The influence of progressivism was thick in Washington in the early 1900s. Had they stopped to put the Federal Reserve Act to the constitutional test, it would have failed. Article 1.8.5 clearly states that Congress is empowered to “coin money [and to] regulate the value thereof.” Congress was not to delegate this to another party. When they did, and that entity was not even a government agency but a private business, they violated the Constitution. Nevertheless, with unconstitutional powers exclusively in hand, the Federal Reserve went about to break all 12 of its promises.
1. Promise: No More Depressions—In 1921, a severe depression was caused by the Federal Reserve. They did it again in 1929, causing the worst depression in American history, lasting 1929-1939. Since World War II, the Federal Reserve’s policies created eleven avoidable recessions.
2. Promise: Interest Rates Will Be Kept Low—A week before Christmas in 1980, the interest rate charged by banks to their most credit-worthy customers—the prime rate—rose to 21.5 percent, its highest in America’s history. That record-breaking “usury fee” capped a rocky but steady climb upward that began right after WWII.580
3. Promise: No Inflation—Since World War II, the Federal Reserve’s inflationary policies have gutted the dollar, causing it to lose 92 percent of its value. For example, a very nice suit that cost $50 right after the war would cost $625 today.581
4. Promise: Submit to Direct Supervision—Originally, the proposal was to put government leaders on the Board “which shall consist of seven members, including the Secretary of the Treasury and ... five members appointed by the President” so there was some degree of oversight.582 Almost immediately after the Federal Reserve Act was passed, more than 200 amendments were added, its structure changed, and instead of transparency, it meets in absolute secrecy to control the economy.
5. Promise: Stabilize the Money Supply—The Federal Reserve’s mismanagement contributed to the Great Depression. In 1928, it tightened the money supply and forced interest rates up. The resulting recession triggered the stock market crash in 1929. It raised interest rates again in 1931, lowered them, and then raised them again in 1932, collapsing the U.S. economy. This foolishness continues today, costing Americans billions if not trillions with each attempt to force the free market to follow the Fed’s short-range solutions to long-range problems.
6. Promise: Keep Clear of Wall Street—The original Federal Reserve Act stipulated, “No director ... shall be an officer, director, or employee of any bank.”583 However, subsequent actions proved that the Board of Governors and the secret Federal Open Market Committee have been dominated by Wall Street bankers. In its first 15 years, Paul Warburg and Benjamin Strong, both Wall Street bankers, ruled the Federal Reserve.
7. Promise: No Charge to Government—In 1941, Rep. Wright Patman (D-TX), the chairman of the House Banking and Currency Committee, asked the chairman of the Federal Reserve Board, Marriner Eccles: “Wasn’t it intended when the Federal Reserve Act was passed that the Federal Reserve Bank would render this service without charge—since under the Act the government would give them the use of government credit free?” Eccles seemed insulted: “I wouldn’t think so!” he said.584
8. Promise: Help Farmers Survive—The Federal Reserve destroyed the U.S. farmers’ independence. It started when the wheat farmers were promised the price of $2 per bushel during World War I. This fixed price drove farmers to borrow and buy more land to enlarge their wheat farms. After the war, demand plummeted and so did farmers’ income. On May 18, 1920, the Federal Reserve raised interest rates on agriculture loans to 7 percent. Many couldn’t pay—and so began the Agricultural Depression of 1920-21. Thousands lost their farms, homes—everything. This process was repeated, with higher taxes, in the early 1930s. An estimated 25 percent of bankrupt farms were sold for failure to pay taxes.585 Taxes were so high that by 1933, farmers were essentially working 2 days a week for the government.586
9. Promise: Help Small Business Survive—The Federal Reserve’s constant yanking on the national economy destroyed thousands of small businesses. In 1925, unemployment was about 3 percent. When the Great Depression hit thousands of businesses closed, unemployment was around 25 percent—that’s 13 million by 1933. New York City police estimated that 7,000 people over age 17 were shining shoes for a living. Congress was forced to enact lending agencies to rescue as many small businesses as possible. Ben Isaacs, a Chicago clothier, sold his car for $15 to buy food. “I would bend my head low [in the relief line] so nobody would recognize me.”587
10. Promise: Protect Banks From Collapse—The unpredictable policy changes of the Federal Reserve kept most banks operating on the razor’s edge. Since the creation of the Federal Reserve, its powers of regulation and control over inflation and the money supply, has caused at least 3,970 U.S. banks to fail since 1934. Some put the number at more than 15,000.588
11. Promise: Protect U.S. Economy From Foreign Entanglements—The Federal Reserve makes no secret that it links U.S. fortunes to international developments. From its website: “The Federal Reserve formulates policies that shape, and are shaped by, international developments. It also participates directly in international affairs.”589 A 2011 audit showed the Federal Reserve provided hundreds of billions in financial assistance to foreign corporations ranging from South Korea to Scotland.590 Analysts accuse the Federal Reserve of escalating U.S. interest rates to make up for bad investments in international investments. Spending other people’s money is always easy.
12. Promise: Keep Banking Decentralized—For banking purposes, America is divided into twelve banking regions across the U.S. Despite this regional leadership, the entire structure gravitates toward the decision-making power in New York. Policies and money-market decisions all originate in New York with the Open Market Committee. People had suspected favoritism toward the New York investors all along.
Finally, after years of preventing an examination of the Federal Reserve’s books, a little light was shed on the complex system in 2011.
What the Audit Revealed
Up until 2011, the Federal Reserve had never been independently audited and scrutinized. It was well protected from snooping eyes. Even though its books were opened for examination for the first time in 2011, not all the books were examined. Nevertheless, the examiners found plenty of problems that simply can’t be excused or ignored.
Insider Help
The auditors found that during the financial crisis of 2010-11, emergency funds dispatched by the Federal Reserve went to more than a dozen banks and companies that had ties to regional Federal Reserve boards. Why them and why not others? This violated the promises that the Federal Reserve would stand independent from high finance bankers and not show favoritism.
The Buddy Network
Financial and political neutrality wasn’t practiced by the Fed. The Government Accountability Office found 18 current or former board members of the Federal Reserve connected to businesses that received emergency lending. On that list were General Electric, JP Morgan, Chase, and Lehman Brothers.
Jeffrey Immelt, CEO of GE (General Electric), was serving on the board of the Federal Reserve when a $16 billion emergency loan was given to GE.591 Sen. Bernie Sanders (D-VT) said of this and other self-serving violations, the Federal Reserve is “riddled with conflicts of interest.”592
The audit also confirmed that between 2007 and 2008, about $1.2 trillion was lent to 300 banking and financial institutions that had close ties to the Fed’s New York “headquarters.” These loans were separate from the TARP bailout money approved by Congress during that same time frame (2008).593
Names Have Been Changed
The story of socialism as described in the previous chapters has invaded politics, the market, education, health care, and economics, and each attempt to reach a utopia has ended in the same way—loss of liberty, loss of prosperity, and loss of control over a nation’s self-directed destiny.
* * *
580 Federal Reserve Board, 2011.
581 Calculated at 8 percent of prices in 1945, or 12.5 times more costly today.
582 Federal Reserve Act, section 10, 1913.
583 Federal Reserve Act, section 4, 1913.
584 House Committee on Banking and Currency, June 24, 1941.
585 James Bovard, Hoover’s Second Wrecking of American Agriculture, Freedom Daily, 2005..
586 B.H. Hibbard, Taxes A Cause of Agricultural Distress, Journal of Farm Economics, Vol. XV, No. 1, January 1933, pp. 1-10.
587 Suds Terkel, Hard Times: An Oral History of the Great Depression, Pantheon Books, 1970.
588 FDIC, Federal Deposit Insurance Corporation Failures and Assistance Transactions, 1934-2011.
589 Federal Reserve, www.federalreserve.gov/pf/pdf/pf_4.pdf, p. 51.
590 GAO Report to Congressional Addressees, Federal Reserve System, Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance, July 2011.
591 Huma Khan, ABCNews, Federal Reserve Board Rife with Conflict of Interest, GAO Report, October 19, 2011.
592 GAO Report to Congressional Addressees, Federal Reserve System, Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance, July 2011.
593 Ibid.
Chapter 79: Forgotten Wedges of Socialism
In Samuel T. Whitman’s “Forgotten Wedges,” he tells about a big walnut tree that stood for decades on the family farm, steadily enduring the rough winters and windstorms of an entire lifetime.
Then, one year, an ice storm blew in. Normally the massive limbs of the beautiful tree could easily carry the weight of the ice that accumulated. But this year, it couldn’t. “It was the iron wedge in its heart that caused the damage,” Whitman wrote.
Whitman’s story begins many years earlier when a young lad found a rusty wood-splitting wedge, a faller’s wedge—wide, flat and splayed from mighty poundings. He carried his prize home, but the pathway did not pass the tool shed. He was already late for dinner so he laid the wedge, edge up, between the limbs of a young walnut tree that his father had planted by the gate. He planned to put it away in the shed afterwards, or the next time he headed out that way. He truly meant to, but he never did.
As the years passed, the lad grew to a man, and he took his father’s place tending the family farm. He raised his family and grew old on its familiar pasture lands. All the while, the walnut tree also matured. It managed as best it could the unfinished chore of the faller’s wedge, and extended its bark and girth around the iron tool, eventually hiding it completely from sight and from memory.
“In the chill silence of that wintry night,” Whitman wrote, “one of the three major limbs split away from the trunk and crashed to the ground. This so unbalanced the remainder of the top that it, too, split apart and went down. When the storm was over, not a twig of the once-proud tree remained.
“Early the next morning, the farmer went out to mourn his loss. …
“Then, his eyes caught sight of something in the splintered ruin. ‘The wedge,’ he muttered reproachfully. ‘The wedge I found in the south pasture.’ A glance told him why the tree had fallen. Growing, edge-up in the trunk, the wedge had prevented the limb fibers from knitting together as they should.”594
A Thousand Wedges
With each passing decade in America, the enthusiasm for growth and unencumbered freedom to build and advance and prosper has kept the nation on an upward climb. The great engine making that possible was the protection of unalienable rights, in particular, the right to property as laid out in the Constitution and the Declaration of Independence.
For reasons of neglect, lack of study, and the failure to teach those principles of freedom to the rising generations, a swarm of small iron wedges found their way into the machinery of liberty. Almost imperceptibly, the wedges bogged down the fragile mechanisms that were creating such power and invention in America. The zeal to expand on the astonishing magnification of labor and effort in the land of the free gave allowance for those wedges to remain unaddressed, unattended and forgotten.
America’s strength eventually spread out across the continent and extended its protections and prosperity to hundreds of millions of people on every continent in the world. Normally, the spreading limbs of this beautiful nation could easily bear the weight of temporary international need. But then cracks and splits started appearing in its limbs and its most critical areas of strength. It is the iron wedges in its heart that have caused all the damage.
The Lethal Faller’s Wedges
With the basic influences of socialism well entrenched within America’s heart by the early 1900s, it was relatively easy from that point forward to finish the job. Here’s how it came together—
1.Entangling Alliances: During World War I, the U.S. loaned billions of dollars to its European allies. When the war ended, a few countries started paying back the loans. This helped calm the American economy that had been on a roller coaster of market panic, recessions, and runs on the banks. Then came the roaring twenties, a decade of prosperity that most people thought would continue.
By 1929, relations with much of Europe started to sour. They changed their mind and decided they wouldn’t pay back their war loans. One of their major complaints repeated the early colonists’ during the War for Independence: If the king won’t let American merchants freely trade to make profits, how could they pay their debts to the Crown? The Europeans made the same claim for relief from the Americans: Why are you hurting us?
2.Smoot-Hawley Tariff Act (1930): In an effort to strengthen sales of U.S. goods, a new tariff was imposed on 3,218 items imported into the America. For almost 900 of these the tax was severely increased. When word of this new tariff reached foreign shores, America’s trading partners were incensed. They retaliated with boycotts and by charging high tariffs on American-made imports.
The tariff war between nations reduced world trade by 33 percent and contributed to the ongoing recession.595 When Smoot-Hawley was passed, unemployment in the U.S. was 7.8. By 1933, it was 25.1 percent. It was an enormous mistake. Already at work on the U.S. economy, was another socialist idea—
3.16th Amendment, February 12, 1913—Income Tax: Originally designed to “soak the rich,” the 16th Amendment ended up soaking everyone. It bypassed the tax-revenue system in Article 1.2.3, and allowed the federal government to confiscate as much as 94 percent of a person’s income. In 1943, President Roosevelt created “withholding,” so taxes were taken at the payroll window before they were even due. Today, income tax has become the principle source of government income, and is an enormous drag on the economy. It was a wedge that would exact trillions out of American workers in future years. Where were the checks and balances keeping an eye on this federal usurpation? They had been blinded by the 17th Amendment—
4.17th Amendment, April 8, 1913—Direct Election of Senators: As discussed in Chapter 62, the state legislature held the chain of control over representative government by its power to appoint a senator to Washington. The senators were supposed to concentrate on protecting states’ rights and maintaining the established order. They were supposed to balance the budget, keep taxes low, and temper the radicalism of the congressmen who came every two years.
The 17th amendment severed the leash held by the legislatures and freed senators to hide from the voters for five years, emerging in the sixth year to trumpet their achievements and then promise, “Vote for me, and think how much money I can bring to the state.” The people’s legislative watchdogs were silenced by the 17th Amendment.
5.Federal Reserve Act, December 23, 1913: And then came the Fed riding atop a Trojan Horse, promising economic peace and calm and prosperity, but hiding inside, another hidden wedge, was regimentation of the worst kin
d—absolute control of the money. “Power by the people” was dealt a fatal blow when control of money and its value was transferred to a private central banking cartel through passage of the Federal Reserve Act in 1913. The Federal Reserve’s record for calming the economy has been suspiciously volatile.
6.Federal Reserve and the Money Supply: From 1921-1927, the Federal Reserve inflated the money supply by 62 percent, sparking a rapid rise in stock prices and encouraging investors to buy stocks with borrowed money. In 1928, the Federal Reserve began a year-long program to pull money out of circulation. This pushed interest rates higher, and triggered the stock market crash in 1929.
To make matters worse, the Federal Reserve increased interest rates again in 1931. Overall, one-third of the money supply was removed from the American economy. This extended the Great Depression for a whole decade longer. In 1936-37, the Federal Reserve required banks to double the reserves of cash they kept in the vault. This reduced by even more the cash in circulation, and triggered a short recession during the Depression.
7.Legitimizing the Unions: Perhaps the most damaging and long-est-lasting wedge that threatened America’s ability to cleanse itself of extremes, followed next. The power of unions to extract higher wages and to force employees to join unions received the force of law in the 1930s.
The Davis-Bacon Act (1931) forced minimum wages on government projects. It also favored white workers in white-only unions. At the time, blacks were not as educated and skilled and were therefore excluded from white-dominated unions.
The Norris-LaGuardia Act (1932) allowed unions to legally organize, and stopped new hires from pledging to never join a union as a condition of employment.
The Naked Socialist Page 46