No one in the freedom movement today disputes that the Federal Reserve is the source of many of our economic woes. Where disagreement arises is in defining the precise nature of the Fed and the source of its capacity to create the harm it does. Many who support gold money and free enterprise claim that the Federal Reserve is a "private corporation" run by capitalist mega-financiers. This I believe to be mistaken.
The Federal Reserve, in my opinion, should not be classified as a private corporation. It should be termed a government-run fascist cartel. There are several important reasons for this. For example, all nationally chartered banks in the Federal Reserve system are forced by the government to join the cartel. Bernanke and his board of governors are appointed by the President and approved by the Senate. The Federal Reserve came into being because of an act of Congress, and it can be altered or legislated out of being at anytime by Congress. These factors are not how private corporations are created or operated. The Fed entails government involvement in a massive way. Without the special monopoly privileges legislated by Congress that sustain the Fed, it disappears.
Moreover, the great bulk of the profits of the Reserve Banks are turned over to the federal treasury. As John McCormack explains in a Liberty magazine article: "[H]olding shares in the Fed is not a very profitable activity. Dividends to member shareholders are limited to 6% of nominal capital (hardly a great rate of return) and all Fed revenues above this amount (invariably vastly greater sums) are returned to the U.S. Treasury. In 1994, for example, total dividends to member banks amounted to $212 million while the Treasury received $20.5 billion, 97 times as much." [Liberty, March 1996.]
Government is thus a full partner in the Federal Reserve System. And a business entity with the government as a full partner is not a private corporation.
Courts Create a Fallacy
Much of the reasoning behind the mistaken notion that the Federal Reserve is a private corporation lies in court cases such as LEWIS vs. United States on June 24, 1982. In that case, the 9th Circuit Court ruled: "We conclude that the [Federal] Reserve Banks are not federal…but are independent, privately owned…corporations…without day to day direction from the federal government."
There are numerous cases like this where the courts have ruled that the Reserve Banks of the System are privately owned and controlled corporations. The mistake made here by those who support the notion of a "private Fed" is that because the courts declare something to be so, it somehow makes it so. This, of course, is a fallacy. Judges only interpret the law; they do not make the truth. Truth is something we discover through identification of the facts of reality and coherence with the laws of logic. Men find the truth through a process of synthesizing reason, experience and intuition.
What then are the facts of reality and the laws of logic in this case? They are as follows: A private entity in the marketplace is the opposite of a public entity. It is a free entity without monetary support and monopolistic legislation to protect it from government bureaucracy. It is an entity that is operating in a laissez-faire environment. To the extent that government intervenes into and controls, regulates, manipulates, or monopolizes an entity's market policies, then that entity is no longer private or free. It becomes statist / collectivist (i.e., socialist / fascist) to some degree or another. How much government involvement there is will determine how collectivist the entity becomes.
For example, Exxon Corporation is considered a private corporation. So let's compare it to the so called "private" Federal Reserve corporation. Does Exxon have its CEO and board of directors appointed and confirmed by the government? No, but the Fed does. Are 97% of Exxon's profits turned over to the federal Treasury? No, but the Fed's profits are. Can Exxon be voted out of existence tomorrow by Congress? No, but the Fed can. Therefore despite what our courts maintain, the Fed is not a private corporation; it is a government run cartel.
The fact that the courts define the Fed as "private" is the way that tyrannical ideologues pull the wool over the people's eyes. This is done to make the people think we are still a free, "private" enterprise country. This is how they smuggle us into corporate statism, i.e., economic fascism — by getting the intelligentsia of the country to buy into their redefinition of words. The courts are run by statist judges, and the schools are run by statist professors — all pretending that we are still a "free" enterprise system. In fact, many of them actually believe their own warped logic. It's the way they were taught, and they lack the intellectual rigor to investigate the fallacies of their assumptions. They ritualistically use the term "private" because it conveys the image of "free." But private in this instance is in name only. If a private entity does not have control over its operations, its profits, and its policies, then it is no longer private; it is public, and socialist or fascist to some degree or another.
Who Controls Who?
So do the bankers control the government, or does the Federal Government control the bankers? One way to answer this question is to ask who can abolish who? Can the Federal Government abolish the Fed? Certainly. Anytime it wants to, Congress could eliminate the Fed by a majority vote of its members. But can the mega-bankers, with all their power to influence politicians, abolish the Federal Government? Hardly. In this respect of creation and abolition, the Federal Government is the power behind the evil of our Federal Reserve system. But in actual practice, I think it is more accurate to say that the evil comes from the combine of the two forces. Separately, neither the mega-bankers, nor the Federal Government would be able to wield the dangerous control over our lives that they gain in concert. It is only when they join forces to become "partners" that they gain the power to do the evil they do.
When the mega-banks of America were still largely free-market institutions operating under the gold standard during the 19th century, their capacity for dangerous power over our economy and individual lives was limited. Likewise with the Federal Government; when it was still a defined Constitutional body without the ability to print paper money, its capacity for dangerous power over our economy and individual lives was limited. But in 1913, these limitations were destroyed because the mega-banks and the Federal Government went into partnership. They formed the massive cartel of the Federal Reserve System. And in doing so, the Federal Government granted monopolistic powers to the mega-banks, which gave them the ability to egregiously expand the money supply via credit creation. After elimination of the dollar's gold convertibility in 1933 and 1971, this became the power to create money indiscriminately.
What needs to be understood, however, is that the mega-banks could never have achieved such a dangerous power grab without the complicity of the Federal Government. Once again, it was the Federal Reserve Act of 1913 that brought the Creature into being. It was Congress that voted to grant monopoly status to the mega-bankers, which gave them their dangerous credit creation power. Without their monopoly backed by the force of government legal tender laws, the mega-bankers do not have the capacity to expand the money supply inordinately and rob us of our wealth. Thus for all their reputed control over world events, the mega-bankers do not become dangerous until they join forces with the government, which gives them the dangerous powers they now wield.
Reinforcing the Collectivist Mantra
It is important to clarify this misconception of a "private Fed" because the Fed is an evil institution. When we mistakenly define it as a private corporation, we then reinforce the collectivist mantra about free enterprise being evil. If the Fed is both a private corporation and evil, then the collectivist claim that private corporations need to be pervasively controlled by centralized government gains merit in the people's eyes.
If, however, we portray the Fed as it actually is (a government run cartel) then the solution to its evil becomes clear — end its protective connection to the government, which would eliminate its monopoly status and its power to dangerously expand the money supply. Simply abolish the Reserve Banks and make the member banks independent institutions again. They would then have to live with the rules that the market would demand. And the market would demand open disclosure of the extent of their fractional reserve loans. Most important of all, the market would demand redemption of all bank issued paper notes with gold coins or bullion upon customer request. Both of these market demands would temper excess paper issuance on the part of banks and keep them responsible.
In other words, repeal the government's legal tender laws, establish a free-market for banking, and let the marketplace decide what should be used for money. The banks would then have to offer quality gold money that the people desired, rather than corruptible paper money that a government cartel mandates. This would decentralize the financial power of our economy out among the thousands of individual banks throughout the country and strip the Federal Government of its dangerous control over our wealth and productivity.
Statists and world government advocates on the left do not want a free banking system for obvious reasons. It would shrink their power and wealth greatly, and short-circuit their dreams for more and more centralized government. But populist conservatives on the right don't want a free banking system either; they want Congress to run banking instead of the Fed. The reason why populist conservatives in America want Congress to run the banking system of America is because they fear a private, free-market banking system. They fear it because they believe 19th century banking was a free-market mess of wildcat corruption, exploitation, and fraud.
But the mess and corruption of 19th century banking was not caused by any connection to laissez-faire capitalism. It was caused by incessant government intervention into the market to convey privileges to the banks and also heap mandates upon them that brought about financial distortions, fraud, and ill-collateralized institutions.
For example, government was famous for intervening to allow the more unscrupulous banks to suspend their contractual obligation of gold redemption to their depositors whenever such banks had expanded credit too excessively. This consequently allowed many banks to repeatedly issue excessive paper notes at larger and larger levels, which created bevies of insolvent institutions throughout the country. Government interventions also relaxed accounting standards for banks, allowed them to overstate their assets and understate their liabilities with impunity. Also government interventions often mandated that banks back shabby state bond issues, which brought many of them to financial ruin. But if the market had been left free, such practices and mandates would never have arisen, and the great majority of insolvent banks would never have come about. The mess and corruption of 19th century banking can be laid at government's interventionist door.
[On this issue of why free-market banking is not dangerous and is vitally necessary to maintain freedom in general, see the following: Ron Paul and Lewis Lehrman, The Case for Gold, (Washington, DC: Cato Institute, 1982), pp. 17-118. Antal E. Fekete, "Money and Credit," http://professorfekete.com/math.asp. George A. Selgin, The Theory of Free Banking: Money Supply under Competitive Note Issue (Totoway, NJ: Roman & Littlefield, 1988), pp. 5-15. Kurt Schuler, "The World History of Free Banking," Chapter 2, in Kevin Dowd (ed.) The Experience of Free Banking, (London: Routledge, 1992), pp 7-47.]
Separate the State and the Banks
The proper approach to this problem is first to portray the Fed in its true light, as a "fascist cartel" rather than as a "private corporation." If we do this, we can then arrive at the right solution to the financial corruption taking place in our society. That solution is to separate the state power from the financial power of society.
Separate the state and the banks just as we long ago separated the state and the churches. Independently, these three institutions will function properly; but let the coercive power of the state fuse with either the moral power of religion or the financial power of banking — and you are begging for a dictatorship.
If the reader will stop and think about why it was so necessary for men to separate the moral power of the church from the state centuries ago, then he will understand also why it is so vital to separate the financial power of banking from the state today.
When the church and the state formed alliances during the Middle Ages, the clergy gained the power to impose their dictates upon the populace by the physical force of the law. With separation of the state and the church, however, it then became necessary for the clergy to win their converts over voluntarily. If a church member didn't like a certain policy of his religion, he was free to walk away without any fear of reprisals from the coercive machinery of the clergy-state combine.
This same principle applies to the banking world. When banks form alliances with the government, they then become capable of imposing their will (or paper money) upon the populace by the physical force of the law. With the separation of the state and the banks in a laissez-faire economy, however, all bankers must then win their customers over voluntarily with quality money and service, just as the clergy have had to win their converts over voluntarily with better ideas and service. Thus, it is not mega-banks that are dangerous and evil. It is mega-banks forming alliances with the state that is dangerous and evil.
Those on the political right, who preach that the Fed is a private corporation, play directly into the hands of those who hate capitalism and freedom. What else can one conclude about capitalism if the evil of the Fed is due to the fact that it is a "private corporation," and therefore needs to be "taken over by Congress?" If capitalism has created such an evil power, then we need (as the collectivists are always eager to tell us) more government power in Washington to counteract it. We need more centralization, more regulation, more bureaucracy, more taxes. This is the tyrannical con that collectivist intellectuals have been utilizing for decades. Demand more power for the central government to counteract evils that the power of the central government has brought into being in the first place. The Fed is a perfect example of this. We don't need a government solution to this problem; we need a government withdrawal from causing it.
Populist Reform of the System
There are several banking reform measures being proposed by populist conservatives today that fall victim to this idea that government is the solution to the evils of our Federal Reserve System. One such example is the National Economic Stabilization and Recovery Act (NESARA) — a radical overhaul of America's monetary system. Because the NESARA people mistakenly conceive of the Fed as being private, they assume that the answer to its abuse of money is to give the money creation power to Congress. But this is jumping from the frying pan into the fire. Does anyone really believe that Congress will responsibly use such a power? They will do the same thing that the Fed has done for 90 years — corrupt the currency in order to create the illusion of prosperity, so as to get congressionally elected and bureaucratically appointed to office again and again.
NESARA's reform plan actually states that by giving Congress the power to create money, "the people" will be able to "create as much or as little currency as they need." You can bet grandma's farm that once Congress has the power to create money, the people and their representatives will definitely "create as much as they need" all right. And since humans have a tendency toward endless need of money, they will ultimately succumb to the same pitfalls as our present Federal Reserve.
Thus many well-meaning advocates of freedom and Constitutional government on the political right are adding fuel to the statist / collectivist propaganda machine controlling our media and schools with their mistaken characterizations of the Federal Reserve as an evil, private corporation.
The mega-banks that make up the Federal Reserve System are dangerously evil, there is no doubt about that. But their evil does not spring from their "privateness," nor from their "corporateness." Their evil springs from the mixture of their corporate goals with government coercion, from the fact that they are in bed with the biggest evil of all — the federal Leviathan in Washington, which grants them protection from market demand. Kick them out of that bed into the free-market, deny them any and all legislated privileges, and we solve the problem of mega-bank exploitation.
The collectivist one-worlders are hard at work today muddying up the ideological waters by smearing the system of capitalism. We do not need to give them added ammunition, which is what we do when we claim that the Federal Reserve is a private corporation. We reinforce the Marxist smear that private free enterprise is a system of favoritism for business class interests, that it is exploitation of the people by private financiers. Class interest favoritism and exploitation are certainly rife throughout our system. But such corruptions are not the result of private corporations and capitalism; they are the result of government cartels and fascism.
No private bank in a truly free-market would possess the power that the government's present mega-bank cartel (the Fed) possesses. The Fed only has it's power because government, having taken over much of the market today, has given the Fed a monopoly. Remove government monopoly privileges (i.e., legal tender laws), and the Fed's power evanesces.
Immense confusion reigns throughout our nation today as to what free enterprise is, what legitimate government entails, how monopolies form, what our rights are, etc. This confusion has been brought about primarily because of grievous political, philosophical and economic fallacies taught in the universities, which has given us legions of Orwellians who twist and corrupt the meaning of words to make them mean what they want them to mean. This process allows them to manipulate the masses into voting America into servitude. Such semantic manipulation is quite apparent in today's analysis of the Federal Reserve System. Our authorities in the courts and in the schools pretend that the Federal Reserve is a private corporation operating in a capitalist free-market independent of government, and most of our punditry buy into it. This enables the authoritarians to bamboozle the people into thinking we still have a free capitalist system, when in actuality we have an ever-increasing fascist economic system.
If we are to succeed in checking this dictatorial aggrandizement that is insidiously moving us toward a One World Government, then we must quit lending credence to collectivist pretenses. We must quit portraying monetary dangers to our freedom as coming from a "private" Federal Reserve. The despotism growing amidst us stems from the mega-banks and our government combining into a grotesque mutation that is neither private nor free. To win the battle against this despotism, we have to portray its reality properly to the people.
To read today's other editorial submission by Dr. Ron Paul, "Iran Sanctions are Precursor to War," click here now.