previously uncollectable debt was converted into a government-backed, interest-bearing asset.
In 1972, the Commonwealth Bank of Detroit—with $1.5 billion in assets, became insolvent. It had borrowed heavily from the Chase Manhattan Bank in New York to invest in high-risk and potentially high-profit ventures. Now that it was in trouble, so was Chase. The bankers went to Washington and told the FDIC the public must be protected from the great financial hardship that would follow if Commonwealth were allowed to close. So the FDIC
pumped in a $60 million loan plus federal guarantees of repayment. Commonwealth was sold to an Arab consortium. Chase took a minor write down but converted most of its potential loss into government-backed assets.
In 1979, the First Pennsylvania Bank of Philadelphia became insolvent. With assets in excess of $9 billion, it was nine-times the size of Commonwealth. It, too, had been an aggressive player in the
'80s. Now the bankers and the Federal Reserve told the FDIC that the public must be protected from the calamity of a bank failure of this size, that the national economy was at stake, perhaps even the entire world. So the FDIC gave a $325 million loan—interest-free for the first year, and at half the market rate thereafter. The Federal Reserve offered money to other banks at a subsidized rate for the PROTECTORS OF THE PUBLIC
65
specific purpose of relending to First Penn. With that enticement, they advanced $175 million in immediate loans plus a $1 billion line of credit.
In 1982, Chicago's Continental Illinois became insolvent. It was the nation's seventh largest bank with $42 billion in assets. The previous year, its profits had soared as a result of loans to high-risk business ventures and foreign governments. Although it had been the darling of market analysts, it quickly unraveled when its cash flow turned negative, and overseas banks began to withdraw deposits. It was the world's first electronic bank run. Federal Reserve Chairman Volcker told the FDIC that it would be unthink-able to allow the world economy to be ruined by a bank failure of this magnitude. So, the FDIC assumed $4.5 billion in bad loans and, in return for the bailout, took 80% ownership of the bank in the form of stock. In effect, the bank was nationalized, but no one called it that. The United States government was now in the banking business.
All of the money to accomplish these bailouts was made
possible by the Federal Reserve System acting as the 'lender of last resort.' That was one of the purposes for which it had been created.
We must not forget that the phrase 'lender of last resort' means that the money is created out of nothing, resulting in the confiscation of our nation's wealth through the hidden tax called inflation.
Chapter F o u r
HOME, SWEET LOAN
As we have seen in previous chapters, the damage done by the banking cartel is made possible by the fact that money can be created out of nothing. It also destroys our purchasing power through the hidden tax called inflation. The mechanism by which it works is hidden and subtle.
Let us turn, now, from the arcane world of central banking to the giddy world of savings-and-loan institutions. By comparison, the problem in the savings-and-loan industry is easy to comprehend. It is simply that vast amounts of money are disappearing into the black hole of government mismanagement, and the losses must eventually be paid by us. The end result is the same in both cases.
SOCIALISM TAKES ROOT IN AMERICA
It all began with a concept. The concept took root in America largely as a result of the Great Depression of the 1930s. American politicians were impressed at how radical Marxists were able to attract popular support by blaming the capitalist system for the country's woes and by promising a socialist Utopia. They admired and feared these radicals; admired them for their skill at mass psychology; feared them lest they become so popular as to win a plurality at the ballot box. It was not long before many political figures began to mimic the soap-box orators, and the voters enthusiastically put them into office.
While the extreme and violent aspects of Communism gener-
ally were rejected, the more genteel theories of socialism became Popular among the educated elite. It was they who would naturally become the leaders in an American socialist system. Someone had
68 THE CREATURE FROM JEKYLL ISLAND
to look after the masses and tell them what to do for their own good, and many with college degrees and those with great wealth became enamored by the thought of playing that role. And so, the concept became widely accepted at all levels of American life—the
'downtrodden masses' as well as the educated elite—that it was desirable for the government to take care of its citizens and to protect them in their economic affairs.
And so, when more than 1900 S&Ls went belly-up in the Great Depression, Herbert Hoover—and a most willing Congress—
created the Federal Home Loan Bank Board to protect depositors in the future. It began to issue charters to institutions that would submit to its regulations, and the public was led to believe that government regulators would be more wise, prudent, and honest than private managers. A federal charter became a kind of government seal of approval. The public, at last, was being protected.
Hoover was succeeded by FDR in the White House who
