Lies the government told you

by Andrew P. Napolitano

  There was a final hindrance to their plan, the upcoming presidential elections. The bill had been written and would quickly pass the House and Senate, but the final step was the need for a President who would not veto the bill. President William Howard Taft, who had previously stated that he did not support the bill and would veto it the first chance he got, was running for reelection. At the time, his reelection was almost certain, as the Republicans were the popular party and Taft was not facing any campaign problems. But the bankers, in order to pass their bill through, needed their Democratic candidate, Woodrow Wilson, to take the presidency. This was the same man who had stated during the 1907 Panic that “[a]ll 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 the country.”12 Wilson could not be a more perfect candidate.

  It was soon apparent that Wilson would not be able to garner enough votes to overcome Taft. It was at this point that ex-president Theodore Roosevelt, a Republican, entered the race as an independent. The bankers had found a way to divide Republican votes and therefore ensure the election of their Democratic candidate. Naturally, the majority of Teddy Roosevelt’s campaign was funded by close allies of J. P. Morgan himself. Wilson won the election, though with only 45 percent of the popular vote. In a two-man race, without the Republican split, Taft was likely to have won, and the Federal Reserve Act would have lost. Instead, less than a year after his election, Wilson signed the Federal Reserve Act into law.

  The Non-Federal, Non-Reserve, Federal Reserve

  When signing it into law, President Wilson claimed that the Federal Reserve Act would “supplant the dictatorship of the private banking institutions” and “stabilize the inflexibility of the national bank note supplies.” As advertised, the Federal Reserve was to be a politically independent private entity, yet it was also to be controlled by Congress. It was to ensure economic stability and prevent future crises. Originally, the Act was only given a life of twenty years, but that time ran out when FDR was president.

  The Federal Reserve is composed of three parts. The first is the Board of Governors, which is responsible for determining monetary policy. Seven people are appointed by the President and confirmed by the Senate for a term of fourteen years, and they decide how much money they will print, what the interest rate will be, and essentially control every aspect of our monetary system.

  Then there are the Regional Reserve Banks, which hold the cash reserves of the system, supply currency to member banks, and act as the fiscal agents of the government; each is run by a regional president and regional bank boards elected by member banks.

  Finally, there is the Open Market Committee, which implements the monetary policy provided by the Board of Governors. It does this through the manipulation of the money supply via the purchase or sale of government securities. In essence, when the Fed buys government securities, money is made and interest rates fall; when it sells government securities, the money supply is reduced and interest rates rise. The committee is made up of the board as well as five of the regional directors. Bond dealers who earn large commissions on every transaction handle the purchases and sales of the securities.

  The most common claim about the Federal Reserve is that it is accountable to the federal government because it is required to report to Congress twice a year regarding its activities. But what the chairman reports and what actually occurs are very different. Because the government has no power over the Federal Reserve, under current law the Federal Reserve cannot be audited. As well, its decisions do not require ratification by anyone in the executive or legislative branches of the government. Each time Congress has requested that the Federal Reserve submit to a voluntary audit, only refusals have been received. The Chairman of the Fed is therefore free to say anything he wants to Congress, and there is no way to verify the truth of his statements.

  The monetary policy decisions made by the Fed are made at secret meetings, and Congress, as well as the public, are only made privy to brief reports released weeks later. Any transcripts made of the deliberations are destroyed. Every other government agency, even the CIA and NSA, are required by law to maintain all documents and transcripts of their activities.13 Since the Federal Reserve is not a government agency, these laws do not apply.

  I have said this many times on air and elsewhere, and even the Fed’s supporters agree with me on this: The job of the CIA is to steal and to keep secrets; yet, we know far more about the CIA than we do about the Federal Reserve.

  The Federal Reserve is a misnomer. As an initial matter, there is nothing “federal” about it. The government does not own a single share of stock in the Federal Reserve. A Chairman of the House Banking Committee (now known as the House Financial Services Committee) even once noted that whether the Federal Reserve worked with the government’s fiscal policy or chose another direction was based mainly on the Federal Reserve Chairman’s mood. Considering that the United States dollar is the currency of the world and the Federal Reserve controls the dollar, one could argue that the Chairman of the Federal Reserve is more powerful than the President. Money is power, and economic and political events around the world can be manipulated through U.S. monetary policy.

  Not only is the word Federal in “Federal Reserve” a government lie, but so is the word Reserve. A reserve implies, and many people assume, that money is being stored away to use in a crisis, and that gold and other hard money are stored in order to ensure that all debts can be paid. This is not the case. Though original notes issued by the Federal Reserve stated, “This note is legal tender for all debts public and private, and is redeemable in lawful money at the United States treasury or at any Federal Reserve Bank,” this was changed by a 1963 amendment. At that time the Fed began to issue its first series of notes without the redemption promise, while taking notes with the redemption promise out of circulation.

  The notes now read, “This note is legal tender for all debts public and private.” By removing the promise, “. . . and is redeemable in lawful money . . .” the Federal Reserve, with the support of the federal government, eliminated a constitutional monetary system and replaced it with paper and public debt.

  Then, when some financial institutions attempted to privatize, the Monetary Control Act of 1980 granted to the Federal Reserve control of all national depository institutions, so that all financial institutions that offered deposits against which checks could be written were now under its control, whether or not they had ever been a part of the Federal Reserve System.14 Now the monopoly was also granted the ability to force cartelization on those who wanted to remain private.

  The public debt continues to grow exponentially with no end in sight. While the cost to the Federal Reserve for printing a note of any denomination is four cents and the Federal Reserve prints money from air, it charges the federal government interest for the monetary loans. As well, the Federal Reserve earns interest on the government securities in its ownership. Therefore, the Federal Reserve makes money each time it prints money, and thus it is encouraged to print more money, no matter whether it has any gold to back it up.

  The term “reserve” is highly fallacious. The Fed does not want to reserve or save; it wants to spend, because the more it spends, the more interest it makes. The only president to issue an Executive Order beginning the process of abolishing the Fed was President John F. Kennedy, and he was dead three weeks later. His Executive Order Number 11110 returned to the Treasury Department its constitutional authority “to issue silver certificates against any silver bullion, silver, or standard silver dollars in the Treasury.”15

  Essentially, the President intended to give back to the federal government the ability to introduce currency backed by silver, without any need for a Federal Reserve. Each ounce of silver, at that time totaling about $4 billion in the government’s possession, could back the new currency. The effect on the Federal Reserve would have been that the new silver-backed money would become preferred to Federal R
eserve Notes, which were not backed by anything, and therefore the new currency would eventually end the need for the Federal Reserve and its monopoly money.16

  As to the justification for the creation of such a financial behemoth that has come to control every aspect of our monetary policy, where is the economic stability and prosperity promised to us? Since the creation of the Federal Reserve, we have experienced the Great Depression, a recession in the early 1980s, the market crash of 1987, and finally, the economic crisis we find ourselves in today. And during all these events, there has also been the constant depreciation of the dollar. These are the result of the inflationary habits of the Federal Reserve, inflationary habits that no one can control or prevent, not without the abolition of the Fed. Rather than dethroning the moneyed elite, the Federal Reserve was their vehicle for a further power grab.

  As F. A. Hayek, a noted Austrian economist, once said, “[t]o put it [money] in the hands of an institution which is protected against competition, which can force us to accept the money, which is subject to incessant political pressure, such an authority will never give us good money.”17The American dollar today is worth just 7 percent of what it was worth in 1913, when the Fed was established to stabilize it.

  Money Does Grow on Trees

  Those who argued for the Federal Reserve Act focused on the fact that we needed to ensure that our currency was “flexible.” They argued that this flexibility was crucial to ensuring that the federal government and the country did not run out of money. Where they criticized the gold standard for not being able to sustain the economy and allow for growth, they argued that this protection would ensure that we never ran out of money. In essence, the Federal Reserve Act brought into law the idea that money could come from nowhere. Not many people realize how the system works, or where our money comes from.

  What supporters of the Federal Reserve Act further argued is that if state banks did not have someone to look out for them, they would in essence overissue their notes and reduce the amount of money they kept in reserve because of their need to make a profit. This action would lead to inflation and economic instability. One would think that if bankers were decentralized and could not depend on each other, then they would sink or swim on their own. In order to continue in prosperity, the bank would likely check itself and make sure that it was safe.

  It is actually only when banks are able to cartelize, that is, form their own regulating partnerships so that they can protect themselves from the problem of a bust if they overextend, that they look to the Fed to “protect” them. In a cartel, they can make an agreement to warn each other when reserves are low and therefore not cash the checks from the deposits of banks whose reserves are low. In essence, this is central banking, and this is the Federal Reserve, federal sponsored cartelization, resulting in all of the same worries that purportedly brought the Federal Reserve as an option in the first place.

  Private independent banks were not able on their own to do what they could with the Federal Reserve behind them. As Professor Murray Rothbard stated, private “banks . . . would never be able to expand credit in concert were it not for the intervention and encouragement of the government. For if banks were truly competitive, any expansion of credit by one bank would quickly pile up the debts of that bank in its competitors, and its competitors would quickly call upon the expanding bank to redeem in cash.”18

  In essence, a bank could not expand too quickly and therefore cause inflation, without risking its own crash. But when the banks get together and work from one central place, no one needs to worry about crashing because it cannot pay back its debts, since it and its competition are all backed by a “lender of last resort.” It’s like a teenager with an unlimited credit card, who knows that no matter how much money she spends, her parents will always pay the bill. And then imagine that the parents were able to force their neighbors to contribute to payments for that bill. Well, we are those neighbors, paying the bankers’ bills through the constant fall of the value of our dollar.

  The Federal Reserve does something similar to fractional reserve banking, except that it has no reserves at all. Let’s say Congress is having a bad year by spending more than it takes in (that would be every single year since the end of the presidency of Andrew Jackson) and some of the bills from social programs have come in, but there is no money in the Treasury. That’s okay, they say, and head over to their favorite banker: The Federal Reserve Bank.

  Now, their banker knows that the government already owes him a lot of money, but it’s all right because the interest payments are making the banker very rich. So the banker (the Fed) takes out his checkbook and writes Congress a nice check, with a lot of zeroes at the end of it. The check is signed, and Congress walks away happy. The Federal Reserve does too, even though it should actually be very worried considering that the check should bounce because there is no money in the Federal Reserve account, at least not technically, but that is not a problem. It is called “monetizing the debt,” and if you or I tried to do it, we’d be going straight to jail. But this is one of the functions of the Federal Reserve, and the government is glad to accept it. Not only accept it, but now the Federal Reserve can charge interest on money that it created out of thin air.19

  Now the best part is that the government cashes that check and starts spending the money. Those who get the money from the government put it in their bank accounts. And here is where things might get a little complicated. The local bank gets this money; let’s say it is a deposit of one hundred dollars. The local bank is very happy because that one-hundred-dollar deposit will allow it to lend out nine hundred dollars.

  Surprising? Not at all, as banks are only required to have 10 percent of their debts on deposit at any given time. This is called “fractional reserve banking” and is practiced in order to hide the fact that banks spend their clients’ money; they don’t actually “save” it for them. So the bank is happy as well. Even though this “money” came from nowhere and did not exist until the moment that the Federal Reserve issued a check, it is still valid and legal money that can be spent. This is all valid and legal, but illusory, and in direct contravention to the Constitution.

  Finally the Perfect Tax: Infinite and Invisible

  It was a very hot Las Vegas day in May 2003, and Robert Kahre had the air-conditioning on full blast when the door to his office swung open and he was confronted with a gun pointed directly at his head. Before he had time to question, he and more than twenty of his workers were handcuffed and held in the sweltering sun without water, while IRS agents swarmed inside, paving a path of disarray. To anyone observing, the situation looked as though Mr. Kahre and his workers had committed multiple felonies. But no, all Mr. Kahre had done was pay his workers, and they chose to accept his payment.

  What the IRS was unhappy about was that the form of payment was U.S. government-minted gold coins. The coins had a face value of 50 dollars but the gold in them was actually worth 806 Federal Reserve dollars. Because there were no tax code regulations that distinguished between coin and paper money, Kahre and his workers paid taxes on the face value of the coins. So in essence, if a worker earns one gold coin a week, his annual salary is only 2,600 dollars, and therefore he is not required to pay taxes. And everyone knows that the federal government is never happy when it does not get taxes, especially from someone like Mr. Kahre. The government charged Kahre with 109 counts of tax-related crimes, including tax evasion, willful failure to file, and conspiracy to evade taxes.20 The government brought fifty-two total charges against the other defendants combined.21

  Fortunately for Kahre and his employees, the jury did not agree with the government, and all those charged were either acquitted or released after a hung jury.22 The government has not yet decided whether it will retry him,23 but considering the results already obtained, one can hope that the Constitution will prevail this time around, and the government will stop scamming us by pretending that any crime was committed.

  Kahre’s story illu
strates the worst part of the Federal Reserve— that it is in essence imposing a secret tax on each and every one of us, a tax that most will not complain about because we do not realize it exists. Most of us do not know how the system works, so we do not complain and live in not-so-blissful ignorance, not entirely blissful because we are still paying for the inflationary money tricks that the Federal Reserve is allowed to play. This is why a family in the 1950s was easily able to survive happily on one income, whereas now it takes two working people to retain that same standard of living. Even if we attempt to save for our retirement, the more we save, the higher this invisible tax will be on us. But the worst effects are usually on the poorest of us, those living on a fixed income, such as the retired or disabled, who are receiving a specific monthly amount. When the value of the dollar falls, then the price of goods adjusts to that, and the buying power of those on a fixed income dwindles. The secret tax is called inflation, and it is the Fed’s most lethal weapon.

  But why would the government constantly expound private banking and allow the Federal Reserve to grow to its size without any regulatory control? If there was no advantage for the government, why would it not only allow the fraud to continue but also support it at every step? To understand the answer, we must understand the concept of inflation and deflation. We need to know how the concept affects the value of money, and therefore the value of our labor.

  The idea of a central bank in Western culture, to control the banking and finance structure of a country, harkens back to 1694 and the creation of the Bank of England by King William III. The King wanted a perpetual money machine for the monarchy so as to assure that the King’s treasury would never run out of money and to circumvent the uprisings that would ensue with increased taxes. With the power of banking, the King could print more money on the sly, so it would not be directly linked to him, and therefore fund his armies and treasury without stealing by assessing taxes. Then, when the money flooded the market, the purchasing power of money bottomed out. And the King, having spent the money before this time, profited, while the people lost out on payments of their labor. Yet, the people, not being knowledgeable about inflation, did not blame the King and no uprisings happened. The monarchy continued this tradition, and it migrated to America as soon as there was profit to be had.