he was a candidate for 

President: "The contest between agreeable fancy and disagreeable 

fact is unequal. Americans are suckers for good news." 

So, where is 

the optimistic scenario in which everything turns 

out all right, in which prosperity is restored and freedom is 

preserved after all? Actually, it is not hard to locate. You can find it 

every day somewhere in your newspaper. It is the shared faith of 

almost all politicians, experts, and commentators. If that is what 

you want to hear, you have just wasted a lot of time reading this 

book. 

There is no optimistic scenario. Events have progressed too far 

for that. Even if we begin to turn things around by forcing 

Congress to cut spending, reduce the debt, and disentangle from 

UN treaties, the Cabal will not let go without a ferocious fight. 

When the Second Bank of the United States was struggling for its 

life in 1834, Nicholas Biddle, who controlled it, set about to cause as 

much havoc in the economy as possible and then to blame it on 

President Jackson's anti-bank policies. By suddenly tightening 

credit and withdrawing money from circulation, he triggered 

full-scale national depression. At the height of his attack, he 

declared: "All other banks and all the merchants may break, but the 

a

566 THE CREATURE FROM JEKYLL ISLAND A REALISTIC SCENARIO 567 

Bank of the United States shall not break." The amount of 

devastation that could be caused by today's Federal Reserve is 

infinitely greater than what Biddle was able to unleash. It would be 

pure self-deception to think that the Cabal would quietly give up 

its power without exercising that option. We must conclude that no 

one is going to get out of this one unscathed. There is hell to pay, 

and it is we who are going to pay it. 

SEVENTH REASON TO ABOLISH THE FED 

What has any of this to do with the Federal Reserve System? 

The answer is that the Federal Reserve is the starting point of the 

pessimistic scenario. The chain of events begins with fiat money 

created by a central bank, which leads to government debt, which 

causes inflation, which destroys the economy, which impoverishes 

the people, which provides an excuse for increasing government 

power, which is £n on-going process culminating in totalitarianism. 

Eliminate the Federal Reserve from this equation, and the pessimistic 

scenario ceases to exist. That is the seventh and final reason to 

abolish the Fed: It is an instrument of totalitarianism. 

If the optimistic scenario is 

too optimistic and the pessimistic 

scenario is too pessimistic, then what is the scenario that we should 

hope lies in our future? 

There is a middle course that lies between optimism and 

pessimism. It is called realism. Calling it a realistic scenario is not 

meant to imply that it is predetermined to happen, nor that it is 

even likely to happen. It is realistic only in the sense that it can 

happen if certain conditions are met. The balance of this chapter 

will be devoted to an analysis of those conditions. 

Let us begin by allowing our opponent, Cynicism, to state the 

problem we face: "Is it realistic to believe that the current trends 

can actually be reversed? Isn't it just fantasy to think that anything 

can be done at this late date to break the CFR's hold over 

government, media, and education? Do we really expect the 

gum-chewing public to go upstream against the indoctrination of 

newspapers, magazines, television, and movies?" 

Apathy joins in: "Forget it. There's nothing you can do. The 

bankers and politicians have all the money and all the power. The 

1 . See chapter seventeen. 

game is already over. Make the most of it, and enjoy life while you 

can. 

Do not listen to Cynicism and Apathy. They are agents of your 

enemy. They want you to quietly get in line and submit without a 

struggle. However, they do make a point that must not be 

overlooked. The battle has progressed far, and our position is not 

good. If we are to reverse the present trends, we must be prepared 

to make a herculean effort. That does not mean "Write your 

Congressman" or ''Vote on Tuesday" or "Sign a petition" or "Send 

in a donation." That is far too easy. Those measures still play an 

important role in the battle plan but they fall far short of the need. 

Armchair campaigns will no longer do it. 

Before turning to the question of what kind of effort will be 

required, let us first be clear on what it is we want to accomplish. 

WHAT MUST NOT BE DONE 

Let us begin with the negatives: what must not be done. The 

most obvious item in this category is that we must not turn to 

government for more of the same "cures" that have made us ill. We 

do not want more power granted to the Fed or the Treasury or the 

President, nor do we need another government agency. We probably 

don't even need any new laws, with the possible exception of 

those legislative acts which repeal some of the old laws now on the 

books. Our goal is the reduction of government, not its expansion. 

We do not want to merely abolish the Fed and turn over its 

operation to the Treasury. That is a popular proposal among those 

who know there is a problem but who have not studied the history 

of central banking. It is a recurrent theme of the Populist movement 

and those advocating what they call Social Credit. Their argument 

is that the Federal Reserve is privately owned and is independent 

of political control. Only Congress is authorized to issue the 

nation's money, not a group of private bankers. Let the Treasury 

issue paper money and bank credit, they say, and we can have all 

the money we need without having to pay one penny in interest to 

the bankers. 

It is an appealing argument, but it contains serious flaws. First, 

the concept that the Fed is privately owned is a legal fiction The 

member banks hold stock, but it carries no voting weight. No 

matter how large the bank or how much capital is 

paid in, each 

bank has one vote. The stock cannot be sold or traded. Stockholders


have none of the usual elements of control that come with 

ownership and, in fact, they are subservient to the central board. 

The seven members of the Board of Governors are appointed by the 

President and confirmed by the Senate. It is true that the Fed is 

independent of direct political control, but it must never be forgotten 

that it was created by Congress and it can be extinguished by 

Congress. In truth, the Federal Reserve is neither an arm of 

government nor is it private. It is a hybrid. It is an association of the 

large commercial banks which has been granted special privileges 

by Congress. A more accurate description would be simply that it 

is a cartel protected by federal law. 

But the more important point is that it makes no difference 

whether the Fed is government or private. Even if it were entirely 

private, merely turning it over to the government would not alter 

its function. The same people undoubtedly would run it, and they 

would continue to create money for political purposes. The Bank of 

England is the granddaddy of central banks. It was privately 

owned at its inception but became an official arm of the British 

government in more recent times. It continues to operate as a 

central bank, and nothing of substance has changed. The central 

banks of all the other industrialized nations are direct arms of their 

respective governments. They are indistinguishable in function 

from the Federal Reserve. The technicalities of structure and 

ownership are not as important as function. Turning the Federal 

Reserve over to the Treasury without at the same time denuding it 

of its function as a central bank—that is, its ability to manipulate 

the money supply—would be a colossal waste of time. 

The proposal of having the Treasury issue the nation's money is 

another question and has nothing to do with who owns the Fed. 

There is nothing wrong with the federal government Issuing 

money so long as it abides by the Constitution and adheres to the 

principle of honesty. Both of these restraints forbid Congress from 

issuing paper money that is not 100% backed by gold or silver. If 

you are in doubt about the reasoning behind that statement, it 

would be a good idea to review chapter fifteen before continuing. 

It is true that, if Congress had the power to create as much 

money as it needs without the Federal Reserve System, interest 

would not have to be paid on the national debt. But the Fed holds 

only a small percentage of the debt. Over 90% of those bonds are 

held by individuals and institutions in the private sector. Terminat- 

A REALISTIC SCENARIO 569 

ing interest payments would not hurt those big, bad bankers nearly 

as much as it would the millions of people who would lose their 

insurance policies, investments, and retirement plans. The Social 

Credit scheme would wipe out the economy in one fell swoop. 

And we still would not have solved the deeper problem. The 

bankers would be cut out of the scam, but the politicians would 

remain. Congress would now be acting as its own central bank, the 

money supply would continue to expand, inflation would continue 

to roar, and the nation would continue to die. Besides, issuing 

money without gold or silver backing violates the Constitution. 

THE JFK RUMOR 

In 1981, a rumor was circulated that President Kennedy had 

been assassinated by agents of the hidden money power because he 

had signed Executive Order #11110 instructing the Treasury to 

print more than $4 billion in United States Notes. That is precisely 

the kind of money we are discussing: paper bills without gold or 

silver backing issued by the government, not the Federal Reserve. 

According to the rumor, the bankers were furious because they 

would lose interest payments on the money supply. When the 

Order was tracked down, however, it involved Silver Certificates, 

not United States Notes. Silver Certificates are backed by silver' 

which means they are real money, so the rumor was wrong on that 

point. But there is no interest paid on Silver Certificates either, so 

the rumor held up on that point. There was a third point, however, 

which everyone seemed to overlook. The Executive Order did not 

instruct the Treasury to issue Silver Certificates. It merely authorized 

it to do so. There is no evidence that this was ever done. If the 

Certificates were printed at all, 

they never found their way into 

circulation. In 1987, the order was rescinded by President Reagan. 

The Treasury did print a small supply of United States Notes in 

1963, but these were authorized by an 1878 act of Congress to 

replace Civil War Greenbacks which had been retired from circulation. 

JFK did not initiate that issue. The greatest quantity of those 

Notes to be in circulation since their last printing in 1969 was $322 

million—not a significant figure compared to Federal Reserve 

Notes. Most of them are now collectors' items. 1 

1. See Currency in U.S. History, (Kansas City: Federal Reserve Bank, n.d.), pp. 10, 11.

[ 



The persistent rumor regarding the bankers' role in JFK's death 

was reinforced by several books circulated in conservative circles. 

They contained an ominous passage from Kennedy's speech at 

Columbia University, just ten days before his assassination. He is 

quoted as saying: "The high office of President has been used to 

foment a plot to destroy the Americans' freedom, and before I leave 

office I must inform the citizen of his plight." However, when 

Columbia University was contacted to provide a transcript of the 

speech, it was learned that Kennedy never spoke there—neither ten 

days before his assassination nor at any other timel Ronald Whealan, 

head librarian at the John Fitzgerald Kennedy Library in Boston, 

provides this additional information: "Ten days prior to the 

assassination he was at the White House meeting with, among 

others, the ambassador to the United States from Portugal." 

It is possible that the President did make the remarks attributed 

to him on a different date before a different audience. Even so, it is 

a cryptic message which could have several meanings. That he 

intended to expose the Fed is the least likely of them all. Kennedy 

had been a life-long socialist and internationalist. He had attended 

the Fabian London School of Economics; participated in the 

destruction of the American money supply; and engineered the 

transfer of American wealth to foreign nations. There is little reason 

to believe that he had suddenly "seen the light" and was preparing 

to reverse his life-long beliefs and commitments. 

MONETARISTS VS SUPPLY-SIDERS 

But we are off the topic. Let us return to those unworkable 

theories regarding monetary reform. Prominent in this category are 

the Monetarists and the Supply-Siders. The Monetarists, adhering 

to the theories of Milton Friedman, believe that money should 

continue to 

be be created by the Mandrake Mechanism of the 

Federal Reserve, but that the supply should be determined by a 

strict formula established by Congress, not the Fed. The Supplysiders, 

represented by Arthur Laffer and Charles Kadlec, believe in 

formulas also, but they have a different one. They want the 

1. Quoted by M.J. "Red" Beckman, Born Again Republic (Billings, Montana: Freedom 

Church, 1981), p. 23; also by Lindsey Williams, To Seduce A Nation (Kasilof, 

Arkansas: Worth Publishing, 1984), p. 26. 

2. Letter to Hoi lee Haswell, Curator at the Low Memorial Library, Columbia 

University, October 13, 1987. 

quantity of money to be determined by the current demand for 

gold. They are not talking about a true gold standard in which 

paper money is fully backed. By following what they call a 

''gold-price rule/' they would simply observe the price of gold in 

the free market and then tinker with the dollar by expanding or 

contracting the money supply to keep its relative value, compared 

to gold, fairly constant. 

These groups are alike in their underlying philosophy. Each has 

a different goal and a different formula, but they agree on method: 

manipulation of the money supply. They share the same conviction 

that the free market will not work without assistance; the same 

faith in the wisdom and integrity of politically-created formulas, 

bureaus, and agencies. The Fed remains unscathed throughout all 

these debates because it is the ultimate mechanism for intervention. 

These people don't really want to change it. They just want their 

turn at running it. 

Occasionally a truly original proposal appears that captures 

one's attention. Addressing a prestigious gathering of conservative 

monetary theorists in 1989, Jerry Jordan suggested that the monetary 

base could be expanded by holding a national lottery. The 

government would pay out more dollars in prize money than it 

received in ticket sales. The excess would represent the amount by 

which the monetary base would expand. Presumably, if they 

wanted to contract the money supply, they would pay out fewer 

dollars than taken in. It was an intriguing thought, but Mr. Jordan 

was quick to add: 'The problem, of course, is that there would not 

be any effective institutional restraint on the growth of the monetary 

base." 

Indeed, that is the problem with all schemes involving 

monetary control by men. 

BALANCED-BUDGET AMENDMENT 

A so-called balanced-budget amendment to the Constitution is 

not the answer either. In fact, it is an illusion and a fraud. Some of 

the biggest spenders in Congress are supporters. They know that it 

is 

popular with the voters but would not cramp their spending 

style in the least. If 

they were not permitted to spend more than 

they receive in taxes, they would have a perfect excuse for raising 

taxes. It would be a way of punishing the voters for placing limits 

"The Future of Price Stability in A Fiat Money World/' by Jerry L. Jordan, Dwell 

Journal ofMoney and Banking, August, 1989, p. 24.


on them. The voters, on the other hand, would collapse under the 

burden of higher taxes and demand that their Congressmen 

circumvent the very amendment they previously supported. And 

that would be easy. Most versions of the balanced-budget amendment 

have an escape hatch built for just that purpose. Congress 

shall balance its budget "except in cases of emergency." Who decides 

what constitutes an emergency? Congress, of course. In other 

words, Congress shall balance its budget except when it doesn't 

want to. So what else is new? 

A serious amendment would have to tackle, not balancing the 

budget, but limiting the spending. If that were done, the budget 

would take care of itself. But even that would be a waste of time 

considering the present composition of Congress. Instead of generating 

political pressure for a Constitutional amendment, we would 

be better off directing that same effort toward throwing the big 

spenders out of office. As long as the spenders are allowed to stay 

in there, they will find a way to get around any law—including the 

Constitution itself. 

Another flaw in most versions of the balanced-budget amendment 

is that it would not affect the off-budget expenditures called 

entitlements. They now represent 52% of all federal outlays and are 

growing by 12% each year. A strategy that ignores that backbreaking 

load is not worth even considering. Furthermore, even if 

Congress could be forced to stop deficit spending, the balancedbudget 

amendment would not solve the problem of inflation or 

paying off the national debt. The Federal Reserve can now inflate 

our money supply by using literally any debt in the world. It does 

not have to come from Congress. Unless we zero in on the Fed 

itself, we will just be playing political games with no chance of 

winning. 

Every year, a few concerned Congressmen submit a bill to 

investigate or audit the Federal Reserve System. They are to be 

commended for their effort, but the process has been an exercise in 

futility. Their bills receive little or no publicity and never get out of 

committee for a vote. Even if they did receive serious attention, 

however, they could actually be counterproductive. 

On the surface, it would appear that there is nothing wrong 

with a Congressional investigation or an audit, but what is there to 

investigate? We must assume the Fed is doing exactly what it says 

and is in total compliance with the law. A few minor improprieties 

" 


probably would be discovered involving personal abuse of funds 

or insider profiteering, but that would be minor compared to the 

gigantic fraud that already is out in the open for all to see. The 

Federal Reserve is 

the world's largest and most successful scam. 

Anyone who understands the nature of money can see that without 

a team of investigators and auditors. 

The danger in a proposal to audit the Fed is that it would 

provide an excuse to delay serious action for several years while 

the audit is going on. It would give the public a false impression 

that Congress is doing something. It also would give the monetary 

technicians an opportunity to lay down a smoke screen of verbiage 

and confusing statistics. The public would expect that all the 

answers will be forthcoming from the investigation, but the very 

groups and combines that need to be investigated would be 

conducting, or at least confounding, the investigation. By the time 

fourteen volumes of testimony, charts, tables, and exhibits finally 

appear, the public would be intimidated and fatigued. The bottom 

line is that we do not need a bill to audit the Fed. We need one to 

abolish it. 

A PLAN FOR ELIMINATING THE FED 

So much for things not to do. Now let's get down to the 

business at hand. To abolish the Federal Reserve System would be 

quite simple. All that would be required is an act of Congress 

consisting of one sentence: The Federal Reserve Act and all of its 

amendments are hereby rescinded. But that would wipe out our 

monetary system overnight and create such havoc in the economy 

that it would play right into the hands of the globalists. They would 

use the resulting chaos as evidence that such a move was a mistake, 

and the American people would likely welcome a, rescue from the 

IMF/World Bank. We would find ourselves back in the Pessimistic 

Scenario even though we had done the right thing. 

There are certain steps that must precede the abandonment of 

the Fed if we are to have a safe passage. The first step is to convert 

our present fiat money into real money. That means we must create 

an entirely new money supply which is 100% backed by precious 

jQnetal—and we must do so within a reasonably short period of 

ime. To that end, we also must establish the true value of our 

present fiat money so it can be exchanged for new money on a


realistic basis and phased out of circulation. Here is how it can be 

done: 

1. Repeal the legal-tender laws. The federal government will 

continue accepting Federal Reserve Notes in the payment of 

taxes, but everyone else will be free to accept them, reject them, 

or discount them as they wish. There is no need to force people 

to accept honest money. Only fiat money needs the threat of 

imprisonment to back it up. Private institutions should be free to 

innovate and to compete. If people want to use Green Stamps or 

Disney-ride coupons or Bank-of-America Notes as a medium of 

exchange, they should be free to do so. The only requirement 

the Green-Stamp 

should be faithful fulfillment of contract. If 

company says it will give a crystal lamp for seven books of 

stamps, then it should be compelled to do so. Disney should be 

required to accept the coupon in exactly the manner printed on 

the back. And, if Bank of America tells its depositors they can 

have their dollars back any time they want, it shouJd be required 

to keep 100% backing (coins or Treasury Certificates) in its vault 

at all times. In the transition to a new money, it is anticipated 

that the old Federal Reserve Notes will continue to be widely 

used. 

2. Freeze the present supply of Federal Reserve Notes, except for 

what will he needed in step number eleven. 

3. Define the "real" dollar in terms of precious-metal content, 

preferably what it was in the past: 371.25 grains of silver. It 

could be another weight of silver or even another metal, but the 

old silver dollar is a proven winner. 

4. Establish gold as an auxiliary monetary reserve which can be 

substituted for silver, not at a fixed-price ratio, but at whatever 

ratio is set by the free market. Fixed ratios always become unfair 

over time as the prices of gold and silver drift relative to each 

other. Although gold may be substituted for silver at this ratio, 

it is only silver that is the foundation for the dollar. 

5. Restore free coinage at the U.S. Mint and issue silver "dollars" 

as well as gold "pieces." Both dollars and pieces will be defined 

by metal content, but only coins with silver content can be called 

dollars, half-dollars, quarter-dollars, or tenth-dollars (dimes). At 

first, 

these coins will be derived only from metal brought into 


the Mint by private parties. They must not be drawn from the 

Treasury's supply which is reserved for use in step number six. 

6. Pay off the national debt with Federal Reserve Notes created for 

that purpose. Creating money without backing is forbidden by 

the Constitution; however, when no one is 

forced by law to 

accept Federal Reserve Notes as legal tender, they will no longer 

be the official money of the United States. They will be merely a 

kind of government script which no one is required to accept. 

Their utility will be determined by their usefulness in payment 

of taxes and by the public's anticipation of having them 

exchanged for real money at a later date. The creation of Federal 

Reserve Notes, with the understanding that they are not the 

official money of the United States, would therefore not be a 

violation of the Constitution. In any event, the deed is already 

done. The decision to redeem government bonds with Federal 

Reserve Notes is not ours. Congress decided that long ago, and 

the course was set at the instant those bonds were issued. We are 

merely playing out the hand. The money will be created for that 

purpose. Our only choice is when: now or later. If we allow the 

bonds to stand, the national debt will be repudiated by inflation. 

The value of the original dollars will gradually be reduced to 

zero while only the interest remains. Everyone's purchasing 

power will be destroyed, and the nation will die. But if we want 

not to repudiate the national debt and decide to pay it off now, 

we will be released from the burden of interest payments and, at 

the same time, prepare the way for a sound monetary system. 

7. Pledge the government's hoard of gold and silver (except the 

military stockpile) to be used as backing for all the Federal 

Reserve Notes in circulation. The denationalization of these 

assets is long overdue. At various times in recent history, it was 

illegal for Americans to own gold, and their private holdings 

were confiscated. The amount which was taken should be 

returned to the private sector as a matter of principle. The rest of 

the gold supply also belongs to the people, because they paid for 

it 

through taxes and inflation. The government has no use for 

gold or silver except to support the money supply. The time has 

come to give it back to the people and use it for that purpose. 

8. Determine the weight of all the gold and silver owned by the 

U.S. government and then calculate the total value of that 

supply in terms of real (silver) dollars.


9. Determine the number of all the Federal Reserve Notes in 

circulation and then calculate the real-dollar value of each one 

by dividing the value of the precious metals by the number of 

Notes. 

10. Retire all Federal Reserve Notes from circulation by offering to 

exchange them for dollars at the calculated ratio. There will be 

enough gold or silver to redeem every Federal Reserve Note in 

circulation. 

11. Convert all contracts based on Federal Reserve Notes to dollars 

using the same exchange ratio. That includes the contracts called 

mortgages and government bonds. In that way, monetary 

values expressed within debt obligations will be converted on 

the same basis and at the same time as currency. 

12. Issue Silver Certificates. As the Treasury redeems Federal 

Reserve Notes for dollars, 

recipients will have the option of 

taking coins or Treasury Certificates which are 100% backed. 

These Certificates will become the new paper currency. 

13. Abolish the Federal Reserve System. It would be possible to 

allow the System to continue as a check clearing-house so long 

as it did not function as a central bank. A check clearing-house 

will be needed, and the banks that presently own the Fed should 

be allowed to continue performing that service. However, they 

must no longer receive tax subsidies to operate, and competition 

must be allowed. However, the Federal Reserve System, as 

presently chartered by Congress, must be abolished. 

14. Introduce free banking. Banks should be deregulated and, at 

the same time, cut loose from protection at taxpayers' expense. 

No more bailouts. The FDIC and other government "insurance" 

agencies should be phased out, and their functions turned over 

to real insurance companies in the private sector. Banks should 

be required to keep 100% reserves for demand deposits, because 

that is a contractual obligation. All forms of time deposits 

should be presented to the public exactly as CDs are today. In 

other words, the depositor should be fully informed that his 

1. Since the value of FRNs would be firmly established in terms of real dollars, 

there would be no compelling reason to exchange them, and it is possible that 

people would continue to use them in daily commerce. Therefore, to retire the FRNs 

and make the transition as quickly as possible, it would be necessary to have the 

banks automatically exchange them for real dollars whenever they are deposited. 

In short order, they would become collectors' items and historical curiosities. 


money is invested and he will have to wait a specified time 

before he can have it back. Competition will insure that those 

institutions that best serve their customers' needs will prosper. 

Those that do not will fall by the wayside—without the need of 

an army of bank regulators. 

15. Reduce the size and scope of government No solution to our 

economic problems is possible under socialism. It is the author's 

view that the government should be limited to the protection of 

life, liberty, and property—nothing more. That means the 

elimination of almost all of the socialist-oriented programs that 

now infest the federal bureaucracy. If we hope to 

retain—or 

perhaps to regain—our freedom, they simply have to go. To that 

end, the federal government should sell all assets not directly 

related to its primary function of protection; it should privately 

sub-contract as many of its services as possible; and it should 

greatly reduce and simplify its taxes. 

16. Restore national independence. A similar restraint must be 

applied at the international level. We must reverse all programs 

leading to disarmament and economic interdependence. The 

most significant step in that direction will be to Get us out of the 

UN and the UN out of the US, but that will be just the beginning. 

There are hundreds of treaties and administrative agreements 

that must be rescinded. There may be a few that are constructive 

and mutually beneficial to us and other nations, but the great 

majority of them will have to go. That is 

not because we are 

isolationist. It is simply because we want to avoid being 

engulfed in global tyranny. 

Some will say that paying off the national debt with Federal 

Reserve Notes amounts to a repudiation of the debt. Not so. 

Accepting the old Notes for payment of taxes is not repudiation. 

Exchanging them for their appropriate share of the nation's gold or 

silver is not repudiation. Converting them straight across to a 

sound money with little or no loss of purchasing power is not 

repudiation. The only thing that would be repudiated is 

the old 

I monetary system, but that was designed to be repudiated. The 

monetary and political scientists who created and sustained the 

Federal Reserve System never intended to repay the national debt. 

It has been their ticket to profit and power. Inflation is repudiation 

on the installment plan. The present system is a political trick, an

Although 


accounting gimmick. We are merely acknowledging what it is. We 

are simply refusing to pretend we don't understand what they are 

doing to us. We are refusing to play the game any longer. 

MEASURING THE SIZE OF THE HANGOVER 

So those are the sixteen steps, but what are their effects? 

should come as no surprise that there is a price to pay for a return 

to monetary sobriety. A hangover cannot be avoided, except by 

continuing the binge, which is the road to death. Lef s take a look at 

what this binge has already cost us. We will measure that by 

calculating how much each Federal Reserve Note will be worth 

when the new money appears. 

The following figures are presented for illustrative purposes 

only. The data are drawn from public sources and from the Federal 

Reserve itself, but there is no way to know how accurate they really 

are. In addition to the question of accuracy, there are some 

statistical items which are so obscure that not even the experts at 

the Fed are certain what they mean. When the time comes to apply 

this program, it will be necessary to assemble a task force of experts 

who can audit the books and assay the metals. Nevertheless, based 

on the best information available to the public, this is what we get: 

The total quantity of silver held by the government on 

September 30, 1993, was 30,200,000 troy ounces. If we 

assume the new dollar will be defined as 371.25 grains of 

silver (which equals .77344 troy ounces), then that supply is 

valued at $39,046,338. 1 

The price of gold on that date was 384.95 Federal-Reserve notes 

per ounce. Silver was 4.99 fiat dollars per ounce. The ratio 

between them, therefore, was 77-to-l. 

The supply of gold was 261,900,000 ounces. The value of the 

gold supply, therefore, (at 77 times its weight in ounces) was 

$26,073,517,000. 

The value of silver and gold combined would be 

$26,112,563,338. 

It 

I 

The 


The number of Federal-Reserve notes this supply would have to 

redeem would be the combined total of the Ml money 

supply (currency and demand deposits) plus the additional 

number of notes needed to pay off the national debt. Ml on 

September 27, 1993, was 1,103,700,000,000 FRNs. 1 The 

national debt stood at 4,395,700,000,000 FRNs. The total 

amount to be redeemed, therefore, would be 

5,499,400,000,000 FRNs. 

bottom line of this calculation is that the value of each 

Federal-Reserve note will be equal to .0047 silver dollar. One 

silver dollar would be worth 213 Federal-Reserve notes! 

BAD, BUT NOT THAT BAD 

That will be a bitter pill to swallow, but it sounds worse than it 

really is. 

Remember that the new dollars will have more purchasing 

power than the old. Coins will play a larger role in everyday 

transactions. The nickel phone call and the ten-cent cigar will have 

returned. In the beginning at least, the price of these items probably 

will be less than that. As explained in chapter seven, any quantity of 

gold or silver will work as the foundation for a monetary system. If 

the quantity is low—as certainly will be the case at the time of 

transition—it merely means the value of each unit of measure will 

be high. In that case, coins will solve the problem. Pennies would 

be used for a cup of coffee; one mill (a tenth of a cent) would pay 

for a phone call, and so on. New, small-denomination tokens 

would fill that need. In a relatively short period of time, however, 

the monetary supply of gold and silver would increase in response 

to free-market demand. When the supply increases, 

the relative 

value will decrease until a natural equilibrium is reached—as 

always has happened in the past. At that point, the tokens will no 

longer be needed and can be phased out. 

An inconvenience? Yes. Vending machines will have to be 

retrofitted for the new coins, but that would be no more difficult 

than retrofitting them to take paper bills or plastic debit cards, 

which is what will be required if we do not adopt these measures. It 

is a small price to pay for an orderly return to real money. 

1 , 

the weight of the silver-dollar is 412.5 grains (.8594 troy ounces), it is 

only 90% pure. Its silver content, however, is exactly 371.25 grains (.77344 troy 

ounces). 

1. For those who feel that M2 or M3 would be a more logical figure, see "Is Ml 

Subtractive or Accumulative?" in the Appendix, containing the author's notes and 

correspondence with the Federal Reserve.


Another possible solution would be to redefine the new dollar 

to contain a smaller quantity of silver. The advantage would be that 

we could continue to use our present coinage. On the negative side, 

however, is the fact that it would create headaches after the 

transition, because coinage then would be too cheap. Instead of 

changing over now, we would merely be postponing the task for 

later. Now is the time to do it—and do it right. The original value of 

a silver dollar was determined after centuries of trial and error. We 

don't have to reinvent the wheel. We know that it will work in the 

long run. 

In the past, the banks have enjoyed a bountiful cash flow from 

interest on money created out of nothing. That will change. They 

will have to make a clear distinction between demand deposits and 

time deposits. Customers wilJ be informed that, if they want the 

privilege of receiving their money back on demand, their deposit of 

coins or Treasury Certificates will be kept in 

the vault and not 

loaned to others. Therefore, it will not earn interest for the bank. If 

must charge 

the bank cannot make money on the deposit, then it 

the depositor a fee for safeguarding his money and for checking 

services. If the customer wants to earn interest on his deposit, then 

he will be informed that it will be invested or loaned out, in which 

case he cannot expect to get it back any time he wants. He will 

knowingly put his money into a time deposit with the agreement 

that a specified amount of time must pass before the investment 

matures. 

The effect of this practice on banking will be enormous. Banks 

will have to pay higher interest rates to attract investment capital. 

They will have to trim their overhead expenses and eliminate some 

of the plush. Profit margins will be tightened. Efficiency will 

improve. They used to offer "free" services which actually were 

paid out of interest earned on their customers' demand deposits. 

Now they will charge for those services, such as checking and safe 

storage of deposits. Customers probably will grumble at first at 

having to pay for those things, and there will be no more free 

toasters. 

Electronic transfer systems will probably become popular for 

their convenience, but they will be optional. Cash and check 

transactions will continue to play an important role. Government 

monitoring will be illegal. Although there will be fewer dollars in 

circulation than there were Federal Reserve Notes, the value of 


each one will be correspondingly greater. Each person will end up 

with the same purchasing power he had before the conversion. For 

a 

short period, both the old and the new money will circulate 

together, and some people will have difficulty making the necessary 

calculations to determine their relative values. But that is 

routine operation for people who live in Europe or for anyone who 

travels to a foreign country. There is no reason to think that 

Americans are too stupid to handle it. 

SOME BAD NEWS AND SOME GOOD 

We should not delude ourselves into thinking that this will be 

an easy transition. It will be a very difficult period, and people will 

have to get used to a whole new way of thinking and doing. The 

freeze on the current money supply may trigger panic in the stock 

market and the business community. Stock prices could tumble, 

causing paper fortunes to disappear back into the computers from 

which they came. Some businesses may fold for a lack of easy 

credit. Weak banks will be allowed to close rather than be bailed 

out with taxes. Unemployment may worsen for a while. Those who 

have been used to a free ride will now have to walk or push or pay 

their way. The masses on welfare will not give up their checks and 

food stamps quietly. The media will fan the flames of discontent. 

The Cabal will be at every switch to derail the train. 

This will be the moment of our greatest danger, the moment 

when the people could tire of their hard journey in the desert and 

lose interest in the promised land. This is the time when they may 

long for a return to captivity and head back to the slave pits of 

Pharaoh. 

The important point, however, is that most of these problems 

would be temporary. They would be present only during the 

period of transition to a new money. As soon as free coinage is 

available at the Mint, and as soon as people see how much demand 

there is for silver and gold coins, there will be a steady stream of 

miners and jewelers who will add great new stores of precious 

metal to the nation's monetary stock. Foreigners undoubtedly will 

add to the inflow. Old silver and gold coins will also reappear in 

the market place. Very quickly, as the stores of precious metal 

respond to supply and demand, the quantity of money will 

increase and its per-unit value will drop to its natural equilibrium. 

a


' 


Won't that be inflation? Yes it will, but it will be significantly 

different from inflation by fiat money on four counts: (1) instead of 

being caused by politicians and bankers attempting to manipulate 

the economy to enhance their personal agendas, it will be caused 

by natural economic forces seeking an equilibrium of supply and 

demand; (2) instead of being harmful to the nation, leading to the 

destruction of the economy, it 

will be part of a healing process, 

leading to prosperity; (3) it will be less severe than what we will 

experience if we do not make the transition; and (4), instead of 

being part of a continuum that is designed to go on forever, it will 

have a built-in termination point: the point of natural equilibrium 

where the human effort to mine gold and silver equals the effort to 

create those things which gold and silver can buy. When that point 

is 

reached, the money supply will cease to expand, and inflation 

will stop—once and for all. The hangover will be gone. From that 

point forward, prices will begin a gradual descent as advances in 

technology allow improved efficiency in production. With the 

arrival of lower prices, better job opportunities, and increasing 

prosperity, the voices of discontent will gradually fade. After the 

storm is over, America will have an honest money supply, a 

government with no national debt, and an economy without 

inflation. 

No matter what scenario unfolds in the future, there is white 

water ahead. We had better tighten our straps and prepare for the 

rapids. We owe it to ourselves and our families to take measures 

which will increase our chances of coming out at the other side. If 

the pessimistic scenario is played out, it will make little difference 

what we do, because there will be no other side. But in the realistic 

scenario, there are certain precautions that will make a big difference 

in our economic well being. 

To fully appreciate the wisdom of some of these measures, it is 

well for us to pause and consider the possibility that a transition to 

economic safety and sanity will not be orderly. Another variant of 

the realistic scenario is that our entire system could collapse, 

including the international structure being assembled at the UN. If 

that should happen, we won't have to worry about an orderly 

transition to a sound monetary system, because it won't happen. 

Our primary concern will be basic survival. 

Economic chaos and civil disorder would not necessarily have to 

be the prelude to world government. If a sufficient number of 

people were well enough informed to know in advance what the 

enemy's game plan is, and especially if they were in the right places 

within the system, they might be able to provide leadership at the 

critical moment. If there is blood in the streets and long periods of 

anarchy, it is theoretically possible that groups of enlightened 

individuals who have prepared in advance could move into the 

power vacuum and take charge. That may sound like another 

pessimistic scenario, but it is not. In the final analysis, it may be the 

most realistic one of all. But we should not hope for it. All we can 

do is prepare for it should it come to pass. 

HOW TO PREPARE 

What can we do to prepare financially? To avoid making this a 

lengthy dissertation, let's use the outline form. Elaboration should 

not be necessary. 

1. Get out of debt. A mortgage on one's home is a logical exception, 

provided the price is right. Borrowing for one's business is also 

an exception if based on a sound business plan. Speculative 

investments are not a good idea in these times unless they are 

made with money you can afford to lose. 

2. Pick a sound bank. Maintain accounts at several institutions. Do 

not keep over $100,000 in any one bank. Remember that not all 

types of accounts are covered by FDIC. Some institutions now 

offer private insurance. Make sure you know to what extent you 

are at risk. 

3. Diversify your investments among blue ribbon, over-thecounter, 

growth, income, large, small, mutuals, bonds, real 

estate, bullion coins, mining stock, and tangibles. Industries that 

do well in hard times are gambling, alcohol, and escapist 

entertainment. Study the fields and companies in which you 

invest. Personal knowledge is indispensable. 

:4. Avoid the most recent "best" performers. Their great track 

records are historical. They have no bearing on future 

performance. To the contrary, they may now be overpriced and 

1. That is not an easy assignment. It helps to have professional assistance from an 

independent source which is able to analyze asset quality> loan ratios, equity ratios, 

loan-loss reserves, and the like. One of the best sources of this kind of information 

is Veribanc. For a nominal fee, this bank-rating service will provide you with 

detailed reports on any bank or saving & loan in America. If you want their 

brochure, write to them at P.O. Box 461, Wakefield, MA 01880.


poised for a fall. 

See how an investment fared over the long 

run—at least fifteen years—and particularly how it performed 

during periods of economic downturn. 

5. When investing in coins, avoid those with high numismatic 

value—unless you are prepared to become an expert. As with 

other types of investments, seek advice but don't depend on it. 

The same is true for diamonds, art pieces, and other collectibles. 

Stay with what you know. Otherwise, you will be vulnerable in 

shark-infested waters where even the most experienced traders 

can lose money. 

6. Maintain a stash of cash, including some old silver coins. The 

currency should be enough to provide your family with 

necessities for about two months. The coins are for more severe 

and prolonged conditions. There is no "correct" quantity. It is a 

matter of personal judgment and financial ability. 

PROFITING FROM DISASTER 

All of this is aimed at surviving the storm and preparing 

ourselves to offer leadership in troubled times ahead. That is a 

rather negative view. There is a more positive outlook for those 

who are looking for good news, as Adlai Stevenson said. It is the 

exciting prospect that we can turn this calamity to our advantage. 

We can actually profit from the coming collapse. That thought has 

spawned hundreds of books and newsletters offering advice on 

how to get rich while others are being destroyed. There is even one 

that gives advice on how to cash in on the environmental-industry 

boom. The pitch is how to make a fortune on the downfall of 

America. 

There is no doubt that opportunities exist to profit from 

investment decisions based on a realistic appraisal of current 

trends. Most of those opportunities/ however depend on making 

market-timing decisions. One must know precisely when to buy, 

when to self, and at what price. To know all that, the investor must 

become expert on the nature of the industries involved and must 

monitor the daily shifts in market forces. He must attempt to 

complete his analysis and reach his conclusions in advance of the 

crowd. And, of course, he must be right Most investors are not 

prepared to do that, so they must depend on the services of 

professionals, usually the same experts who are encouraging them 

to invest in these kinds of enterprises. If the investment is 

profit- 


able, the analyst receives an income. If the investment turns sour, 

the analyst still receives an income. 

That relationship is not unique to the "profit-from-crash" 

group, however. It is to be found at every level of the investment 

business as well as within the legal and medical professions. The 

customer pays for the advice regardless of its quality. What is 

disturbing about this investment concept is that it actually may 

help to make matters worse. By focusing on finding clever ways to 

avoid the effects of inflation or of making a profit from it, we are 

doing nothing to stop it and, thereby, encouraging its continuation. 

Those who are gaining from inflation are not likely to offer serious 

resistance to it. As they watch their profits pile up, they may 

become its most ardent supporters—

586 THE CREATURE FROM JEKYLL ISLAND A REALISTIC SCENARIO 587 

working together, however, they multiply their efforts and 

equal a force of nine. That is the power of organization. When 

choosing an organization, look for experienced and principled 

leadership which has proven that it understands the deeper 

issues and cannot be sidetracked by the Cabal. 

4. Form an educational study group. Give it an enticing name such 

as The Reality Club or The Awareness Lunch Bunch. Make the 

meetings interesting and short. Use local speakers, ask members 

to give book reviews, show videos, have mock debates, throw 

parties. The goal is 

choir. 

to reach new people, not to preach to the 

5. Form ad-hoc committees, along with other like-minded friends, 

to promote specific projects and programs. Here are a few 

hypothetical examples covering a range of issues: The 

Committee for Sound Money, Parents for Better Education, 

Americans for Tax Relief, North-Bay Residents for Private 

Property. That is an excellent way to bring pressure to bear on 

the political structure and, at the same time, attract the support 

of new people who share your common objective. 

6. Expand your influence within the community. People seldom 

follow strangers. Become known and respected for your 

knowledge. Join groups which are influential within your city 

or profession. Political groups are particularly important, 

regardless of party. Volunteer for work and seek a leadership 

role. Personally visit your city and county politicians and 

maintain ongoing communication. Send them books, articles, 

baseball tickets—anything to make sure they don't forget who 

you are. This is doubly important for political candidates. If you 

have the talent and the aptitude, consider running for some kind 

of public office yourself. 

7. Use politics, don't be used by it We got into our present mess 

through politics and we must get out the same way; but getting 

out is a lot harder than getting in. The strategy, however, is 

simple: remove the big-spending internationalists from office 

and replace them with men and women dedicated to sound 

money and national independence. The way to remove the 

spenders is to expose their voting records to their constituents, 

most of whom have no idea how they vote on key issues. The 

way to get better candidates elected is to volunteer to work in 

their campaigns. Work within party organizations where 

possible but beware! Never allow loyalty to the party to 

override loyalty to principle. Political parties are always 

controlled from the top, and the major parties are controlled by 

the very forces we must oppose. It is imperative that you and 

your candidate remain independent of party control. Otherwise, 

your money and your effort eventually will be used against 

you. 

With that warning aside, we should be encouraged by the fact 

that the task is not as overwhelming as it seems. The power to 

reverse the present trend rests in the hands of only 535 people. 

There are 435 Representatives and 100 Senators. To control a 

majority, all we have to do is influence the election of 268 people. In 

reality, if we began to come even close to that figure, we likely 

would see a wave of sudden political conversions among those 

who remain in office. It is possible that we could achieve our goal 

by influencing the election in only 100 Congressional districts! By 

using the political freedom that yet remains in our system, we can 

overthrow the government of the United States every two years 

without firing a shot! But we had better get going on it. Time is 

running out. 

CONCLUSIONS AND SUMMARY 

We have finally come to the end of this book. It was not a 

textbook on banking theory. It was a who-dunnit, and by now you 

know the answer. 

We have covered a vast expanse of history and have wandered 

yfar afield from our main topic. It was necessary. Without the larger 

TOew, the case against the Federal Reserve System would have been 

^veak. It would have omitted the elements of war, revolution, 

[depression, and fraud. Without that long journey, we would be 

limited to a sterile discussion of interest rates, discount policies, 

and reserve ratios. That is not where the body is hidden. 

In the foreword, it was stated that there were seven reasons to 

abolish the Federal Reserve System. It is time to repeat them here: 

1. An excellent analysis of the voting records of all Congressmen and Senators is 

published each year by The New American magazine, P.O. Box 8040, Appleton, 

Wisconsin 54913. The same organization makes available bulk supplies of 

pamphlets tailored to each Congressional district for distribution to the public. The 

big spenders hate them!


• It is incapable of accomplishing its stated objectives. 

• It is a cartel operating against the public interest. 

• It is the supreme instrument of usury. 

• It generates our most unfair tax. 

• It encourages war. 

• It destabilizes the economy. 

• It is an instrument of totalitarianism. 

The purpose of this book has been to demonstrate the accuracy 

of those assertions. 

A plan for recovery was finally presented which involves 

sixteen steps, each based upon lessons which emerged from 

history. These lessons were mingled with a large amount of theory 

which is traceable only to the mind of the author himself. Which is 

to say there is no guarantee the plan will work. But it is a plan. It is 

better to fail trying than to do nothing. Like men on a sinking ship, 

we must risk the water. We cannot stay where we are. 

There undoubtedly are technical flaws in these proposals, for 

the mechanism is merely a prototype. Someone surely will discover 

a gear that will not mesh or a lever that is disconnected. It will need 

the additional work of specialists in many diverse fields. Even then, 

the job will not be complete, for it must finally be handed over to 

those who are skilled in drafting legislation. Their task will be 

two-fold. First, they must make it workable in the real world of 

politics. Secondly, they must prevent loopholes and vagaries which 

could eventually subvert the plan. 

But none of these considerations should deter us from beginning 

the process. We may not have answers to all 

the technical 

questions, but we do have an answer to the big question. We do 

know that the Federal Reserve System must be abolished. Let us, 

therefore, begin. 

The Creature has grown large and powerful since its conception 

on Jekyll Island. It now roams across every continent and 

compels the masses to serve it, feed it, obey it, worship it. If it is not 

slain, it will become our eternal lord and master. 

Can it be slain? Yes it can. 

How will it be slain? By piercing it with a million lances of truth. 

Who will slay it? A million crusaders with determination and 

courage. 

The crusade has already begun. 

AN INVITATION 

If you would like to join me in this crusade to 

abolish the Federal Reserve and to restore American 

prosperity, let me know who you are. I will advise 

you of important developments and will put you in 

touch with others who are already in the battle. I 

will also send you a list of books, videos, pamphlets, 

and other materials you will need for carrying the 

message to your friends. Send a self-addressed, 

business-size envelope with two postage stamps to: 

G. Edward Griffin 

P.O. Box 4646 

Westlake Village, CA 91359-1646 

Materials may also be obtained at our website: 

www.realityzone.com

590 APPENDIX 

(A.) STRUCTURE AND FUNCTION 

OF THE FEDERAL RESERVE SYSTEM 

The three main components of the Fed are: (1) the national Board 

of Governors, (2) the regional Reserve Banks, and (3) the Federal Open 

Market Committee. Lesser components include: (4) the commercial 

banks which hold the stock, and (5) the advisory councils. 

The function of the national Board of Governors is to determine 

the system's monetary policy. The Board consists of seven members 

who are appointed by the President and confirmed by the Senate. 

Their terms of office are fourteen years and are staggered so that they 

do not coincide with the presidential term of office. The purpose of this 

is to insure that no single President can dominate Fed policy by 

stacking the Board with his appointments. One Board member is 

appointed as the Chairman for four years and another as Vice 

Chairman for four years. The Chairman controls the staff and is the 

single most powerful influence within the system. 

Control is exercised by the Board and a handful of top staff 

employees. The Federal Reserve Act mandated that the President, 

when selecting Governors "shall have due regard to a fair representation 

of the financial, agricultural, industrial and commercial 

interests, and geographical divisions of the country." This mandate is 

now almost completely ignored, and the men come primarily from the 

fields of banking and finance. 

The function of the regional Reserve Banks is to hold cash reserves 

of the system, supply currency to member banks, clear checks, and act 

as fiscal agent for the government. 

The twelve regional Reserve Banks are located in Atlanta, Boston, 

Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, 

Philadelphia, Richmond, San Francisco, and St. Louis. They are 

corporations with stock held by the commercial banks which are 

members of the system. Member banks elect the directors of the 

regional Reserve Banks of which they are a part. The larger banks hold 

more shares but they have only one vote in the selection of the 

Directors. 

Within each regional-bank system there are nine Directors. The 

member banks elect three Class-A directors who represent the banking 

industry and three Class-B directors who represent the general public. 

The remaining three Class-C directors are appointed by the national 

Board. The Chairman and Vice Chairman of each regional Reserve 

Bank must be Class-C directors. The selection of President and other 

officers is subject to veto by the national Board of Governors. In this 

way, the national Board is able to exercise control over the regional 

branches of the system. 

APPENDIX 591 

The function of the Federal Open Market Committee is to implement 

the monetary policy set by national Board, although it exercises 

considerable autonomy in setting its own policy. It manipulates the 

money supply and interest rates primarily by purchasing or selling 

government securities—although it also accomplishes that through the 

purchase or sale of foreign currencies and the securities of other 

governments as well. Money is 

created and interest rates go down 

when it purchases. Money is extinguished and interest rates go up 

when it sells. Policy is formulated on a daily basis. In fact, it is 

monitored by the minute and the Committee often intervenes in the 

market to affect immediate changes. 

The Open Market Committee is composed of the national Board of 

Governors plus five of the twelve regional Presidents who serve on a 

rotating basis. The exception to this is the President of the New York 

regional Bank who is always on the Committee. Thus, once again, the 

System is firmly in control of the national Board with the President of 

the New York regional Bank being more powerful than the others. 

Twenty-four bond dealers handle all sales of government securities. 

Government agencies cannot exchange with each other without 

going through dealers who earn commissions on each transaction. 

Decisions are made at secret meetings. A brief report is released to 

the public six weeks later, but transcripts of the deliberations are 

destroyed. That policy was begun in 1970 when the Freedom-of-Information 

Act was passed. Not even the CIA enjoys such secrecy. 

The function of the member banks is to conduct the nation's 

banking business and to implement the System's monetary policy in 

terms of putting money into or drawing it out of the system at the 

point of contact with individual or corporate borrowers. 

This leads to the troublesome question of ownership. The federal 

government does not own any stock in the System. In that sense, the 

Fed is privately owned. That, however, is misleading in that it implies 

a typical private-ownership relationship in which the stockholders 

own and control. Nothing could be further from the truth. In this case, 

the stock carries no proprietary interest, cannot be sold or pledged as 

collateral, and does not carry ordinary voting rights. Each bank is 

entitled to but one vote regardless of the amount of stock it holds. In 

reality, the stock is not evidence of "ownership" but simply certificates 

showing how much operating capital each bank has put into the 

System. It is not a government agency and it is not a private corporation 

in the normal sense of the word. It is subject to political control yet, 

because of its tremendous power over politicians and the elective 

process, it has managed to remain independent of political oversight. 

Simply stated, it is a cartel, and its organizational structure is uniquely 

structured to serve that end.

592 APPENDIX 

(B.) NATURAL LAWS 

OF HUMAN BEHAVIOR IN ECONOMICS 


LESSON: When gold (or silver) is used as money and when the 

forces of supply and demand are not thwarted by government 

intervention, the amount of new metal added to the money supply 

will always be closely proportional to the expanding services and 

goods which can be purchased with it. Long-term stability of prices 

is the dependable result of these forces. This process is automatic 

and impartial. Any attempt by politicians to intervene will destroy 

the benefit for all. Therefore, 

LAW: Long-term price stability is possible only when the 

money supply is based upon the gold (or silver) supply without 

government interference. 


LESSON: Whenever government sets out to manipulate the 

money supply, regardless of the intelligence or good intentions of 

those who attempt to direct the process, the result is inflation, 

economic chaos, and political upheaval. By contrast, whenever 

government is limited in its monetary power to only the 

maintenance of honest weights and measures of precious metals, 

the result is price stability, economic prosperity, and political 

tranquility. Therefore, 

LAW: For a nation to enjoy economic prosperity and political 

tranquility, the monetary power of its politicians must be limited 

solely to the maintenance of honest weights and measures of 

precious metals. 


LESSON: Fiat money is paper money without precious-metal 

backing and which people are required by law to accept. It allows 

politicians to increase spending without raising taxes. Fiat money 

is the cause of inflation, and the amount which people lose in 

purchasing power is exactly the amount which was taken from 

them and transferred to their government by this process. Inflation, 

therefore, is a hidden tax. This tax is the most unfair of all because 

it falls most heavily on those who are least able to pay: the small 

wage earner and those on fixed incomes. It also punishes the thrifty 

by eroding the value of their savings. This creates resentment 

among the people/ leading always to political unrest and national 

disunity. Therefore, 

LAW: A nation that resorts to the use of hat money has doomed 

itself to economic hardship and political disunity. 

APPENDIX 593 


LESSON: Fractional money is paper money which is backed by 

precious metals up to only a portion of the face amount. It is a 

hybrid, being part receipt money and part fiat money. Generally, 

the public is unaware of this fact and believes that fractional money 

can be redeemed in full at any time. When the truth is discovered, 

as periodically happens, there are runs on the bank, and only the 

first few depositors in line can be paid. Since fractional money 

earns just as much interest for the bankers as does gold or silver, the 

temptation is great for them to create as much of it as possible. As 

this happens, the fraction which represents the reserve becomes 

smaller and smaller until, eventually, it is reduced to zero. 

Therefore, 

LAW: Fractional money will always degenerate into fiat 

money. It is but fiat money in transition. 


LESSON: It is human nature for man to place personal 

priorities ahead of all 

others. Even the best of men cannot long 

resist the temptation to benefit at the expense of their neighbors if 

the occasion is placed squarely before them. This is especially true 

when the means by which they benefit is obscure and not likely to 

be perceived as such. There may be exceptional men from time to 

time who can resist that temptation, but their numbers are small. 

The general rule will prevail in the long run. 

A managed economy presents men with precisely that kind of 

opportunity. The power to create and extinguish the nation's 

money supply provides unlimited potential for personal gain. 

Throughout history the granting of that power has been justified as 

being necessary to protect the public, but the results have always 

been the opposite. It has been used against the public and for the 

personal gain of those who control. Therefore, 

LAW: When men are entrusted with the power to control the 

money supply, they will eventually use that power to confiscate the 

wealth of their neighbors.

. 

594 APPENDIX APPENDIX 595 

(C.) 

IS M-l SUBTRACTIVE OR ACCUMULATIVE? 

Below is a copy of the author's letter to Mike Dubrow at the Public 

Information department of the Federal Reserve System. In a telephone 

conversation on February 14, 1994, Mr. Dubrow said that the assumption 

stated in the letter would be correct if it were not for the fact that 

the system is under the control of a central bank. The Federal Reserve, 

he said, would not allow that to happen, because it would be 

inflationary. The Fed would reduce the money supply to offset the 

effect of monetary expansion as dollars moved from M-l to M-2 and 

back to M-l again. In other words, the assumption is correct, but the 

Fed has the power to offset it—if it wants to. The bottom line is that 

M-l is accumulative. As such, it is the most meaningful measure of the 

money supply. 

Q. Cdwwtd Qfdffin 

ftaoc 4646, Wntfafa Vtfbtye OR 91359 

MikeDubrow 

FAX #(202) 452-2707 

FederalReserveSystem 

Washington.DC 

DearMr. Dubrow, 

January 19, 1994 

Aswe discussed duringourphoneconversation this 

morning, I am preparing a paper on the Federal Reserve 

System, and an interesting question has arisen. Jt is so 

fund amental that almost everyone withwhom I have spoken 

thought they knew the answer but, upon analysis, 

have concluded theywere not so su re after alJ 

IS Ml SUBTRACTIVE OR ACCUMULATIVE? 

It is my u nderstanding that there are three optional 

definitions ofthemoney supply: 

Ml = currency + short-term deposits. 

+ short-term time deposits, 

M2 = M 1 

M3 = M2 + institutional long-term deposits. 

It is clear that, when money is paid out ofa checking 

account and put into a savings account, it increases M2, 

but the question is: Does it remain as part ofM 1 or is it 

subtracted from it? Herbert Mayo, in his book Investments 

(Chicago: Dryden Press, 1983), says "If individuals 

shift funds from savings accounts to checking 

accounts, the money supply is increased under the 

narrow definition (M-l) but is unaffected if the 

broader definition (M-2) is employed." This implies 

that, when money is moved from a checking account 

to a savings account, it is subtracted from M 1 . Otherwise, 

it would not increase Ml when it is moved back 

again from savings to checking. When we spoke on 

the phone, you confirmed that his interpretation is 

correct. 

But how can that be?The money moved from checking 

to savings or any other investment does not d isappear 

into a vault. It is spent in fulfillment ofthe 

investment project. It is given to a vendor or a contractor 

or an employee and reappears in theircheckingaccounts 

where it becomes part ofM 1 once again. It would seem, 

therefore, that it doesn't really leave M 1 at all. It merely 

increases M2. 

I have hypothesized one possible explanation. It is 

that the money does, in fact, disappear into a vault, or 

at least into a bookkeeping ledger, for a short period of 

time. That would be the time between its deposit into 

the savings account and its subsequent transfer to 

the checking accounts of borrowers. The time period 

might be short — perhaps less than thirty days on the 

average—but it still needs to be considered when calculating 

the money aggregates. Therefore, Ml is reduced 

when money is transferred from checking to 

savings, but that is only a temporary effect. M 1 will 

be increased once again just as soon as the new M2 

money is redirected to borrowers. Is that a correct explanation? 

Thankyou foryou r help with these puzzling items. 

Sincerely, 

G.EdwardGriffin 

(805)496-1649

. Why 

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Smith, Arthur. The Real Colonel House. New York: George H. Doran Company, 1918. 

Smith, Vera C. The Rationale of Central Banking. London: P.S. King & Son, 1936. 

Smyth, Albert Henry, ed. The Writings of Benjamin Franklin. New York: Macmillan, 1906. 

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Wall Street and the Bolshevik Revolution. 

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602 INDEX 

INDEX 603 

Acceptances: 416, 426-427, 480-483, 486, 

490, 495 

Adlai Stevenson: 565, 584 

Aeroflot: 301 

Agfa Ansco: 482 

Aldrich Bill: 441^143, 448, 456, 459, 462, 

464, 469 

Aldrich, Nelson: «, 20, 24, 205, 437, 

439, 441, 445, 448, 464, 469 

American Acceptance Council: 482 

American Bankers Association: 462 

American Express Company: 482 

American I.G. Chemical Corporation: 482 

American Trust Company: 482 

AMTRAX: 45, 63 

Andrew, Abraham Piatt: 5, 11, 24 

Andropov, Yuri: 530 

Anti-Semitism: 285, 289, 414-415, 417-419 

Archbold, John D.: 245 

Armour, J. Ogden: 454 

Articles of Confederation: 316, 318 

Asia-Pacific Economic Cooperation 

Agreement (APEC): 112 

Aspen Institute: 532 

Astor family: 272 

Bailey, Sir Abe: 272 

Baker, George F.: 6, 443, 454 

Baker, James: 116,118 

Balanced-budget amendment: 571-572 

Balfour, Arthur: 238, 271 

Ballard, Robert: 248 

Baltimore & Ohio Railway: 279 

Bancor: 544-547 

Bank notes: 174, 176, 178, 182 

Bank of America: 114 

Bank of England: 171, 174hl75, 177-183, 

223, 232, 269, 271, 311, 325, 330, 339, 

412, 415, 417, 422-427, 429, 439, 450, 

472-473, 475, 480, 489-490, 498, 503 

Bank of France: 183, 221, 269, 425, 472- 

473 

Bank of Intemaf 1 Settlements: 115, 119 

Bank of Manhattan Trust Company: 482 

Bank of North America: 325-328, 330, 339 

Bankers Trust Company: 5, 127, 423, 433, 

472-473 

BankOklahoma: 62 

Baring, Sir Francis: 222 

Barnes, Harry Elmer: 243 

Baruch, Bernard: 258, 453 

Bauer, Mayer Amschel: 218 

Beit brothers: 272 

Belmont, August: 208, 383, 391, 414^415 

Bezant: 149-150, 156 

Bickley, George W.L.: 392, 394 

Biddle, Nicholas: 341, 347-348, 351-352, 

354, 356-357, 360, 396, 565 

Bills of credit: 309-310, 316, 324, 346-347, 

383 

Bimetallism: 320, 323 

Bismarck, Otto von: 374 

Boer War: 277-278 

Bolshevik Revolution: 263, 267, 283 

Bolsheviks: 123, 125, 266, 276, 279-282, 

285-286, 289-293, 306 

Boom-bust cycle 343-345, 360, 420, 488- 

489, 552 

Booth, John Wilkes: 392-394 

Bovard, James: 122 

Brady, Nicholas: 75, 119 

Bretton Woods Conference: 85-86, 88, 

105,114,544 

Brown, Lester: 528 

Bryan, William Jennings: 241, 251, 256- 

257,403,456,465^59 

Brzezinski, Zbigniew: 110 

Buchanan, Sir George: 267, 274, 280 

Buckley, William: 525 

Bullard, Arthur: 290, 294 

Bunting, John: 53 

Burns, Arthur: 43-44 

Bush, George: 74, 76, 120, 126-130 

Bush, Prescott: 302 

Carnegie Corporation: 482 

Carnegie Foundation: 447 

Carnegie United Kingdom Trust: 272 

Carnegie, Andrew: 428 

Carter, Jimmy: 110-111, 528 

Casey, William: 299 

Castro, Fidel; 116 

Catton, Bruce: 379 

Celeste, Richard: 71 

Central Intelligence Agency (CIA): 72, 

Chandler, Lester 424, 484 

Chase Manhattan Bank: 41-42, 47,52-53, 

59, 64, 115, 299 

Chase National Bank: 19, 435, 440, 482 

Chase, Salmon P.: 384-385 

Chemical Bank: 41, 59 

Chernow, Ron: 9, 57, 120, 229, 246, 416, 

433,452,455 

China: 107, 121-123, 126, 132, 301-305 

Chrysler Corporation: 41, 44, 48-49, 64 

Churchill, Winston: 214, 248-249, 252- 

253, 255, 261, 502 

Citibank: 115, 123, 537^538 

Citicorp: 119, 297 

Civil War: 358, 361, 367, 369, 373-377, 

379, 397, 398, 407-408, 411, 418, 429 

Cleveland, Harlan: 528 

Clinton, George: 336 

Clinton, William: 82, 119, 267, 301, 507 

Club of Rome: 528-532 

Coe, Virginius Frank: 88 

Commodity Credit Corporation: 120, 126 

Commonwealth Bank of Detroit: 41, 51- 

53,64 

Commonwealth Savings Company of 

Lincoln: 71 

Communism/Communists: 67-68, 87- 

88, 105, 108, 122-126, 265, 267, 270, 

274, 282, 286, 298-299, 304, 529-530 

Coningsby: 227 

Continental Army: 312, 323 

Continental Congress: 311, 313, 318-319, 

325,339 

Continental Illinois: 41, 54-55, 57-62, 65 

Continentals: 161 

Cooke, Jay: 408 

Coolidge, Calvin: 497 

Cooper, Richard N.: Ill, 122 

Council on Foreign Relations (CFR): 88, 

110-111, 113,122, 129, 263, 273, 283, 

302, 304, 410, 427, 482, 515-516, 52^- 

528, 531, 533-536, 546, 561, 563 

Cousteau, Jacques: 529 

Crane, Charles: 288, 292 

Crane, Philip: 115 

Cunard Lines: 246-247, 262 

Dabney, Morgan & Company: 412 

Daddy Warbucks: 18 

Dall, Curtis: 500 

Davison, Henry P.: 5, 8-11, 24, 275, 434 

Deficit spending: 479, 484, 486, 501, 507 

Dillon, Read & Company: 295 

Disarmament: 514, 518, 526 

Discount Window: 44, 54, 193, 201, 477- 

479, 483, 489 

Disraeli, Benjamin: 227-228 

Dixon, Donald: 78 

Dodge, Cleveland H.: 239,447, 453-454, 

Douglas, Stephen: 370, 385 

Drachma: 149 

Drexel Burnham Lambert: 79, 81 

Drexel, Anthony: 412 

Duane, William: 353 

Dulles, John Foster: 110 

Duncan, Sherman & Company: 412 

Dutch East Indies Company: 173 

Earth Summit: 528, 532 

East India Company: 226 

Eccles, Marriner: 187 

Edison, Thomas: 190 

Eisenhower, Dwight: 110 

Ellsworth, Oliver: 315 

Emancipation Proclamation: 379-380, 

390, 395 

Entitlements: 509-510, 535 

Environmentalism: 516, 523, 526-536 

Equitable Life Assurance Society: 433, 

482 

Equitable Trust Company: 295 

Equity Corporation: 499 

Esher, Lord: 271, 277 

European Union (EU): 112, 560 

Export-Import Bank: 128, 130, 299 

Fabians: 87^88, 96, 105, 106, 109-111, 239, 

273, 483, 529, 570 

Falk, Richard A.: 527 

Fascism /Fascists: 270, 279 

Federal Deposit Insurance Corporation 

(FDIC): 27, 49-54, 57, 60-61, 63-65, 

68-69, 7^-75, 89, 95, 327, 364, 539, 

576,583 

Federal Deposit Loan Corporation 

r 

(FDLCJ:27 

Federal Emergency Management 

Agency (FEMA): 544 

Federal Farm Loan Board: 477 

Federal Housing Authority (FHA): 68 

Federal Reserve Act: 463-465, 468, 472, 

476477,481,502 

Federal Reserve Board: 69, 71, 73 

Federal Savings & Loan Insurance Corporation 

(FSLIC): 68, 73-74, 77 

Ferrell, Robert: 238 

Fiat money: 155, 157-160, 162-165, 169- 

170, 186, 190-193, 195-203, 206-207, 

309-312, 314h316, 324, 352, 409, 419- 

420, 429, 566, 573-574, 582 

Financial Institutions Reform and 

Recovery Act: 74, 80 

First Arabian Corporation: 52 

First Bank of the United States: 325, 328, 

330-333,335,338-339 

First National Bank: 433 

First National Bank of Boston: 482 

First National Bank of Chicago: 115, 127 

First National Bank of Los Angeles: 482 

First National Bank of New York: 5 

First National Bank of St. Louis: 482 

First National City Bank: 41 

First Pennsylvania Bank of Philadelphia: 

53-54, 64, 327

604 INDEX 

INDEX 605 

Fisher, Irving. 188 

Forbes, B.C.: 9 

Forbes, John: 412 

Ford Motor Corporation: 49 

Forrestal, James: 295 

Forrester, Izola: 393 

Fractional money: 165, 167, 169-170, 174 

Fractional-reserve banking: 155, 167, 197, 

219, 341, 343, 362-363, 368, 375, 409, 

478, 488 

Frame, Andrew: 462 

Franklin, Benjamin: 158, 162 

Free banking: 366-367, 375, 576 

Free coinage: 321, 324 

Friedman, Milton: 570 

Galbraith, John Kenneth: 17, 86, 179, 330, 

334, 343, 351, 368-369, 387, 404, 425, 

436, 439, 445, 472, 495, 524, 525 

Gallatin, Albert: 383 

Gardner, Iîchard: 111 

Garn-St. Germain Act: 72 

Gates, Fred: 556 

Gelb, Leslie H.: 129 

Gelzer, Heinrich: 150 

General Agreement on Tariffs and Trade 

(GATT):112,113 

General Education Board: 239, 555 

George, Lloyd: 280 

Glass Bill: 464 

Glass, Carter: 458^63, 465-466 

Glass-Owen Bill: 461, 463, 469 

Gorbachev, Mikhail: 123, 529-530 

Gouge, William: 346 

Goulevitch, Arsene de: 267 

Graham, Katharine: 524 

Grattan, C. Hartley: 241 

Gray, Edwin: 71 

Greenbacks: 384-385, 387-388, 390, 395 

Greenspan, Alan: 73, 76, 119, 148, 403, 474 

Greider, William: 22, 62, 117, 369 

Grenfell, Edward: 413 

Gresham's Law: 148 

Grey, Lord Albert: 271 

Grey, Sir Edward: 241, 253 

Groseclose, Elgin: 146, 175, 182, 322, 362- 

364, 407, 487 

Guaranty Trust Company: 292, 433, 482 

Gyohten, Toyoo: 112 

Hacker, Louis: 322 

Hagedorn, Hermann: 275 

Hamilton, Alexander: 316, 319, 328, 335 

Hammer, Armand: 293 

Harper & Brothers: 244 

Harriman, W. Averell: 293 

Harris Forbes & Company: 295 

Harvey, George: 454 

Hayes, Everis: 439 

Hazard Circular: 386 

Hazlitt, Henry: 585 

Hemphill, Robert: 188 

Hepburn, A. Barton: 19, 440 

Herzog, Jesus Silva: 116 

Hitler: 295, 546 

Home Savings Bank of Cincinnati: 71 

Hoover Institution for War, Revolution 

and Peace: 22 

Hoover, Herbert: 68, 293, 474, 495, 501 

Horan, James: 381 

House, Edward Mandell: 213, 239-245, 

253, 255, 257, 260-261, 266, 273, 281, 

290, 294, 456-460, 465^69, 472 

Hudson Institute: 516, 524 

Hussein, Saddam: 304, 305 

Huntington, Samuel: 111 

I.G. Farben: 295, 482 

Illuminati: 392 

Income tax: 204-205, 382, 508-509, 511, 

534 

Ingraham, Jane: 81, 300 

Insight magazine: 118 

International Acceptance Bank of New 

York: 482 

International Green Cross: 529 

International Monetary Fund 

(IMF/World Bank): 85-94, 97-108, 

112, 114-121, 124, 127-132, 296, 514, 

516, 539, 542, 544, 550, 563, 573 

Irving Trust: 127 

Islamic Fundamentalism: 304 

J.P. Morgan & Company: 431, 433, 453- 

Jackson, Andrew: 256, 341, 347-353, 355- 

356, 358-360, 396, 565 

Jackson, Stanley: 410, 416 

James, Jesse: 392 

Jameson, Sir Leander: 277 

Jastram, Roy: 181 

Jefferson, Thomas: 162, 190, 313, 319, 328, 

330, 332, 338, 341-342, 553 

Jekyll Island: 3, 6-11, 16-18, 23, 50, 60, 62, 

423, 437 

Jekyll Island Club: 6, 210 

Joachimsthalers; 318 

John Birch Society: 268 

Johnston, Sir Harry: 271 

Jordan, Jerry: 571 

Josephson, Matthew: 408 

Junk bonds: 78-79, 81 

Kadlec, Charles: 570 

Kahn, Herman: 516, 524, 525 

Kahn, Otto H.: 279, 453, 460 

Kane, Edward: 78 

Keating, Charles: 78 

Kelleher, Cornelius: 282 

Kellock, Harold: 23 

Kenan, H.S.: 448 

Kennan, George: 290, 527 

Kennedy, John R: 109, 485, 569-570 

Kenworthy, Joseph: 252 

Kerensky, Aleksandr: 276, 285, 289, 291 

Keynes, John Maynard: 87, 89-90, 105, 

146, 168, 212, 273, 483, 497, 544 

KGB: 270 

King George III: 359 

King George V: 253 

Kissinger, Henry: 113, 532 

Knights of the Golden Circle: 392-395 

Kolko, Gabriel: 415, 435-436, 444, 446, 

460, 462 

Korean War: 516 

Krooss, Herman: 345 

Kruger, Paul: 277 

Ku Klux Klan: 393 

Kuhn, Loeb & Company: 5, 18, 263, 279, 

292-293, 295, 395, 423, 433, 444, 453, 

481^82, 496 

Labouchere, Pierre-Cesar: 222 

Laffer, Arthur: 570 

LaFollette, Robert: 442 

Lamont, Corliss: 279 

Lamont, Thomas W.: 278 

Langdon, John: 315 

Laughlin, J. Laurence: 446, 459-461 

Lawrence, Richard: 357 

Lazard Brothers: 272 

League of Nations: 273, 422 

Lee, Ivy: 295 

Leffingwell, Russell C: 278 

Legal tender: 155-163, 169-170, 187, 207, 

311, 315, 321, 326, 330, 384, 386, 574 

Lehman Corporation: 499 

Lehman, John: 303 

Lehrman, Lewis: 434 

Lenin: 270, 276, 281-283, 286-287, 291, 

293, 297, 300, 305, 546 

Lewin, Leonard: 524, 525 

Lewinsohn, Richard: 217, 237 

Lie, Trygve: 401 

Lincoln Savings: 73-74, 78 

Lincoln, Abraham: 370-371, 373-375, 

377, 379-381, 383-385, 389-395 

Lindbergh, Sr„ Charles: 442-443, 446, 

448,461,465,476 

Linowitz, Sol: 528 

Lockhart, Bruce: 280-282, 290 

Lockheed: 41, 45-46, 63 

London School of Economics: 109, 570 

Luce, Clare Booth: 525 

Luce, Henry: 524 

Lundberg, Ferdinand: 239, 245, 258, 447, 

452,454,473 

Lusitania: 246-255, 260-262, 410 

Lyons, Eugene: 287 

Manufacturers Hanover: 41, 59 

Mao: 546 

Marine Midland Corporation: 499 

Marshall, John: 346 

Martin, Rose: 273 

Marx, Karl: 211, 266 

Mason, George: 315 

Masonic lodges: 392 

Massachusetts: 157-158, 160, 307, 310- 

311,362-364,367 

Mauretania: 246, 425 

Maximilian, Ferdinand: 374, 377, 392 

May, Max: 292 

Mayer, Martin: 486 

McAdoo, William: 238-239, 256, 258, 454, 

458, 464 

McCormick, Cyrus: 447 

McCulloch v. Maryland: 346, 351 

McLandress, Herschel: 524 

McLaughlin, Andrew: 163 

McNamara, Robert: 516, 532 

Medicare: 509-510, 535 

MelJon, Andrew: 425, 495, 497 

Mellen,CS.:244 

Mensheviks: 279-280 

Mersey, Lord: 214, 255 

Metropolitan Life Insurance Co. 482 

Mexico: 104 

Midland Bank: 272 

Miliarense: 149 

Milken, Michael: 79, 81 

Milner, Lord Alfred: 267, 270-272, 274, 

277-280 

Minor, Robert: 211, 266 

Monetarists; 570 

Monetary Control Act of 1980: 115, 201 

Monroe Doctrine: 373, 377

606 INDEX 

INDEX 607 

Monroe, James: 373 

Monserrat: 264 

Moral hazard: 35, 36, 39 

Moody, John: 236, 415, 435 

Morgan Guaranty: 41, 56, 59, 127 

Morgan, Grenfell, and Company: 272 

Morgan, Harjes & Company; 412 

Morgan, House of: 119, 419, 429, 452 

Morgan, J .P.: 4^8, 23, 209, 235-239, 244- 

261, 266, 272-278, 283, 302, 410-418, 

427, 431, 433-434, 443, 447-448, 455, 

496, 499, 502 

Morgan, Jr., J.P.: 412, 417-^18, 454, 458, 

&0 

Morgan, Junius: 411 

Morgan thau, Henry: 453 

Morris, Edward: 292 

Morris, Robert: 325-326, 328, 330, 335 

Morrow, Dwight: 278 

Morton, Frederic: 218, 224-225 

Mullins, Eustace: 413 

Munsey, Frank: 452-453 

Murphy, Grayson: 278 

Mussolini: 546 

Mutual Life Insurance Company: 433, 482 

Myers, Gustavus: 331 

Napoleon Bonaparte: 173, 181, 183, 220- 

226 

Napoleon 111: 378 

National Banking Acts of 1863-65: 386- 

388,407 

National Citizens' League: 445, 459-460 

National City Bank: 5, 239, 258, 266, 276, 

292, 295, 433, 435, 447, 454, 464 

National Civic Federation: 434 

National debt: 388, 508, 510-512, 534, 

535, 568, 572, S75-S77, 579, 582 

National Monetary Commission: 437, 448 

Nazism /Nazis: 270, 295 

New Haven Railroad: 244 

New World Order: 109, 111-113, 122, 

125, 129, 132, 514, 528, 530, 549-550, 

552,561,564 

New York City: 41, 46-47, 64 

New York Life Insurance Company: 433 

New York Title and Mortgage Company: 

New York Trust Company: 482 

Nixon, Richard: 91, 302 

Norman, Montagu: 269, 399, 423, 425, 

429, 472, 486, 489, 495, 498 

North American Free Trade Agreement 

(NAFTA): 112, 113 

North, Douglass: 322 

Northern Pacific Railroad: 408 

Norton, Charles D.: 5, 24 

Nye, Gerald P.: 238 

Office of Thrift Supervision: 74 

Open Market: 194, 477, 479, 481-482, 484- 

487, 490, 492, 499, 503 

Oppenheimer, Michael: 527 

Order of American Knights: 393 

Order of the Sons of Liberty: 393 

Orwell, George: 556-557, 560 

Overseas Private Investment Corporation 

(OP1C): 128, 300 

Owen, Robert L.: 461, 476 

Page, Walter H.: 238-239, 241-242 

Paine, Thomas: 315 

Panama Canal: 115 

Passell, Peter 80 

Paterson, William: 175 

Patman, Wright: 42-43, 187 

Patterson, Robert P.: 295, 485 

Patterson, William: 177 

Paul, Ron: 434 

Peabody & Company: 415-417 

Peabody, George: 410-413, 415-416 

Peel, Sir Robert: 181 

Pel], Claiburne: 528 

Penn Central: 41-44, 55, 63 

Perm Square Bank of Oklahoma: 55 

Perkins, George W.: 266, 452-453 

Pieces of Eight: 318-319 

Pike, Henry: 277 

Planters Trust and Savings Bank of 

Opelousa: 61 

Poland: 126, 297 

Politburo: 530 

Polo, Marco; 155 

Poor, Henry: 365 

Pratt, Sereno: 415 

Pujo Committee: 443-444, 447, 454 

Pujo, Arsene: 6, 443 

Quigley, Carroll: 213, 267-272, 278, 282, 

423, 475, 494 

Rand Corporation: 516 

Randolph, John: 352 

Reagan, Ronald: 62, 71, 111, 126, 474, 507 

Reales: 318 

Red Cross: 263, 274-275, 279-284, 285, 

289, 291-292, 302, 306 

Reed, George: 315 

Reed, John: 119 

Regan, Donald. 58, 114 

Reichsbank: 18, 183, 269, 425 

Remini, Robert: 354, 356 

Report from Iron Mountain: 516, 518, 

521, 523-526, 534, 536, 556, 558, 560 

Resolution Funding Corporation: 74 

Resolution Trust Corporation: 81-82 

Resolution Trust Oversight Board: 74 

Rhodes, Cecil: 208, 219, 263, 270-272, 

277-278, 281-283, 410, 428, 430, 534 

Ricardo, David: 180 

Rist, Charles: 269, 425, 472 

Roberts, Paul: 96 

Robins, Raymond: 212, 281-282, 284, 290 

Rockefeller, David: 42, 47, 112-113, 123, 

297, 299, 532 

Rockefeller, John D.: 209, 266, 400, 434, 

446,555 

Rockefeller, John D. Ill: 401 

Rockefeller, Jr., John D.: 4r-5 

Rockefeller, William: 5, 454 

Rockefellers: 245, 272 

Roosevelt, Franklin Delano: 10, 68, 239, 

258,502 

Roosevelt, Theodore: 266, 451-453, 455- 

456, 468 

Roscoe, Theodore: 393 

Rostow, Walt: 524 

Rothbard, Murray: 142, 176, 327, 337, 

344, 362, 423, 484-485, 495 

Rothschild, Alphonse: 414, 418 

Rothschild, Amschel: 225 

Rothschild, House of: 5, 219-220, 227, 

232, 413, 415, 417-418, 429 

Rothschild, James (Jacob): 224, 228, 232 

Rothschild, Kalmann: 225 

Rothschild, Nathan: 22^227, 234, 271, 

331,413,415 

Rothschild, Salomon: 225, 231 

Rothschild Formula: Chap. 11 + 303-305 

Rothschilds: 234, 235, 240, 246, 271, 331, 

340, 374, 383, 389, 413-419, 482 

Round Table: 270, 272-275, 277-283, 291- 

292, 296^297, 302, 305, 428 

Royal Bank of Canada: 127 

Royal Institute of Intemtl Affairs: 273 

Rubin, Robert: 119 

Ruml, Beardsley: 204 

Rusk, Dean: 525 

Ruskin, John: 270-271 

Russell, Bertrand: 529 

Russia: 107, 124-132, 263-267, 27^276, 

279-296, 299-302, 306, 377-378, 395 

Russian Revolution: 263, 265, 267 

Ryan, John D.: 266 

Ryan, Thomas: 453 

S&Ls: 68-74, 76-81, 83^-84 

S.S. Kristianiafjord: 265, 288, 292 

Salinas, Carlos: 119 

Salomon Brothers: 81 

Sandinistas: 301 

Schacht, Hjalmar: 269, 425 

Schapiro, Leonard: 286 

Schiff, Jacob: 210, 263-266, 285, 292, 395, 

45^454, 458 

Schlicktenthalers: 318 

Schmidt, Helmut: 47 

Second Bank of the United States: 341- 

359, 375, 382-386, 442, 565 

Selgin, George: 366 

Seligman, Edwin: 17, 440 

Sennholz, Hans: 76, 82, 367 

Seymour, Charles: 241, 459, 465 

Shafroth, John: 439 

Shaw, George Bernard: 87, 101 

Sibley, Joseph: 245 

Sidonia: 227-228 

Silver certificates: 485 

Simpson, Colin: 246, 251, 254 

Sjaastad, Larry A.: 121 

Skull and Bones: 80 

Slavery: 370-377, 379, 382, 392, 395 

Smuts, Jan: 278 

Social Democrats: 12^125, 129 

Social Security: 509-510, 535 

Socialism/Socialists: 85-88, 95-106, 109, 

124, 266-267, 270, 420, 530, 535, 546 

Solidus: 149 

South Africa: 271-272, 276-278 

Soviet Union: 89, 100, 293, 296, 304 

Soviets: 121, 123-124, 126-129, 132 

Spanish dollar: 319, 324 

Special Drawing Right (SDR): 90 

Sprague, Irvine: 49-54, 57-61 

Standard Brands: 499 

Standard Oil Company; 245, 435 

Stanton, Edwin M.: 393-394 

Steffens, Lincoln: 288 

Stephenson, Nathaniel Wright: 10, 439, 

446 

Stillman, James: 454 

Stockman, David: 114 

Strong, Benjamin: 24, 258, 269, 423-429, 

441, 450, 472-^74, 484-489, 497, 502 

Strong, Maurice: 531^533, 549 

Sumner, William: 169 

Supply-siders: 570 

Supreme Court: 346-347, 349, 351

608 INDEX 

Sutton, Anthony: 22, 266, 275, 291, 303 

Swift, Harold: 292 

Swift, Helen: 292 

Taft, William Howard: 451-453, 456, 468 

Tawney, R.H: 273 

Taxes: 191, 193, 196, 199, 203-205 

Terrorism: 546, 562 

Thalers:318 

Theobald, Thomas: 297 

Thompson, William: 289-291 

Thompson, William Boyce: 275-276, 280- 

Tiananmen Square: 301 

Tocqueville, Alexis de: 554 

Torrijos: 115 

Toynbee, Arnold: 273 

Trade deficit: 91, 93-94 

Trafkant, Rep. James: 304, 305 

Transvaal: 277-278 

Trilateral Commission: 112 

Trotsky: 264-267, 282-283, 286-287, 291 

Truman, Harry: 88 

Tsar Alexander II: 377-378, 395 

Tsar Nicholas: 264-265, 267, 274, 280, 

283, 285, 288 

Tulipomania: 491-492 

Turner, Dennis: 77, 90 

Turner, Captain William: 255 

Tutko, Thomas: 521 

U-boat: 237, 248-249, 252-253, 261 

U.S. Steel; 435 

United Americans: 279 

United Nations: 86, 89, 108, 114, 422, 514- 

516, 526, 530-532, 541, 544-545, 548, 

550,561,563-564,577 

Unity Bank and Trust Company: 50-51 

Usury: 190-191, 207 

Vanderlip, Frank: 5, 11, 24, 439, 441, 450, 

460,463-464,469 

Vernon S&L: 78 

Vieira, Edwin: 318 

Viereck, George: 240-241, 251, 456-457 

Volcker, Paul; 54, 58, 60, 65, 71, 112, 116, 

117 

Vreeland, Edward: 437, 441, 450 

Wall Street: 4, 11, 18, 22-23, 72-^1, 236- 

237, 244, 257-259, 266, 276, 281, 288, 

29C-295, 302, 408, 415, 417, 431, 433, 

435, 442-448, 453-456, 461-462, 472, 

482, 497, 502 

Wall, M. Danny; 73 

Wallich, Henry: 116 

War Industries Board: 258-259 

War of 1812: 336, 340-341, 357, 359, 363 

Warburg & Company, M.M.: 18 

Warburg, Felix: 18, 453 

Warburg, James: 10 

Warburg, Max: 5, 18 

Warburg, Paul: 5, 9-10, 17-19, 22-24, 438, 

440, 444-445, 448, 450, 453, 455, 458, 

461, 465-466, 481-482, 486, 496 

Washington, George: 161, 164, 312, 314- 

315,322-323 

Waterloo: 224, 226-227, 233 

Watt, James: 114, 119 

Webb, Sidney and Beatrice: 87 

Webster, Daniel: 351 

Welles, Chris: 42, 44 

Wellington, Duke of: 224-227 

Wells, H.G.: 88 

Wenrworth, W.C: 399, 498 

Westinghouse Acceptance Bank: 482 

Westinghouse, H.H.: 279 

Wheeler, George: 244, 415 

White Star Lines: 246 

White, Harry Dexter: 87, 105, 212 

Whitney family: 272 

Wildcat banks: 333, 336-337, 340 

Willard, Daniel: 279 

Willing, Thomas: 330 

Willis, Henry Parker: 427, 460-462, 465 

Wilson, Derek: 219, 227, 331, 383, 414-415 

Wilson, James: 315 

Wilson, R. McNair: 221, 223 

Wilson, Woodrow: 238-243, 250-252, 

255-258, 260-261, 266, 275, 281, 288- 

289, 293, 447-449, 452-460, 466-469 

Wolf, George: 356 

Wood, Daniel: 532 

Woods Hole Oceanographic Institute: 254 

World Bank: 85-86, 88-89, 95-98, 100- 

103, 105-109, 118, 121, 124, 126, 130- 

132,296,301,302 

World Future Society: 532 

World Trade Organization (WTO): 1 13, 

114 

World War I: 235, 238, 259-261, 265, 275, 

473, 479, 483-484, 489, 502 

World War II: 502 

WorldWatch Institute: 528 

Wrangell-Rokassowsky, Carl: 378 

Yago, Glenn: 80 

Yeltsin, Boris: 300 

Yilin,Yao:122 

Zakaria, Fareed: 304 

understand. He has dealt with such diverse 

subjects as archaeology and ancient earth 

history, terrorism, international banking, 

internal subversion, the history of taxation, 

U.S. foreign policy, the science and politics 

of cancer therapy, the Supreme Court, and 

the United Nations. Some of his previous 

works include World without Cancer, The 

Discovery of Noah's Ark, Moles in High Places, 

The Open Gates of Troy, No Place to Hide, The 

Capitalist Conspiracy, More Deadly than War, 

The Grand Design, The Great Prison Break, and 

The Fearful Master. 

Mr. Griffin is 

a graduate of the University 

of Michigan where he majored in speech 

and communications. In preparation for 

writing this book, he enrolled in the College 

of Financial Planning located in Denver. His 

goal was not to become a professional financial 

planner but to better understand the real 

world of investments and money markets. 

He obtained his CFP designation (Certified 

Financial Planner) in 1989. 

Mr. Griffin is 

a recipient of the coveted 

Telly Award for excellence in television 

production, a Contributing Editor for The 

New American magazine, the creator of The 

Reality Zone Audio Archives, and is 

President 

of American Media, a publishing and videoproduction 

company in Southern California.

Where does money come from? Where does it go? Who 

makes it? The money magicians' secrets are unveiled. Here is a 

close look at 

their mirrors and smoke machines, the pulleys, 

cogs, and wheels that create the grand illusion called money. 

A boring subject? Just wait! You'll be hooked in five 

minutes. Reads like a detective story - which it really is. But ifs 

all true. This book is about the most blatant scam of history. If s 

all here: the cause of wars, boom-bust cycles, inflation, depression, 

prosperity. Your world view will definitely change. 

Putting it quite simply: this may be the most important 

book on world affairs you will ever read. 

"A superb analysis deserving serious attention by all 

Americans. Be prepared for one heck of a journey through time 

and mind." 

Ron Paul, member of Congress 

House Banking Committee 

"What every American needs to know about central bank 

power. A gripping adventure into the secret world of the 

international banking cartel/' 

Mark Thornton, Asst. Professor of Economics, 

Auburn University; Coordinator Academic Affairs, 

Ludwig von Mises Institute 

"A magnificent accomplishment - a train-load of heavy history, 

organized so well and written in such a relaxed and easy style 

that it captivated me. I hated to put it down/' 

Dan Smoot 

Publisher/Editor, Dan Smoot Report 

"As a career banker and president of a bank consulting firm, I 

thought I had a good understanding of the Federal Reserve. But 

this book changed the way I view our entire monetary system/' 

Marilyn MacGruder Barmwall 

Grand Junction, Colorado 

ISBN 

D-^lETflb-lfl-E 

51950 > 

P.O. Box 4646 

Westlake Village 

California 91359 

1 111 Ml II 

9 7 80912' 9861 80* 111

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