excerpts from the book
The Case Against the Fed
by Murray N. Rothbard (1994)
Ludwig von Mises Institute, 2007,
"Money," in our economy, is pieces of paper issued by
the Federal Reserve, on which are engraved the following: This
Note is Legal Tender for all Debts, Private, and Public."
This "Federal Reserve Note," and nothing else, is money,
and all vendors and creditors must accept these notes, like it
If chronic inflation ... is caused by the continuing creation
of new money, and if in each country its governmental "Central
Bank" (in the United States, the Federal Reserve) is the
sole monopoly source and creator of all money, who then is responsible
for the blight of inflation? Who except the very institution that
is solely empowered to create money, that is the Fed.
[The] fractional-reserve banker, even if he violates his contract,
cannot be treated as an embezzler and a criminal; but the banker
must still face the lesser, but still unwelcome fact of insolvency.
There are two major ways in which he can become insolvent.
The first and most devastating route,
because it could happen at any time, is if the bank's customers,
those who hold the warehouse receipts or receive it in payment,
lose confidence in the chances of the bank's repayment of the
receipts and decide, en masse, to cash them in. This loss of confidence,
if it spreads from a few to a large number of bank depositors,
is devastating because it is always fatal. It is fatal because,
by the very nature of fractional-reserve banking, the bank cannot
honor all of its contracts. Hence the overwhelming nature of the
dread process known as a "bank run," a process by which
a large number of bank customers get the wind up, sniff trouble,
and demand their money. The "bank run," which shivers
the timbers of every banker, is essentially a "populist"
uprising by which the duped public, the depositors, demand the
right to their own money. This process can and will break any
bank subject to its power. Thus, suppose that an effective and
convincing orator should go on television tomorrow, and urge the
American public: "People of America, the banking system of
this country is insolvent. 'Your money' is not in the bank vaults.
They have less than 10 percent of your money on hand. People of
America, get your money out of the banks now before it is too
late!" If the people should now heed this advice en masse,
the American banking system would be destroyed tomorrow.
A deposit of cash in a bank is treated as a credit rather than
a bailment, and the loans go on the bank's balance sheet.
Bank credit expansion under fractional-reserve banking (or "creation
of counterfeit warehouse receipts") creates price inflation,
loss of purchasing power of the currency unit, and redistribution
of wealth and income. Euphoria caused by a pouring of new money
into the economy is followed by grumbling as price inflation sets
in, and some people benefit while others lose. But inflationary
booms are not the only consequence of fractional-reserve counterfeiting.
For at some point in the process, a reaction sets in. An actual
bank run might set in, sweeping across the banking system; or
banks, in fear of such a run, might suddenly contract their credit,
call in and not renew their loans, and sell securities they own,
in order to stay solvent. This sudden contraction will also swiftly
contract the amount of warehouse receipts, or money, in circulation.
In short, as the fractional-reserve system is either found out
or in danger of being found out, swift credit contraction leads
to a financial and business crisis and recession. There is no
space here to go into a full analysis of business cycles, but
it is clear that the credit-creation process by the banks habitually
generates destructive boom-bust cycles.
Central Banking began in England, when the Bank of England was
chartered in 1694. Other large nations copied this institution
over the next two centuries, the role of the Central Bank reaching
its now familiar form with the English Peel Act of 1844. The United
States was the last major nation to enjoy the dubious blessings
of Central Banking, adopting the Federal Reserve System in 1913.
... It is significant that the Bank of
England was launched to help the English government finance a
large deficit. Governments everywhere and at all times are short
of money, and much more desperately so than individuals or business
firms. The reason is simple: unlike private persons or firms,
who obtain money by selling needed goods and services to others,
governments produce nothing of value and therefore have nothing
to sell. Governments can only obtain money by grabbing it from
others, and therefore they are always on the lookout to find new
and ingenious ways of doing the grabbing. Taxation is the new
In the Western world, the first government paper money was issued
by the British colony of Massachusetts in 1690.
The 1690s were a particularly difficult
time for the English government. The country had just gone through
four decades of revolution and civil war, in large part in opposition
to high taxes, and the new government scarcely felt secure enough
to impose a further bout of higher taxation. And yet, the government
had many lands it wished to conquer, especially the mighty French
Empire, a feat that would entail a vast increase in expenditures.
The path of deficit spending seemed blocked for the English since
the government had only recently destroyed its own credit by defaulting
on over half of its debt, thereby bankrupting a large number of
capitalists in the realm, who had entrusted their savings to the
government. Who then would lend anymore money to the English State?
At this difficult juncture, Parliament
was approached by a syndicate headed by William Paterson, a Scottish
promoter. The syndicate would establish a Bank of England, which
would print enough bank notes, supposedly payable in gold or silver,
to finance the government deficit. No need to rely on voluntary
savings when the money tap could be turned on! In return, the
government would keep all of its deposits at the new bank. Opening
in July 1694, the Bank of England quickly issued the enormous
sum of £760,000, most of which was used to purchase government
debt. In less than two years time, the bank's outstanding notes
of £765,000 were only backed by £36,000 in cash. A
run demanding specie smashed the bank, which was now out of business.
But the English government, in the first of many such bailouts,
rushed in to allow the Bank of England to "suspend specie
payments," that is, to cease its obligations to pay in specie,
while yet being able to force its debtors to pay the bank in full.
Specie payments resumed two years later, but from then on, the
government allowed the Bank of England to suspend specie payment,
while continuing in operation, every time it got into financial
The year following the first suspension,
in 1697, the Bank of England induced Parliament to prohibit any
new corporate bank from being established in England. In other
words, no other incorporated bank could enter into competition
with the Bank. In addition, counterfeiting Bank of England notes
was now made punishable by death. A decade later, the government
moved to grant the Bank of England a virtual monopoly on the issue
of bank notes.
... The modern form of Central Banking
was established by the Peel Act of 1844. The Bank of England was
granted an absolute monopoly on the issue of all bank notes in
England. These notes, in turn, were redeemable in gold. Private
commercial banks were only allowed to issue demand deposits. This
meant that, in order to acquire cash demanded by the public, the
banks had to keep checking accounts at the Bank of England. In
effect, bank demand deposits were redeemable in Bank of England
notes, which in turn were redeemable in gold. There was a double-inverted
pyramid in the banking system. At the bottom pyramid, the Bank
of England, engaging in fractional-reserve banking, multiplied
fake warehouse receipts to gold-its notes and deposits-on top
of its gold reserves. In their turn, in a second inverted pyramid
on top of the Bank of England, the private commercial banks pyramided
their demand deposits on top of their reserves, or their deposit
accounts, at the Bank of England. It is clear that, once Britain
went off the gold standard, first during World War I and finally
in 1931, the Bank of England notes could serve as the standard
fiat money, and the private banks could still pyramid demand deposits
on top of their Bank of England reserves. The big difference is
that now the gold standard no longer served as any kind of check
upon the Central Bank's expansion of its credit, i.e., its counterfeit
notes and deposits.
The real reason for the adoption of the Federal Reserve, and its
promotion by the large banks ... the banks sought a Central Bank
to enhance their profits by permitting them to inflate far beyond
the bounds set by free-market competition.
The bankers, however, faced a big public
relations problem. What they wanted was the federal government
creating and enforcing a banking cartel by means of a Central
Bank. Yet they faced a political climate that was hostile to monopoly
and centralization, and favored free competition. They also faced
a public opinion hostile to Wall Street and to what they perceptively
but inchoately saw as the "money power."
... first in the 1860s and 1870s, the
Morgans, as the major financiers and underwriters of America's
first big business, the railroads; tried desperately and repeatedly
to cartelize railroads: to arrange railroad "pools"
to restrict shipments, allocate shipments among themselves, and
raise freight rates, in order to increase profits in the railroad
industry. Despite the Morgan clout and a ready willingness by
most of the railroad magnates, the attempts kept floundering,
shattered on the rock of market competition, as individual railroads
cheated on the agreement in order to pick up quick profits, and
new venture capital built competing railroads to take advantage
of the high cartel prices. Finally, the Morgan-led railroads turned
to the federal government to regulate railroads and thereby to
enforce the cartel that they could not achieve on the free market.
Hence the Interstate Commerce Commission, established in 1887.
The famed Progressive Era, an era of a Great Leap Forward in massive
regulation of business by state and federal government, stretched
approximately from 1900 or the late 1890s through World War I.
The Progressive Era was essentially put through by the Morgans
and their allies in order to cartelize American business and industry.
... Just as the big bankers, in trying
to setup a Central Bank, had to face a public opinion suspicious
of Wall Street and hostile to Central Banking, so the financiers
and industrialists faced a public steeped in a tradition and ideology
of free competition and hostility to monopoly. How could they
get the public and legislators to go along with the fundamental
transformation of the American economy toward cartels and monopoly?
The answer was the same in both cases:
the big businessmen and financiers had to form an alliance with
the opinion-molding classes in society, in order to engineer the
consent of the public by means of crafty and persuasive propaganda.
The opinion-molding classes, in previous centuries the Church,
but now consisting of media people, journalists, intellectuals,
economists and other academics, professionals, educators as well
as ministers, had to be enlisted in this cause.
The House of Morgan had begun, in the 1860s and 70s, as an investment
bank financing and controlling railroads, and then, in later decades,
moved into manufacturing and commercial banking. In the opposing
coalition, the Rockefellers had begun in oil and moved into commercial
banking; Harriman had earned his spurs as a brilliant railroad
investor and entrepreneur in competition with the Morgans; and
Kuhn, Loeb began in investment banking financing manufacturing.
From the 1890s until World War II, much of American political
history, of programs and conflicts, can be interpreted not so
much as 'Democrat" versus "Republican," but as
the interaction or conflict between the Morgans and their allies
on the one hand, and the Rockefeller-Harriman-Kuhn, Loeb alliance
on the other.
After the failure of the first drive toward central banking with
the defeat of the Fowler Bill in 1902, and the collapse of Secretary
Shaw's efforts to use the Treasury as a surrogate central bank,
the bank reform forces decided to put their cards on the L table
and push frankly for a Central Bank for the United States.
... The Panic of 1907 struck in October,
the result of an inflation stimulated by Secretary of the Treasury
Leslie Shaw in the previous two years. The Panic galvanized the
big bankers to put on a concerted putsch for a Lender of Last
Resort in the shape of a central bank.
... The task of the bank reformers was
well summarized by J. R. Duffield, secretary of the Bankers Publishing
Company, in January 1908: "It is recognized generally that
before legislation can be had there must be an educational campaign
carried on, first among the bankers, and later among commercial
organizations, and finally among the people as a whole."
With the movement fully primed, as now time for Senator Aldrich
to write the bill. Or rather, it was time for the senator, surrounded
by a few of the topmost leaders of the financial elite, to go
off in seclusion, and hammer out a detailed plan around which
all parts of the central banking movement could rally. Someone,
probably Henry P. Davison, got the idea of convening a small group
of top leaders in a super-secret conclave, to draft the bill.
The eager J. P. Morgan arranged for a plush private conference
at his exclusive millionaire's retreat, at the Jekyll Island Club
on Jekyll Island, Georgia. Morgan was a co-owner of the club.
On November 22, 1910, Senator Aldrich, with a handful of companions,
set forth under assumed names in a privately chartered railroad
car from Hoboken, New Jersey to the coast of Georgia, allegedly
on a duck-hunting expedition.
The conferees worked for a solid week
at the plush Jekyll Island retreat, and hammered out the draft
of the bill for the Federal Reserve System. Only six people attended
this supersecret week-long meeting, and these six neatly reflected
the power structure within the bankers' alliance of the central
banking movement. The conferees were, in addition to Aldrich (Rockefeller
kinsman); Henry P. Davison, Morgan partner; Paul Warburg, Kuhn
Loeb partner; Frank A. Vanderlip, vice-president of Rockefeller's
National City Bank of New York; Charles D. Norton, president of
Morgan's First National Bank of New York; and Professor A. Piatt
Andrew, head of the NMC [National Monetary Commission] research
staff, who had recently been made an Assistant Secretary of the
Treasury under Taft, and who was a technician with a foot in both
the Rockefeller and Morgan camps.
The conferees forged the Aldrich Bill,
which, with only minor variations, was to become the Federal Reserve
Act of 1913.
... Aldrich's name was removed from the
bill and Aldrich him)self decided not to run for reelection in
1912, the Federal Reserve Act was passed overwhelmingly on December
22, 1913, to go into effect in November of the following year.
As A. Barton Hepburn exulted to the annual meeting of the American
Bankers Association in late August 1913: "The measure recognizes
and adopts the principles of a central bank. Indeed, if it works
out as the sponsors of the law hope, it will make all incorporated
banks together joint owners of central dominating power."
... The new Federal Reserve System had
finally brought a central bank to America: the push of the big
bankers had at last succeeded. Following the crucial plank of
post-Peel Act Central Banking, the Fed was given a monopoly of
the issue of all bank notes; national banks, as well as state
banks, could now only issue deposits, and the deposits had to
be redeemable in Federal Reserve Notes as well as, at least nominally,
in gold. All national banks were "forced" to become
members of the Federal Reserve System, a "coercion"
they had long eagerly sought, which meant that national bank reserves
had to be kept in the form of demand deposits, or checking accounts,
at the Fed. The Fed was now in place as lender of last resort;
and with the prestige, power, and resources of the U. S. Treasury
solidly behind it, it could inflate more consistently than the
Wall Street banks under the National Banking System, and above
all, it could and did, inflate even during recessions, in order
to bail out the banks. The Fed could now try to keep the economy
from recessions that liquidated the unsound investments of the
inflationary boom, and it could try to keep the inflation going
The new Federal Reserve System coincided with the outbreak of
World War Tin Europe, and it is generally agreed that it was only
the new system that permitted the U.S. to enter the war and to
finance both its own war effort, and massive loans to the allies;
roughly, the Fed doubled the money supply of the U.S. during the
war and prices doubled in consequence. For those who believe that
U.S. entry into World War I was one of the most disastrous events
for the U.S. and for Europe in the twentieth century, the facilitating
of U.S. entry into the war is scarcely a major point in favor
of the Federal Reserve.
In form as well as in content, the Federal
Reserve System is precisely the cozy government-big bank partnership,
the government-enforced banking cartel, that big bankers had long
envisioned. Many critics of the Fed like to harp on the fact that
the private bankers legally own the Federal Reserve System, but
this is an unimportant legalistic fact; Fed (and therefore possible
bank) profits from its operations are taxed away by the Treasury.
The benefits to the bankers from the Fed come not from its legal
profits but from the very essence of its operations: its task
of coordination and backing for bank credit inflation. These benefits
dwarf any possible direct profits from the Fed's banking operations
It is all too clear on examining the origin and early years of
the Fed, that, both in its personnel and chosen monetary and financial
policies, the Morgan Empire was in almost supreme control of the
The New Deal constituted a concerted Bringing Down and displacement
of Morgan dominance, a coalition of opposition financial out-groups
combined in the New Deal to topple it from power. This coalition
was an alliance of the Rockefellers; a newly-burgeoning Harriman
power in the Democratic Party; newer and brasher Wall Street Jewish
investment banks such as Lehman Brothers and Goldman Sachs pushing
Kuhn, Loeb into the shade; and such ethnic out-groups as Irish
Catholic buccaneer Joseph P. Kennedy, Italian-Americans such as
the Giannini family of California's Bank of America, and Mormons
such as Marriner Eccles, head of a vast Utah banking-holding company-construction
conglomerate, and allied to the California-based Bechtel Corporation
in construction and to the Rockefeller's Standard Oil of California.
The main harbinger of this financial revolution
was the Rockefeller's successful takeover of the Morgan's flagship
commercial bank, the mighty Chase National Bank of New York. After
the 1929 crash, Winthrop W. Aldrich, son of Senator Nelson Aldrich
and brother-in-law of John D. Rockefeller, Jr., engineered a merger
of his Rockefeller-controlled Equitable Trust Company into Chase
Bank. From that point on, Aldrich engaged in a titanic struggle
within Chase, by 1932 managing to oust the Morgan's Chase CEO
Albert Wiggin and to replace him by Aldrich himself. Ever since,
Chase has been the virtual general headquarters of the Rockefeller
After 1933, Federal Reserve Notes and deposits were no longer
redeemable in gold coins to Americans; and after 1971, the dollar
was no longer redeemable in gold bullion to foreign governments
and central banks. The gold of Americans was confiscated and exchanged
for Federal Reserve Notes, which became legal tender; and Americans
were stuck in a regime of fiat paper issued by the government
and the Federal Reserve. Over the years, all early restraints
on Fed activities or its issuing of credit have been lifted; indeed,
since 1980, the Federal Reserve has enjoyed the absolute power
to do literally anything it wants: to buy not only U.S. government
securities but any asset whatever, and to buy as many assets and
to inflate credit as much as it pleases. There are no restraints
left on the Federal Reserve.
Since World War Il the various financial interests have entered
into a permanent realignment: the Morgans and the other financial
groups have taken their place as compliant junior partners in
a powerful "Eastern Establishment," led unchallenged
by the Rockefellers.
Pursuant to its essence as a post-Peel Act Central Bank, the Federal
Reserve enjoys a monopoly of the issue of all bank notes. The
U. S. Treasury, which issued paper money as Greenbacks during
the Civil War, continued to issue one-dollar "Silver Certificates"
redeemable in silver bullion or coin at the Treasury until August
16, 1968. The Treasury has now abandoned any note issue, leaving
all the country's paper notes, or "cash," to be emitted
by the Federal Reserve. Not only that; since the U.S. abandonment
of the gold standard in 1933, Federal Reserve Notes have been
legal tender for all monetary debts, public or private.
It is impossible for the Federal Reserve to go bankrupt; it holds
the legal monopoly of counterfeiting (of creating money out of
thin air) in the entire country.
If the Fed purchases any asset it will increase the nation's money
supply immediately by that amount; and, in a few weeks, by whatever
multiple of that amount the banks are allowed to pyramid on top
of their new reserves. If it sells any asset (again, generally
U.S. government bonds), the sale will have the symmetrically reverse
effect. At first, the nation's money supply will decrease by the
precise amount of the sale of bonds; and in a few weeks, it will
decline by a multiple, say ten times, that amount.
Thus, the major control instrument that
the Fed exercises over the banks is "open market operations,"
purchases or sale of assets, generally U.S. government bonds.
The American economy has suffered from chronic inflation, and
from destructive booms and busts, because that inflation has been
invariably generated by the Fed itself. That role, in fact, is
the very purpose of its existence: to cartelize the private commercial
banks, and to help them inflate money and credit together, pumping
in reserves to the banks, and bailing them out if they get into
trouble. When the Fed was imposed upon the public by the cartel
of big banks and their hired economists, they told us that the
Fed was needed to provide needed stability to the economic system.
After the Fed was founded, during the 1920s, the Establishment
economists and bankers proclaimed that the American economy was
now in a marvelous New Era, an era in which the Fed, employing
its modern scientific tools, would stabilize the monetary system
and eliminate any future business cycles. The result: it is undeniable
that, ever since the Fed was visited upon us in 1914, our inflations
have been more intense, and our depressions far deeper, than ever