The following interview was conducted by David McAlvany on July 28, 2009, and contains crucial information on the Federal Reserve System by the man who literally wrote the book on the subject: G. Edward Griffin. His book The Creature from Jekyll Island was first published in 1994, and its insights are more vital now than ever. If you haven’t been able to read the book, you’ll find this interview essential for understanding what has been going on in the U.S. over the past year in particular, and since 1913 in general. The interview is preceded by an introduction drawn from David McAlvany’s commentary in his July 21, 2009, McAlvany Weekly Commentary podcast at McAlvany.com.
In 1906, an earthquake hit the city of San Francisco. Gas lines burst, and four square miles – nearly half of the entire city – burned in what at the time was one of the country’s greatest catastrophes. The damage amounted to between $350 and $500 million.
Also in 1906, a financial earthquake hit U.S. markets when the Hepburn Act was passed in Congress and signed into law. That act allowed the Interstate commerce commission to set price controls on rail rates. When the act became law in the summer of 1906, the railroad stocks (which were at that time a very large component of the market) began to tank.
The consequences of any given piece of legislation really begins to hit home from 12 to 24 months after passage, so in the fall of 1907 the economy at large caught the Hepburn flu. United Copper, a company of which two successful investors by the name of Morse and Heinze were majority owners, was likewise affected, and came under pressure from short sellers. Morse and Heinze attempted to squeeze those short sellers out of their positions, but failed, and UC’s share price slumped from $60 to $10 in a matter of days. The two investors were bankrupted, and so were the banks they controlled – one in Montana and the other in New York. And the fall of these men had another, surprising, effect, as well.
Morse and Heinze had had a prior association with the third largest trust company in the country: the Knickerbocker Trust. That relationship had long been severed by mid-1907, but facts were not to get in the way of a good story. The past relationship led the general public to believe that the trust might also be in danger of insolvency. Though such was emphatically not the case, perception trumped reality and a run on the trust ensued.
As the trust scrambled to meet its depositors’ demands, JP Morgan both directly and indirectly pulled out the supports and credit lines to the Knickerbocker Trust, which subsequently collapsed. The Trust was a competitor, and Morgan’s attitude was apparently that if he couldn’t control it, he must destroy it.
Perhaps Morgan could not have foreseen the unintended consequences of his actions, but the 1907 banking crisis ended up resembling the 1906 San Francisco fire in at least one respect: it just kept burning … and burning … and burning. The 1907 panic turned into the worst by far of 13 banking panics that occurred between 1814 and 1914. Its impact was so significant in the public mind that it prepared the way for the implementation of the Federal Reserve System in 1913.
In May of 1908, Congress passed the Aldrich-Vreeland Act, which established the National Monetary Commission to look into the causes of the panic, and recommend enhancements for bank regulation. Senator Aldrich spent nearly two years studying European banking models, and in November 1910 convened a private meeting at the Jekyll Island Club, off the coast of Georgia. Representatives of all the major New York banks were invited.
The National Monetary Commission published its final report in January, 1911. The proposal was for an independent central bank. It outlined the involvement of regional member banks working through a central clearinghouse – a system similar to the one that Former president Andrew Jackson had purposefully subverted in 1836. He allowed the charter of The Second Bank of the United States to expire because of concerns over corruption, insider dealings, destruction of the currency, constitutional illegality, and political subversion. The merits of reinstituting such a system were debated for nearly two years. A bill proposing one took the name of The Federal Reserve Act, and it was signed and enacted on the same day – December 22, 1913.
We take the Federal Reserve system for granted today. It operates in total secrecy, and has never been audited. But in an effort to bring transparency to the system, a formal and independent audit is being proposed in Congress as this is written – 100 Democrats and almost every Republican have signed onto this bill.
Where the Federal Reserve System takes us over the next 5-25 years will be determined under the current administration. In an attempt to dig into this more deeply we’ve asked G. Edward Griffin to join us for an interview on where we are today with the “Feral” Reserve System and what system changes, including an expansion of influence and control, will mean for us as individuals and in the market place. Changing rules in the middle of the game comes with a cost – let’s see if we can’t anticipate and be positioned ahead of these tectonic shifts.
Following is the interview of G. Edward Griffin that occurred on July 28, 2009. Participants in the interview were David McAlvany (D.M.); Kevin Orrick (K.O.) – David’s co-host on the McAlvany Weekly Commentary; and G. Edward Griffin (E.G.). The interview has been edited for publication.
D.M. The year 1907 was obviously similar in scope to the changes that we’ve seen in the 2006 to 2008 period: changes in the financial system, changes to the banking giants, changes to the constituents – the players, and what we eventually saw by 1913 was something that was signed into law on December 22. The Federal Reserve Act was something that forever changed the financial system and structure here in the United States. The way we do business, what we take for granted in terms of currency stability – those things can be predicated on what happened December 22, 1913. So what we want to do is explore with Mr. Griffin. Last week, we brought ourselves up to the 1913 period. But we didn’t really explore what the Federal Reserve is, what its creation was intended to do, or what its purpose was. So let’s start with that and see what the role of the Fed was intended to be. What is this organization?
E.G. I am delighted to hear intense interest in the historical detail of this because without that knowledge it’s pretty hard to understand what’s going on today. And of course if we don’t know what’s going on today, we have no chance at all to know what’s going to happen tomorrow – which is probably where most people’s concern is.
We had a lot of banking problems in the United States and runs on the bank [prior to 1913]. The banks were all chartered by the various states, and the charters were all pretty much the same. The bottom line is that what we have in the form of the Federal Reserve System today was already in existence, more or less, at the state level and in all the various states. In other words it was a partnership between the state governments and the state banks, and that partnership was such that the banks were legally allowed to participate in what is called fractional reserve banking.
What this means is that they were able to issue banknotes that people accepted as money – paper currency issued by the banks themselves. But those notes were far in excess of the actual reserves which were held in the vaults of the banks. That worked for a while, until everyone wanted their money back. The people have money on deposit in the bank, usually with the confidence that, well, it’s my money, and if I need it for an emergency or if I don’t like the way this bank is operating – or if I just want to put it somewhere else, I can always go and get it. That’s the general promise of the bank. That’s what they call a demand deposit, but the point is that if more than 3, 4, or 5% of the depositors want their money back, the bank is exposed – because the bank doesn’t have that money. It’s loaned out. So those were the occasions where runs on the banks occurred; banks went bankrupt because they didn’t have the assets they claimed they did. Banks went out of existence; people lost their money; it was a terrible situation.
This was a periodic thing that went on throughout history. Certainly it was going on in America at that time, so now we come to 1913. The public was fed up with this. The banks were worried about it because they didn’t like being exposed in this fashion. They didn’t like having people all demanding their money back, and declaring bankruptcy.
So now we come to 1913, and this very mysterious trip to Jekyll Island – well, actually that happened in 1910. The Federal Reserve Act was passed into law in 1913. But the drafting of the act and all of the planning started in 1910 – at a very special, very private, and very secret meeting on Jekyll Island.
Now Jekyll Island has a mysterious sound to it, but it’s a real island. A lot of people assume that it was a mythological island, something like Dr. Jekyll and Mr. Hyde. It has that mysterious sound to it. But it’s a real island off the coast of Georgia, and in those days, 1910, the island was completely privately owned by a small group of billionaires from New York. People like JP Morgan, William Rockefeller, and their business associates. They went for the cold winter months to escape New York. They had beautiful homes there, and they had a beautiful clubhouse, which is still there. You can visit it today. It was in that clubhouse that the seven leaders of the financial world, literally – at least of the United States: the JP Morgans, the Rockefeller interests, the Kuhn Loeb companies, and people like that in international investment firms – that’s where they all went and they went in secret. They denied to anybody who inquired that they ever went to this meeting.
It wasn’t until quite a few years after the Federal Reserve System was passed into law and became revered by the population as a great American institution – only then did they begin to talk openly about it. But the underlying fact is that they did go there under conditions of great secrecy, and they drafted the Federal Reserve Act there, and then they brought it back to Washington, DC. It was passed into law after a great deal of debate, commotion, a lot of propaganda – all over a three-year period.
The significance of the secrecy is that the Federal Reserve Act was offered to the American people as a means of breaking the grip of the money trust. That was the phrase that was used in those days to sell this legislation because the American people were concerned about the financial grip the large investment firms and banks, insurance companies, etc. had on the economy. Primarily the problem centered around New York and Wall Street, and they wanted legislation that would control those forces and protect the American people.
Well, lo and behold, the very bill that was supposed to break the grip of the money trust turns out to have been written by the money trust – that’s what they did there. That was the reason for the secrecy. They didn’t want the world to know that this great anti-bank bill was written by the banks themselves. So, you begin to understand when you get into the historical details how much deception was built into the system at the very beginning. Even today most Americans think that the Federal Reserve System is a government agency, and was created to control the banks to benefit the American people.
It’s a complete deception because the truth of the matter is that the Federal Reserve System as it was created on Jekyll Island by these representatives of the very large banks was a cartel, not a government agency at all – a cartel no different than a banana cartel, a sugar cartel, or an oil cartel. It was a banking cartel, and they created the cartel agreement on Jekyll Island.
Then they said, how are we going to force all of the banks, the newcomers, and all of the American people to abide by our cartel agreement? That’s simple: We take the agreement, make it into legislation, and pass it into law. We get the bubblehead congressmen to pass our agreement into law and call it the Federal Reserve Act, and that’s exactly what they did. So the cartel agreement is put in place as a law, and you must abide by it or go to prison because it now has government support and enforcement.
The Federal Reserve System has the appearance of a government agency, and engages in a little bit of political involvement mostly for show, but the institution is primarily completely independent. In fact, instead of the Congress controlling the Federal Reserve System, as it ought to, it’s more the other way around. Now it’s the Federal Reserve System controlling Congress.
You can certainly see that recently with all of the expenditures of taxpayer money. The Congressmen vote without even reading these bills. They are just told what to do by the banks, the bank representatives, the Federal Reserve, and the Secretary of the Treasury – who always comes from the banks. They are just told what to vote for, and they just vote for it because they know that the real power lies in financial institutions.
So we’ve got a creation here: a cartel that was supposed to control the banks, but instead the banks are now controlling the government. And it is all done in the name of protecting the economy, working on behalf of the American citizens, preventing bank failures, and that sort of thing. Well, it does prevent bank failure. We have to give it credit for that. How does it do that? Simply by taking money out of the pockets of taxpayers and giving it to the failing banks whenever they get in trouble.
They call it a bailout program, or a stimulus package, or something like that, but when you look at the real essence, it’s plundering the American taxpayer and putting the money into the banks – replacing their ledgers whenever they lose a lot of money.
K.O. Well, Mr. Griffin, we’ve always enjoyed reading your book, and going back and referencing it. But I have to say Chapter 2 is probably one of the more condensed ways of understanding how the Federal Reserve actually sells what they’re doing. You said in Chapter 2 of The Creature from Jekyll Island that the name of the game is bailout. Could you explain briefly what that means?
E.G. Yes, I’m glad you like that chapter. I had a bit of fun creating it.
The banks know that they have their cartel agreement enforced by law, so they are not too concerned about losses. They know that no matter what decisions they make, if their loans go sour, they can absorb small losses. When the big losses come down the line, they know that they can go to Congress and say, “Hey, we need money to make up losses and we need it because it’s in the interest of the American people. We don’t want the economy to collapse; we don’t want the banking system to collapse; we don’t want corporations to go out of existence. Look at all the thousands of people who would lose their jobs, and a lot of these workers have families and children. The children won’t have milk to drink.” You know, all this heart-string stuff.
Basically they’re just trying to cover up the truth because they want taxpayer money to bail out their bad business decisions – but they always frame the issue in terms of protecting the nation. As a result, they’re free to make loans to just about anybody.
Now, small loans they’re very careful about. If you go into a bank to borrow some money for a car or house, they look you over very carefully – they look at your ability to pay. They are very cautious about that. But if you are a huge entity like a giant automobile company, or a city like New York City, or you’re huge like Mexico – and you’re not just talking about borrowing ten or twenty thousand dollars or two hundred thousand dollars, but rather millions or billions of dollars, this becomes very attractive to the banks because they don’t make money on anything except interest on loans. That’s their whole business. They need to make huge loans and collect interest on these loans; that’s their life blood. So they think: here’s a loan to Mexico or here’s a loan to China; think of the interest we can get off this loan. So they make bad loans, that’s the bottom line.
Eventually, of course, some borrowers have trouble making the interest payments on those loans, and they start to get behind on their payments. What’s the bank supposed to do with a country that’s behind on its payments – or a large automobile company, or whatever? The banks can’t really go and foreclose on an automobile company or a country, so the bank is kind of in a quandary.
So this is what they say: We’re going to extend your payment period. We are going to make it easier for you; we’re going to give you a break, and you won’t have to pay this month – we’ll extend the loan. In other words, we’re going to extend the loan to the borrower so he can pay the interest, and we can continue to collect interest, but the corpus of the loan increases. The executives of the corporation or the political leaders of the country say: That’s a hot deal; that’s a way we can continue to have this money. And they use it for their purposes. We won’t go into their purposes, but they get the loan extended and that works for a while.
After a while, though, they can’t make the payments on the new loan either, so the banks say: I’ll tell you what, let’s just roll over the debt. We’ll cancel it out. It’ll be a whole new debt, and it will be a larger debt, and we will expand the term from two years to five years. That works for a while, and then that starts to fizzle out. They keep doing that, over and over again.
These restructurings are primarily cosmetic, and finally the lenders have to have the taxpayers put some money into the pot to cover delinquent payments. When the banks get to that point, they go to Congress and come up with a sad story about how we need to protect America by bailing out these bad loans. Bailing them out will preserve jobs, keep people working, keep the economy strong, and keep the country that borrowed the money from becoming an enemy. After all if we force them into a tight spot with repayment demands, they may become enemies of America, and we don’t need any more enemies.
So it’s always framed as protecting and enhancing the interests of the American people. They get the American people on line through their Congressmen, who are pretty much captives of the whole system. Congress votes tax dollars for some kind of a stimulus program or some kind of a bailout program. But if you follow the buck, you’ll always find that the buck goes into the coffers of the banks. The stimulus programs are there to allow the borrowers to continue to send the interest payments to the banks. That’s where money ends up.
When Congress starts to resist, the banks go international for their money. They go to the International Monetary Fund or the World Bank, and they say: This isn’t really a national problem let’s have these loans backed up or guaranteed by an international banking agency, and the American people cheer because they think: that’s not our money; that’s coming from the world somehow. But they don’t realize that much of that money comes from the United States, and once again it’s their nice friendly politicians in Washington who are voting the money to the IMF so it can go toward the interest payments on these loans, and it just goes around and around like that.
And finally a government agency steps in, like the Federal Deposit Insurance Corporation, and they guarantee loans with money they don’t have. So where will that money come from? It comes from the taxpayers. This is the game called “bailout” and we certainly see it playing out in full force today, not only in billions, but in trillions of dollars.
If you watch these Congressmen on C-Span as they talk about what they’re going to do, you realize that these guys don’t have a clue. They’re just being herded along. They’re being told by leaders of the banking industry that if they don’t vote for these bailout programs immediately, the whole banking system will collapse. America will collapse. The world will collapse. And you don’t want that on your conscience, do you Mr. Congressman? And they say, oh, no sir. So they just vote without reading these bills. They don’t have any idea how it works, and they don’t care. They just want to cover their derrieres, so if everything goes badly they will say, don’t blame me, I voted to bail out the system.
Around and around it goes, and unfortunately the average voter doesn’t understand the game either. So while he’s cheering all these great moves, thinking they’re for his benefit, you know there are other agencies taking money away as taxes. I’m talking about taking money away from the people through their taxes and through inflation, so the spectators are being run through the ringer royally. They don’t even know it, and they think that what’s happening is all for their benefit.
D.M. What we’ve described is a past-tense play that has been followed through in detail: rescheduling the debt, rolling it over, extending the payment periods, ultimately passing it on to the taxpayer, and allowing the FDIC to play its part. The book that you wrote sometime ago feels like it could be an exposé on the present-tense, though. This is the same playbook that has been in place, and has been utilized, not just in the last three years, but you go back through each of the financial crises of the last century. The Federal Reserve has implemented the same play, and ultimately passed the cost of its failures on to the taxpayers.
To close the loop, the real cost to taxpayers isn’t that their effective tax rate went from, say, 20% to 25% – that’s not the tax we’re talking about. We’re talking about the long-term decline of the dollar. We’re talking about the fact that, in order to finance this scheme, the Fed has created an almost infinite sea of money. And the more money it creates, the less purchasing power the original stock of dollars has in the marketplace.
From 1913 to the present, we’re looking at close to a 95-97% devaluation of the dollar, and that is how we have bailed the bankers out. That is how we have paid for this system. Some people got rich, and a lot of other people have gotten a lot poorer. There’s a sociological commentary that can go with it and a political commentary as well, but in terms of economic commentary: the financial effect this has had on the American public is that we simply can’t afford what we used to be able to afford. Three to five cents on the dollar is our purchasing power today.
E.G. Yes, I think that cannot be overstated. It takes a dollar today – not even a dollar, but a Federal Reserve note (which we call a dollar) – to buy what three cents would buy back when the Federal Reserve System was created. This is not an accident. That money went somewhere. That purchasing power went somewhere. It didn’t just disappear. It went somewhere.
Where did it go? It went into a pocket. It went to benefit the two partners in this scam: the government and the banks. They captured this lost purchasing power.
It’s not merely an interesting phenomenon to read about. These people know full well – I call them monetary scientists – they know full well how to extract money from the American people without them even knowing it. Of course, that’s the ideal way, if you’re going to rob somebody. It’s better to do it without them knowing it. Otherwise, they might resist, they might fight back. And the bankers don’t want that.
That’s the great value of inflation to the banks – and to the government, of course, which is a partner in this whole thing. You mentioned looking into the future of all this, and for those who like the second chapter in my book, I would urge them to go to the second-to-the-last chapter. That chapter is kind of a whimsical look into the future, and it was drafted in 1994. I just put my thinking cap on, and said, I wonder what it would be like if this trend continues. So I came up with this scenario.
I hadn’t read it in many years, but when all of these bailouts began to happen in explosive quantities, I went back and reread this chapter. It blew my socks off. I didn’t realize that it was possible to predict so accurately even the minor details, even the language being used to sell this scam. It’s all there, and a lot of people say: Gee, you must have a crystal ball, you must be a genius. No, none of the above, all you need to know is what the game is and to know what they have done in the past. You can always predict the future if you know what the past is.
D.M. You’re right. It doesn’t take a crystal ball. It does take perspective.
The McAlvany Intelligence Advisor (MIA), September 2009; reprinted by permission. For more information on MIA, please call 1-877-622-5826 or go to www.MIAtoday.com.