reply to post by ALightinDarkness
My reply: Basically, Flaherty is correct as far as he goes. But, as we shall see in so many of his statements, he stops short of the entire truth. A
half-truth is just as much of a deception as an outright lie. Flaherty says that the Board of Governors is politically appointed. This is true and it
is supposed to make us feel safe in the thought that the President responds to the will of the people and that he selects only those who have the
public interest at heart. The part of the story omitted by Flaherty is that the President does not select these people from his own personal address
book, nor does he ask the public to submit nominations. With few exceptions, he makes appointments from lists given to him by the staffs of banking
committees of Congress and from private sources that have been influential in his election campaign. The most powerful of all these groups are the
financial institutions (including prominent members of the Fed itself) and the media corporations over which they have effective control. One does not
have to be a so-called conspiracy theorist to recognize the tremendous influence that these institutions have over the outcome of presidential
campaigns, and anyone with knowledge of how our current political system works will understand why the President makes exactly the appointments that
the banks want him to make. All one has to do to see the accuracy of this appraisal is to examine the backgrounds and attitudes of the men who receive
the appointments. While there is an occasional token individual who appears to come from the consumer sector of society, the majority are bankers
deeply committed to the perpetuation of the system that sustains them. Anyone who would seriously challenge the power of the banking cartel would
never be appointed. So, while Flaherty is correct in what he says, the implication of what he says (that the Fed is subject to control of the people
through the political process) is entirely false.
Flaherty: Nearly all the interest the Federal Reserve collects on government bonds is rebated to the Treasury each year, so the government does not
pay any net interest to the Fed.
My reply: Here is another half-truth that is a whopper deception. It is true that most of the money paid by the government for interest on the
national debt is returned to the government. That is because the Fed’s charter requires any interest payments in excess of the Fed’s actual
operating expenses to be refunded. However, before we jump to the conclusion that this is a wonderful benefit, we must remember that the banking
cartel is able to use tax dollars to pay 100% of its operating expenses with few questions asked about the nature of those expenses. After all of
those expenses are paid, what is left over is rebated to the Treasury, as Flaherty says. There is no secret about this, and you will find an
explanation of it in my book. Technically, there is no “profit” on this money. However, remember that creating money for the government is only
one of the functions of the Fed. The real bonanza comes, not from money created out of nothing for the government, but from money created out of
nothing by the commercial banks for loans to the private sector. That’s where the real action is. This is the famous slight-of-hand trick. Distract
attention with one hand while the coin is retrieved by the other. By focusing on the supposed generosity of the Fed by returning unused interest to
the Treasury, we are supposed to overlook the much larger river of gold flowing into the member banks in the form of interest on nothing as a result
of consumer and commercial loans.
Flaherty: Hypothesis: Bankers and senators met in secret on Jekyll Island, Georgia in 1910 to design a central bank that would give New York City
banks control over the nation’s money supply. Facts: The meeting did take place, but plans for a return to central banking were already widely
known. Regardless, the proposal that came out of the Jekyll Island meeting never passed Congress. The one that did, the Federal Reserve Act, placed
control over monetary policy with a public body, the Federal Reserve Board, not with commercial banks.
My reply: Here again we have a half-truth that functions as a deception. Plans for a return to central banking, indeed, were already known, but they
were unpopular with the voters and large blocks of Congress. That was the very problem that led to the great secrecy. Frank Vanderlip, one of the
participants at the Jekyll Island meeting, later confirmed that, if the public had known that the bankers were the ones creating legislation to
supposedly “break the grip of the money trust,” the bill would never have been passed into law. The facts presented in my book, and fully
documented by references from original sources, show that my version is historical fact. Flaherty attempts to minimize these facts by implying that
the original, secret meeting was not important because the first draft of the legislation was rejected. What he does not say is that the second draft
that was passed into law was essentially the same as the first. The primary difference was that Senator Aldrich’s name was removed from the title of
the bill and replaced by the names of Carter Glass and Robert Owen. This was to remove the stigma of Aldrich as an icon for “big-business
Republicans” and replace it with the more popular image of Democrats, “defenders of the working man.” It was a strategy advocated by Paul
Warburg, one of the participants at the Jekyll Island meeting. The fact that Flaherty makes no mention of this suggests that he has not made an
objective analysis but, instead, has presented a biased critique in the guise of scholarship. His statement that “the Federal Reserve Act, placed
control over monetary policy with a public body, the Federal Reserve Board, not with commercial banks” cannot be taken seriously. The Federal
Reserve is not a public body in any meaningful sense of the phrase.
Flaherty: Hypothesis: Through fractional reserve banking and double-entry accounting, banks are able to create new money with the stroke of a pen (or
a computer keystroke). The money they lend costs them nothing to produce, yet they charge interest on it. Facts: The banking system is indeed able to
create money with a mere computer keystroke. However, a bank’s ability to create money is tied directly to the amount of reserves customers have
deposited there. A bank must pay a competitive interest rate on those deposits to keep them from leaving to other banks. This interest expense alone
is a substantial portion of a bank’s operating costs and is de facto proof a bank cannot costlessly create money.
My reply: Flaherty presents facts that in no way contradict what I said in my book. I speak of rotten apples, and he speaks of sweet oranges. My book
makes it clear that the bank’s ability to create money is tied to its reserves. The current average ratio (it varies depending on the bank) is about
ten-to-one. In other words, for every one dollar on deposit and held in reserve, the bank can create up to an additional nine dollars out of nothing
for the purpose of lending. The statement that the banks must pay a competitive interest rate on those deposits is humorous when one considers the
math. For example, let us assume for the sake of illustration that the bank pays 1.5% interest. Then it turns around and charges, let’s say 6.5%
interest. That’s a spread of 5%. Although that’s a pretty good brokerage commission, it doesn’t sound exorbitant. But, here is another of those
half-truths. Don’t forget that the bank uses each deposited dollar as a so-called reserve for creating up to an additional nine dollars in loans. It
collects interest on these loans as well. Let us assume that the bank is not fully loaned up, as they call it, and has an average of only eight
dollars in magic-money loans for every one dollar on deposit. In that case, it will collect 6.5% interest on all eight of those dollars. That means,
based on each dollar placed on deposit, the bank will collect 52% in interest. After paying the original depositor the generous “competitive”
amount of 1.5%, the bank actually receives a brokerage fee of approximately 50%. When Flaherty says that “This interest expense alone is a
substantial portion of a bank’s operating costs and is de facto proof a bank cannot costlessly create money,” one can only wonder what banking
system he is describing. It certainly is not the one in the United States.
Flaherty: Hypothesis: Supporters of the Federal Reserve Act knew they did not have the votes to win, so they waited to vote until its opponents left
for Christmas vacation. Since a majority of senators were not present to vote on the bill, its passage is not constitutionally valid. Facts: The
voting record clearly shows that a majority of the senate did vote on the bill. Although some senators had left Washington for the holiday, the
Congressional Record shows their respective positions on the legislation. Even if all opponents had all been present to vote, the Federal Reserve Act
still would have passed easily.
My reply: I agree with Flaherty on this issue and often have said so in the Q&A portions of my lectures. Please note that this is not contradictory to
what I wrote in The Creature. What I said there is an accurate historical fact. There is little doubt in my mind that the vote would have passed
eventually, but by slipping it through as they did, it circumvented the possibility of challenges and debate. I have never commented on the
Constitutionality question, although I tend to think that a strict interpretation would have made this vote invalid. The problem here, however, has
nothing to do with the Federal Reserve Act but with the rules of Congress.
Flaherty: Hypothesis: All money is created only when someone takes out a loan. Therefore, there can never be enough of this debt-money in circulation
to repay all principal and interest. This imbalance causes inflation, financial crises, social maladies, and will eventually destroy the economy
unless there is a massive injection of “debt-free” money. This idea is from Dr. Jacques Jaikaran’s book, The Debt Virus. Facts: The hypothesis
shows an incomplete view of how the banking system interacts with the economy. The system necessarily creates an amount of “debt-free” money equal
to the interest on its loans. It does this whenever it pays operating expenses, dividends, or purchases assets. As a result, there is more than enough
money in circulation to retire all bank-related debt.
My reply: I object to being lumped together with other analysts on this issue. I did not write The Debt Virus, I wrote The Creature from Jekyll
Island. On page 191, I explained why I consider the claim that there is not enough money to pay off interest to be a myth
Flaherty: Hypothesis: The Federal Reserve consistently resists attempts to audit its books. This is because any independent inspection would reveal
the Fed’s treachery. Fact: Independent accounting firms conduct full financial audits of the Federal Reserve banks and the Board of Governors every
year. The Fed is also subject to certain types of audits from the Government Accounting Office.
My reply: I never wrote or implied, as Flaherty says, that “any independent inspection would reveal the Fed’s treachery.” What I wrote is: (1)
The Fed resists external audit; (2) If it were audited by an independent party, I suspect there would be nothing illegal found; (3) The problem is not
that it steals from the American people illegally but that it does so legally; (4) Therefore, we do not need to audit the Fed, we need to abolish it.
Flaherty: Hypothesis: Major European banks and investment houses own the Federal Reserve. From across the Atlantic they dictate monetary policy for
their own benefit. Facts: No foreigners own any part of the Fed. Each Federal Reserve bank is owned exclusively by the participating commercial banks
and S&Ls operating within the Federal Reserve bank’s district. Individuals and non-bank firms, be they foreign or domestic, are not permitted by law
to own any shares of a Federal Reserve bank. Moreover, monetary policy is controlled by the publicly-appointed Board of Governors, not by the Federal
My reply: Flaherty is basically correct, and I have never claimed in my book or in my lectures that it was otherwise. I do not appreciate being lumped
together with those who claim foreign control over the Fed. The real danger in this line of reasoning is that it is often coupled with the argument
that, if we could only get control away from foreigners and put it into the hands of Congress or the Treasury, then everything would be all right. In
truth, even if the Fed were in the hands of foreigners, placing it into the hands of American bankers and politician would make little difference. The
Fed does not need to be converted into a government agency. It needs to be abolished.