From roughly 1871 to 1914, when World War I began, most of the developed world operated under what is referred to as the classical gold standard, meaning most of the world’s currencies were pegged to gold. This meant that they were also pegged to each other. Businesspeople could make plans and projections far into the future, ship goods, start businesses, and invest in foreign lands, and they always knew exactly what the exchange rate would be.
On average over the period when the developed world was on the classical gold standard, there was no inflation . . . none, zero zip, nada. Sure, there were a few booms and busts, inflations and deflations. But from the beginning of the classical gold standard to the end, it averaged out as a zero sum game. The reason? Gold: the great equalizer.
Here’s why: When countries experienced economic booms, they imported more goods. The imported goods were paid for with gold, so gold flowed out. As gold flowed out of the countries, their currency supplies contracted (that is monetary deflation). This caused these economies to slow down and the demand for imports to fall. As the economy slowed, prices fell, making these countries’ goods more attractive to foreign buyers. And as exports rose to meet foreign demand, gold flowed back into that country. Then the process started all over again, the value of currency—based on gold—always moving up and down, in a narrow range, maintaining the equilibrium.
During the classical gold standard our currency was real, verifiable money, meaning that there was actual gold and silver in the Treasury backing it up. The currency was just a receipt for the money. Then, in stepped the Fed, one of the most notorious and misunderstood institutions in the history of the United States.
The difficulty with the Fed is that there’s a lot of information out there, which is one reason why it’s so controversial. There are two very polarized camps when it comes to the Fed. On one end you have the government, which trusts it to regulate the U.S. economy. On the other end, you have the conspiracy theorists, who believe, in no uncertain terms, that the Fed will eventually bring about the collapse of the U.S. economy.
Well, I’m here to tell you these “crackpots” are not as crazy as they may seem. For one thing, the Federal Reserve is not a government agency. It is a privately owned bank that has stockholders to whom it pays dividends. It has the power to actually create currency from nothing, and it is shielded from audits and congressional oversight. As former senator and presidential contender Barry Goldwater pointed out, “The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States.”
Not So Humble Beginnings
Famed Austrian School economist Murray N. Rothbard, the vice president of the Ludwig von Mises Institute, distinguished professor of economics, and author of twenty-six books, opens his book The Case Against the Fed with the following:
By far the most secret and least accountable operation of the federal government is not, as one might expect, the CIA, DIA, or some other super-secret intelligence agency. The CIA and other intelligence operations are under control of Congress. They are accountable: a Congressional committee supervises these operations, controls their budgets, and is informed of their covert activities.
The Federal Reserve, however, is accountable to no one; it has no budget; it is subject to no audit; and no Congressional committee knows of, or can truly supervise, its operations. The Federal Reserve, virtually in total control of the nation’s monetary system, is accountable to nobody.
Here’s how it all got started. You might call this the not so humble beginning.
In 1907 there was a banking and stock market panic in the U.S., aptly called the Panic of 1907. It was widely believed that the big New York banks known as the Money Trust had been causing crashes, and then capitalizing on them by buying up stocks from rattled investors and selling them for tremendous profit just days or weeks later. The Panic of 1907 was a particularly devastating one for the U.S. economy, and there was an outcry by the general public for the government to do something.
In 1908 Congress created the National Monetary Commission to research the situation, and to recommend banking reforms that would prevent such panics, as well as to investigate the Money Trust. Senator Nelson Aldrich was appointed chairman, and immediately set out for Europe, spending two years and $300,000 (that’s $6 million adjusted for inflation) to consult with the private central bankers of England, France, and Germany.
Upon his return, Senator Aldrich decided to take some time off and organized a duck hunt with some friends. The friends he invited on vacation with him were the who’s who of U.S. economic power, the very New York bankers he was supposed to be investigating: Paul Warburg (Kuhn, Loeb & Company), Abraham Pete Andrew (assistant secretary of the treasury), Frank Vanderlip (president of the Rockefeller-lead National City Bank of New York), Henry P. Davison (senior partner at J. P. Morgan), Charles D. Norton (president of the Morgan-led First National Bank of New York), and Benjamin Strong (head of J. P. Morgan Bankers Trust, and to become the first Federal Reserve head).
It is estimated that these men represented one quarter of the world’s wealth. The retreat took place on a little island off the coast of Georgia called Jekyll Island. But there wasn’t much duck hunting; instead Aldrich and his distinguished guests spent nine days around a table hatching a plan that eventually created the Federal Reserve.
Here is what some of the attendees had to say about that meeting:
Picture a party of the nation’s greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily hieing hundreds of miles South, embarking on a mysterious launch, sneaking on to an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance.
I am not romancing. I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written.
B. C. Forbes, Forbes magazine, 1916
The results of the conference were entirely confidential. Even the fact there had been a meeting was not permitted to become public. Though eighteen years have since gone by, I do not feel free to give a description of this most interesting conference concerning which Senator Aldrich pledged all participants to secrecy.
Paul Warburg, The Federal Reserve System: Its Origin and Growth
There was an occasion, near the close of 1910, when I was as secretive, indeed, as furtive, as any conspirator. I do not feel it is any exaggeration to speak of our secret expedition to Jekyll Island as the occasion of the actual conception of what eventually became the Federal Reserve System. We were told to leave our last names behind us. . . . We were instructed to come one at a time and as unobtrusively as possible to the railroad terminal on the New Jersey littoral of the Hudson, where Senator Aldrich’s private car would be in readiness. . . . The servants and train crew may have known the identities of one or two of us, but they did not know all, and it was the names of all printed together that would have made our mysterious journey significant in Washington, in Wall Street, even in London. Discovery, we knew, simply must not happen, or else all our time and effort would be wasted. If it were to be exposed publicly that our particular group had got together and written a banking bill, that bill would have no chance whatever of passage by Congress.
Frank Vanderlip*, quoted in The Saturday Evening Post, February 9, 1935
Secrecy was so important to the attendees of this summit because Aldrich, as the chairman of the National Monetary Commission, was charged with investigating banking practices and recommending reforms after the Panic of 1907, not to conspire with the bankers on a remote island. So the bankers who were under investigation for needed reforms got together