Creature From Jekyll Island by G. Edward

2. See Lincoln's annual message to Congress, December 1, 1862, Fehrenbacher, p. 398.

386 THE CREATURE FROM JEKYLL ISLAND

In 1862, the basic position of the bankers was outlined in a memo, called The Hazard Circular, prepared by an American agent of British financiers and circulated among the country's wealthy businessmen. It said:

The great debt that capitalists will see to it is made out of the war must be used as a means to control the volume of money. To accomplish this the bonds must be used as a banking basis. We are now waiting for the Secretary of the Treasury to make this recommendation to Congress. It will not do to allow the greenback, as it is called, to circulate as money any length of time, as we cannot control that. But we can control the bonds and through them the bank issues.1

THE NATIONAL BANKING ACT

On February 25, 1863, Congress passed the National Banking Act (with major amendments the following year) which established a new system of nationally-chartered banks. The structure was similar to the Bank of the United States with the exception that, instead of one central bank with power to influence the activities of the others, there were now to be many national banks with control over all of them coming from Washington. Most banking legislation is sold to the public under the attractive label of reform. The National Banking Act was one of the rare exceptions. It was promoted fairly honestly as a wartime emergency scheme to raise money for military expenses by creating a market for government bonds and then transforming those bonds into circulating money.

Here is how it worked:

When a national bank purchased government bonds, it did not hold on to them. It turned them back to the Treasury which exchanged them for an equal amount of 'United States Bank Notes' with the bank's name engraved on them. The government declared these to be legal tender for taxes and duties, and that status caused them to be generally accepted by the public as money. The bank's net cost for these bonds was zero, because they got their money back immediately. Technically, the bank still owned the bonds and collected interest on them, but they also had the use of an equal amount of newly created bank-note money which also could be loaned out at interest. When all the smoke and 1. The Hon. Charles A. Lindburgh, Banking and Currency and the Money Trust (Washington, D.C.: National Capital Press, 1913), p. 102.

GREENBACKS AND OTHER CRIMES 387

mirrors were moved away, it was merely a variation on the ancient scheme. The monetary and political scientists had simply converted government debt into money, and the bankers were collecting a substantial fee at both ends for their service.

The one shortcoming of the system, at least from the point of view of the manipulators, was that, even though the bank notes were widely circulated, they were not classified as 'lawful' money.

In other words, they were not legal tender for all debts, just for taxes and duties. Precious-metal coins and greenbacks were still the country's official money. It was not until the arrival of the Federal Reserve System fifty years later that government debt in the form of bank notes would be mandated as the nation's official money for all transactions—under penalty of law.

The National Banking Act of 1863 required banks to keep a percentage of their notes and deposits in the form of lawful money (gold coins) as a reserve to cover the possibility of a run. That percentage varied depending on the size and location of the bank but, on an average, it was about twelve per cent. That means a bank with $1 million in coin deposits could use approximately $880,000

of that ($1 million less 12%) to purchase government bonds, exchange the bonds for bank notes, lend out the bank notes, and collect interest on both the bonds and the loans. The bank could now earn interest on $880,000 loaned to the government in the form of coins plus interest on $880,000 loaned to its customers in the form of bank notes.1 That doubled the bank's income without the inconvenience of having to increase its capital. Needless to say, the bonds were gobbled up just as fast as they could be printed, and the problem of funding the war had been solved.

Another consequence of the national banking system was to make it impossible from that date forward for the federal government ever to get out of debt. Please reread that statement. It is not an exaggeration. Even friends of central-banking are forced to admit this reality. Galbraith says gloomily:

Rarely has economic circumstance managed more successfully to confound the most prudent in economic foresight. In numerous years 1- That represents the theoretical maximum. The actual numbers would have been slightly less due to the fact that banks seldom were able to keep a full 100% of their bank notes circulating in the form of loans. The functional asset leverage probably averaged about 70% rather than 88%.

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THE CREATURE FROM JEKYLL ISLAND

following the war the Federal government ran a heavy surplus. It could not pay off its debt, retire its securities, because to do so meant there would be no bonds to back the national bank notes. To pay off the debt was to destroy the money supply.1

As pointed out in a previous section, that is essentially the situation which exists today. Every dollar of our currency and checkbook money was created by the act of lending. If all debt were repaid, our entire money supply would vanish back into the inkwells and computers. The national debt is the principal foundation upon which money is created for private debt.2 To pay off or even greatly reduce the national debt would cripple our monetary system. No politician would dare to advocate that, even if surplus funds were available in the Treasury. The Federal Reserve System, therefore, has virtually locked our nation into perpetual debt.

THE HIDDEN COST OF WAR

The third consequence of the National Banking Act will come as no surprise to anyone who has survived the previous pages of this book. During the war, the purchasing power of the greenbacks fell by 65%. The money supply increased by 138%. Prices more than doubled while wages rose by less than half. By that mechanism, Americans surrendered to the government and to the banks more than half of all the money they earned or held during that period—in addition to their taxes.3

Financial conditions in the South were even worse. With the exception of the seizure of about $400,000 in gold from the Federal mint at New Orleans, almost all of the war was funded by the printing of fiat money. Confederate