CHAPTER 20 – Part 3THE FEDERAL RESERVE

WRECKS AMERICA

The Lost Science of Money

WHO KNEW THE MONETARY SYSTEM AND LET THIS HAPPEN?

Cui bono ?

THEMES OF LOST SCIENCE OF MONEY BOOK

1. Primary importance of the money power (power to create money and regulate it)

2. Nature of money purposely kept secret and confused

3. How a society defines money determines who controls the society

4. Battle over control of money has raged for millennia: public vs private

5. The misuse of the monetary system causes tremendous misery and suffering for the ordinary people. Will Decker & Martin Dunn, February 2014

6. Whenever the public has owned a significant fraction of the money power, great public benefit has ensued: Sparta, the Roman Republic, the American Colonies in the 18th century, GREENBACKS after the Civil War, Canada after the Great Depression, British experience after World War II. Martin Dunn, July 2014.

PARTS OF PRESENTATION1. McFadden Charges the Federal Reserve with Treason

2. Changes in the Lawa) Bankingb) Gold Standardc) Securities

3. The Social Security Act

4. Historic Collapse of the Gold/Silver Ratio: The Silver Purchase Program

5. The Money Supply Finally Starts Increasing: One more Insult from the Fed

6. How Easy It Is to Create Money: Financing WW II

7. Aftermatha) Propaganda to Resurrect Capitalism’s Moral Standingb) The Catholic Reaction to the Debaclec) Church of England De-Fangs the Bank of England

8. Summary

1.McFadden Charges the Federal Reserve with Treason

Louis T. McFaddenRepresentative 1915-1935

May 23, 1933 – Rep. McFadden presented a list of chargesagainst the Federal Reserve Board and Banks officers, askingfor an investigation and their impeachment. The last charge was:

“Whereas I charge them, jointly and severally, with the crimeof having treasonably conspired and acted against the peaceand security of the United States, and with having treasonablyconspired to destroy constitutional government in the UnitedStates…”

President Jackson, in his age, had called them a “den of vipers”.

2.Changes in the Law: Banking – Thomas Amendment

“(b) If the Secretary, when directed by the President, is unable to secure the assent of the several Federal Reserve banks and the Federal Reserve Board… To direct the Secretary of the Treasury to cause to be issued in such amount or amounts as he may from time to time order, United States notes, as provided in the Act … approved February 25, 1862…” [Greenbacks]

THE THOMAS AMENDMENT – LEGALIZE ISSUANCE OF GREENBACKSTITLE III – AGRICULTURAL ADJUSTMENT ACT OF 1933

ELMER THOMAS(1876 – 1965)Oklahoma Senator (1927 – 1951)

“[The Thomas Amendment] stated that whenever the president desired currency expansion, he first must authorize the open market committee of the Federal Reserve to purchase up to $3 billion of federal obligations. Should open market operations prove insufficient, the president had several options. He could have the U.S. Treasury issue up to $3 billion in greenbacks, reduce the gold content of the dollar by as much as 50 percent, or accept $100 million dollars in silver at a price not to exceed fifty cents per ounce in payment of World War I debts owed by European nations. …” David D. Webb, "Thomas Amendment," Encyclopedia of Oklahoma History and Culture, www.okhistory.org (accessed April 26, 2015). Thomas was an Oklahoma Senator.

The Banking Act of 1933 “An Act to provide for the safer and more effective use of the assets of banks, …

to prevent the undue diversion of funds into speculative operations, and for other purposes.”

2.Changes in the Law: Banking Act of 1933

• The Federal Reserve Board, in Washington D.C., could regulate margin requirements on stocks: “…the Federal Reserve Board shall have power to fix from time to time … the percentage of individual bank capital and surplus which may be represented by loans secured by stock or bond collateral made by member banks within such district… with a view to preventing the undue use of bank loans for the speculative carrying of securities.” Banking Act of 1933, Sec. 7

• The Board’s power over reserve requirements, rediscount rates, and market operations was increased.

• The Open Market Committee was created: “There is hereby created a Federal Open Market Committee… which shall consist of as many members as there are Federal reserve districts. Each Federal reserve bank by its board of directors shall annually select one member of said committee.” Banking Act of 1933, Sec. 8 “The Committee could inject new money into the economy by creating money to purchase government bonds. It could remove money by selling its holdings of bonds.” Zarlenga, LSM, p. 561

• The Board’s power over foreign banking was secured: “The Federal Reserve Board shall exercise special supervision over all relationships and transactions of any kind entered into by any Federal reserve bank with any foreign bank or banker, or with any group of foreign banks or bankers, and all such relationships and transactions shall be subject to such regulations, conditions, and limitations as the Board may prescribe.” Banking Act of 1933, Sec. 10

2. Changes in the Law: 1935 Banking Act

Restructuring the Federal Reserve

• dissolved the old Federal Reserve Board in Washington D.C. and replaced it with a seven-member Board of Governors, appointed by the President for 14-year terms

• the Board of Governors became increasingly independent from the executive branch of the federal government: the Treasury Secretary and the Comptroller of the Currency were no longer on the board

• created the Federal Open Market Committee (FOMC) and authorized the Fed Bank of New York to purchase and/or sell U.S. government securities in the open market in order to determine the stock of money in the U.S.

• the Board’s powers were greatly increased: power to regulate margin requirements on stocks; power over reserve requirements, rediscount rates, and market operations; power to appoint the presidents of the 12 Federal Reserve Banks; power to regulate the FRBs and foreclose their credit if they did not comply

The Federal Reserve moved its meetings fromthe Treasury Department to a new buildingconstructed on Constitution Avenue, Washington, D.C.

2.Changes in the Law: Banking - FDIC

The Banking Act of 1933Established the Federal Deposit Insurance Corporation (FDIC), with deposit insurance limited to $2,500 per accountholder.

“This act truly revolutionized the banking system, because of the guarantee that depositors now had, from non-banking sources.”

Zarlenga, LSM, p. 561

2.Changes in the Law: Banking – Glass Steagall

The Banking Act of 1933Over time, the term ‘Glass-Steagall Act’ came to be used most often to refer to four provisions

of the 1933 Banking Act that separated commercial banking from investment banking.

Required commercial banks to eliminate their securities affiliates.

The law defined commercial banks as taking in deposits and making loans, and investment banks as underwriting and dealing with securities. The act explained that commercial banks could not deal with securities, and investment banks could not own commercial banks or have close connections with them. With the exception of commercial banks being allowed to underwrite government issued bonds, commercial banks could only have ten percent of their income come from securities.

GLASS-STEAGALBEGINS, 1933

GLASS-STEAGALENDS, 1999

2. Changes in the Law: Gold Standard

Executive Order 6102 required all persons to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 (equivalent to $376.58 in 2014) per troy ounce. Under the Trading With the Enemy Act of 1917, as amended by the recently passed Emergency Banking Act of March 9, 1933, violation of the order was punishable by fine up to $10,000 (equivalent to $182,185 in 2014) or up to ten years in prison, or both.

The order caused all gold coin production to cease and all 1933 minted coins to be destroyed.

The stated reason for the order was that hard times had caused "hoarding" of gold, stalling economic growth and making the depression worse. The main rationale behind the order was actually to remove the constraint on the Federal Reserve which prevented it from increasing the money supply during the depression. If gold can’t be legally owned, then it can’t be legally redeemed. If it can’t be legally redeemed, then it can’t constrain the central bank.

Wikipedia, Executive Order 6102

Executive Order 6102

2. Changes in the Law: Gold Standard – Acts of Congress

1934 Gold Reserve Act

The United States Gold Reserve Act of January 30, 1934:

• required that all gold and gold certificates held by the Federal Reserve be surrendered and vested in the sole title of the United States Department of the Treasury.

• changed the nominal price of gold from $20.67 per troy ounce to $35. The Treasury saw the value of their gold holdings increase by $2.81 billion overnight.

• U.S. went off the gold standard domestically, but stayed on for international payments.

2. Changes in the Law: Securities

THE S.E.C. DEFINES THE ‘UP-TICK RULE’ – TO CONTROL SHORT SELLING - 1938Banks can not only create credit-money out of thin air, but speculators can sell stock that does not exist!

When a person sells a stock short on the exchange, he is offering for sale a stock he does not own. In effect, he is increasing the amount of stock in the market. He does this to cause the market price to decrease; after the market price goes down, he can step in and buy the security cheaper than when he sold it. He then has the stock to give to the buyer along with his profit: sell high – buy low – in that order.

The U.S. Securities and Exchange Commission adopted the up-tick rule for short selling in 1938: a short sale could be done only at a price higher than the stock’s previous sale price (plus tick).

“By the mid 1980’s and 90s, virtually all of these good regulations had beencircumvented by the nation’s exchanges. Trading in index futures gotaround the short sale regulations, because they can be sold in quantity,without up-ticks, and without borrowing stock.” Zarlenga, LSM, p. 562

The S.E.C. eliminated the uptick rule on July 6, 2007.

2. Changes in the Law: Securities

MARGIN REQUIREMENTS WERE RAISED

The Board of Governors of the Federal Reserve System was given permanent power to regulate margin requirements in the Banking Act of 1935. ‘Margin’ is that portion of the stock price paid by the buyer. The remainder of the price would be money borrowed from the broker.

In the 1920’s, investors commonly paid only 10% of the stock’s price and borrowed the remaining 90% (‘margin requirement’ = 10%). When the prices on the stock market began to go down and the value of the collateral therefore went down, the brokers or banks asked for more money from the investor (‘margin call’), But many investors did not have money, so the banks or brokers sold their shares, causing further declines in the stock prices. This was one of the major causes of the Stock Market Crash of 1929.

FRB Initial margin requirements - percent of total value required to purchase stock

3.The Social Security Act - 1935“The single most important poverty fighting legislation

in America” Zarlenga, LSM, p. 562

Tom Paine, ‘father of the American Revolution’, was the first to propose old age pensionsas well as giving young families money to set up their households.

From the website of the Social Security Administration:

Thomas PaineIn the winter of 1795-96 Thomas Paine wrote his last great pamphlet, "Agrarian Justice." The pamphlet was first published in French in Paris. An English edition was brought out in 1797.

In this pamphlet Paine advocated the creation of a social insurance scheme for the aged and for young people just starting out in life. The benefits were to be paid from a national fund accumulated for this purpose. The fund was to be financed by a 10% tax on inherited property… his plan was quite modern, recognizing the problem of income security for the elderly, and the desirability of creating a national fund for this purpose.

“Since the early 1970s the financial elite has incessantly worked to destroy Social Security… it would be best to have the money created directly by government, and paid to recipients.” Zarlenga, LSM, p. 563

4. Historic Collapse of the Gold/Silver Ratio:The Great Depression caused the price of silver to collapse

“The monetary theories of Adam Smith, David Ricardo, Karl Marx, and of Von Mises and the Austrians, all of which assert a commodity or quasi commodity nature of money, are refuted by the reality of the silver collapse.”

Zarlenga, LSM, p. 563

Silver dropped from $1.38 per ounce in 1919, to 44 cents an ounce in 1932, down 75%.

Gold was still $20.67 per ounce, its value protected by law.

“The ‘sanction’ of the law (and earlier the ‘sanctification’ of the Temple) was still valid for commodity gold, but had been withdrawn from commodity silver The law is what determined the ratio. The sanction of the law is what determined the value of the precious metals as money.” Zarlenga, LSM, p. 563

4. Historic Collapse of the Gold/Silver Ratio:Silver Used to Increase the Money Supply and Reserves

1933, December 21 - Proclamation No. 2067: Roosevelt ordered the U.S. mints to buy the entire domestic production of newly mined silver at 64.5 cents per ounce. This increased the money supply slightly.

1934, June 19 -The Silver Purchase Act of 1934: directed the Treasury to purchase all silver, at home and abroad, until silver was one-fourth the stock of gold and silver. The Treasurer was directed to issue silver certificates against the reserve of silver coin or bullion. The President was authorized to require silver’s delivery to the mint in return for the payment of its fair value in any U.S. currency.

1934, August 9 - Executive Order 6814: Roosevelt ordered the seizure of all silver in the continental United States, excluding silver coins.

cowles.econ.yale.edu/P/cm/m04/m04-26.pdf

5. The Money Supply Finally Starts Increasing: One more Insult from the Fed

CONTRACTIO

N

Friedman & Schwartz, p. 494

“Then as recovery was getting underway, the newly constituted FedBoard of Governors made a last ignorant gesture of obstructionismand doubled the reserve requirements in the 1936 to 1937 period,cutting short the recovery, and hamstringing the money supply.

This demonstrated the continuing banker domination of the system.” Zarlenga, LSM, p. 564

6.How Easy It Is to Create Money: Financing WW II

“It would not be until World War II that full monetary expansion was allowed and full employment was sought, when it was assured the employment and money would be channeled into destruction rather than production of infrastructure, houses, and other useful items…

Americans haven’t understood that it is the financiers who are the ones initiating real violence [depression, war], under cover of economic theory.”

Zarlenga, LSM, pp. 564-565

6.How Easy It Is to Create Money: Financing WW II

“…channeling the new money into production rather thandestruction would have tended to create value, keepprices down, and not required unnecessary loss of life.”

Zarlenga, LSM, p. 566

MONETARY EXPANSION

ALLOWED FOR WAR

“From July 1, 1940 to December 1, 1941, expenditures totaled $21.7 billion,far in excess of anything previously spent by the New Deal…” studenski & Kroos, Financial History of the United States, pub. 1952, p. 455

“The national debt in February 1946 was $279.8 billion. 31% ofthis debt ($87 billion) that was held by the commercial bankscan be considered as money that they created out of thin air.” Zarlenga, LSM, p. 565

7. Aftermath - Propaganda to Resurrect Capitalism’s Moral Standing

“… a host of unemployed citizens face the grim problem of existence, and an equally great number toil with little return.

… our distress comes from no failure of substance… Nature still offers her bounty and human efforts have multiplied it. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply.

Primarily this is because rulers of the exchange of mankind's goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men… The money changers have fled from their high seats in the temple of our civilization… The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.” Franklin D. Roosevelt’s Inaugural Address

Roosevelt’s Inaugural Address – March 1933:The end of the belittlement of government and

the end of trust in “free markets”

7. Aftermath - Propaganda to Resurrect Capitalism’s Moral Standing

BLAME THE GOVERNMENT“Decades later, when many participants and memories were dead, concerted attempts began by a cabal of economists and financiers to shift blame for creating and prolonging the depression away from the financiers and the Federal Reserve System and onto the government.”

Zarlenga, LSM, p. 567

Alan Greenspan used the Conservative’s basic ploy – blaming the evils of the private Federal Reserve System on government:

“And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported.“ “Gold & Economic Freedom”, in Ayn Rand, Capitalism The Unknown Ideal, pub. 1967

“This false view ignores the attempts of several past Democratic Chairmen of the House Banking

Committee to pass laws to nationalize or do away with the Federal Reserve System… if the

Fed is already a government entity, these economists shouldn’t mind too much when it

gets nationalized!” Zarlenga, LSM, p. 567

7. Aftermath - Propaganda to Resurrect Capitalism’s Moral Standing

Austrian School of Economics:Blame the Government

The Austrian economist F.A. Hayek wrote Denationalisation of Money, pub. 1978:

• “The long depression of the 1930s… was wholly due to the mismanagement of money by government — before as well as after the crisis of 1929.”

• “It was not ‘capitalism’ but government intervention that has been responsible for the recurrent crises of the past.”

what about the PRIVATELY-OWNED FEDERAL RESERVE?

7.Aftermath:The Catholic Reaction to the Debacle

Papal Encyclical: Pope Pius XI, May 15, 1931

Quadragesimo Anno (Latin: In the 40th Year)

POPE PIUS XI in 1930Pius was pope between the two world wars

and during the Great Depression:1922-1939

This letter from the Pope was named after the 40th anniversary of Leo XIII’s encyclical - Rerum Novarum (1891). Both dealt with the modern industrial economy, but Pius XI spoke explicitly of the evils of finance capitalism.

Zarlenga: “a remarkable document”.

7.Aftermath:The Catholic Reaction to the Debacle

“No longer would the Church automatically provide easy moral support for powerful systems and rich individuals doing evil under cover of ‘conservative’ economic theory.” Zarlenga, LSM, p. 569

71. In the first place, the worker must be paid a wage sufficient to support him and his family.

88. …the right ordering of economic life cannot be left to a free competition of forces. For from this source, as from a poisoned spring, have originated and spread all the errors of individualist economic teaching.

But free competition, while justified and certainly useful provided it is kept within certain limits, clearly cannot direct economic life - a truth which the outcome of the application in practice of the tenets of this evil individualistic spirit has more than sufficiently demonstrated.

7.Aftermath:The Catholic Reaction to the Debacle

“Pius XI then addressed some key monetary matters:” Zarlenga, LSM, p. 569

105. In the first place, it is obvious that not only is wealth concentrated in our times but an immense power and despotic economic dictatorship is consolidated in the hands of a few, who often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure.

106. This dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow, so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will.

7.Aftermath:The Catholic Reaction to the Debacle

“The encyclical pointed out with foresight in 1931 that this financial system was inexorably moving towards warfare:” Zarlenga, LSM, p. 569

107. This concentration of power and might, the characteristic mark, as it were, of contemporary economic life, is the fruit that the unlimited freedom of struggle among competitors has of its own nature produced, and which lets only the strongest survive; and this is often the same as saying, those who fight the most violently, those who give least heed to their conscience.

108. This accumulation of might and of power generates in turn three kinds of conflict. First, there is the struggle for economic supremacy itself; then there is the bitter fight to gain supremacy over the State in order to use in economic struggles its resources and authority; finally there is conflict between States themselves...

7.Aftermath:The Catholic Reaction to the Debacle

“Very significantly, while noting the importance of charity, Quadragesimo Anno suggested that juridical actions – legislative remedies – were also called for.”

Zarlenga, LSM, p. 570

110. Free competition, kept within definite and due limits, and still more economic dictatorship, must be effectively brought under public authority in these matters which pertain to the latter's function…

“This represented an important shift towards real reform.” Zarlenga, LSM, p. 571

7.Aftermath:Church of England De-Fangs the Bank of England

“The Church of England took the greatest monetary initiative of the 20th century when it called for the nationalization of the Bank of England.”

Zarlenga, LSM, p. 571

Temple became Archbishop of Canterbury in 1942, when a German invasion seemed likely. He worked for the relief of Jewish refugees from Nazism, and publicly supported a negotiated peace, as opposed to the unconditional surrender that the Allied leaders were demanding.

Temple's admirers have called him "a philosopher, theologian, social teacher, educational reformer, and the leader of the ecumenical movement of his generation," "the most significant Anglican churchman of the twentieth century," "the most renowned Primate in the Church of England since the English Reformation," "Anglican's most creative and comprehensive contribution to the theological enterprise of the West." William Temple

(1881-1944)Archbishop of Canterbury

(April, 1942-1944)

7.Aftermath: Church of England De-Fangs the Bank of England“The Church of England took the greatest monetary initiative of the 20th century when it called for

the nationalization of the Bank of England.”

London, September 26, 1942Reverend William Temple

Zarlenga, LSM, p. 571

“… we have now reached a stage where something universally needed – namely money, or credit which does duty for money – has become in effect a monopoly…

The banks should be limited in their lending power to the amount deposited by their clients, while the issue of newer credit should be the function of public authority.

This is not in any way to censure the banks or bankers… But the system has become anomalous [abnormal], and, as so often happens when anomaly has persisted through a long period of time, the result is to make into the master what ought to be the servant.” In Zarlenga, LSM, p.571, as quoted in Bernard W. Dempsey, Interest and Usury, pub. 1948, p. v.

7.Aftermath:THE BANK OF ENGLAND WAS NATIONALIZED IN 1946

“But unfortunately it was no longer in England, but in America where the problem was now concentrated.”

Zarlenga, LSM, p. 571

8. SUMMARY

• In less than 20 years, the Federal Reserve brought out money system, banks, exchanges and economy to utter ruin.

• The bankers refused to do anything, using the “fear of inflation” argument in the middle of the worse deflation of the century.

• Government, not the banks, rescued the situation.

• Bankers allowed a large creation of new money only when it was devoted to warfare.

• The “free market” culture of the 1920’s was re-established. The nation’s exchanges either circumvented or removed the regulations put in place

to stop another crash.

Q & A

WILL DECKER’S CONCLUSION:

THE CONTROL OF MONEY -- WITHOUT CONTROL FROM THE PUBLIC -- LEADS TOCORRUPTION … USURPATION … SLAVERY.