Most Americans have little or no idea what “the Fed” is or does, despite the fact that, ever since its creation in 1913, it has had monopolistic control over the money supply in the country and regulated virtually every type of financial transaction. When Tucker Carlson interviewed former Congressman Ron Paul on his podcast, he recalled how, when Paul was running for the Republican Party nomination and was giving a speech at Michigan State University, hundreds of students began spontaneously chanting “End the Fed!” Carlson said he was taken aback by this since he, as a professional journalist, was paid to know at least something about the Fed but did not. The Michigan State University students obviously did — they had been reading and listening to Paul’s speeches.
The pervasive lack of awareness of the Fed’s activities, as with so much else the government does, is what economists call “rational ignorance.” When it comes to educating ourselves, we spend most of our time and effort on our own education, jobs, family matters, paying the bills — our private lives. We spend very little time and effort learning about what the hundreds of government agencies of all types are doing. This is why the late Rush Limbaugh referred to most Americans as “low-information voters.”
Politicians have always understood this, which is why so many of them are habitual liars and deceivers. Indeed, when Alexander Hamilton made his case for creating a national bank run by politicians in his 1790 Report on a National Bank, his political nemesis, Thomas Jefferson, responded by saying that it was intentionally confusing, a subterfuge designed to fool the public into acquiescing to a vast, unconstitutional expansion of governmental powers. Jefferson was right on the money, as usual.
Forerunner: The First Bank of the United States, set up at the urging of Alexander Hamilton, was America’s first central bank — although, unlike the modern Federal Reserve, it did not have the power to print money or the authority to purchase government bonds. But it did set the precedent that the federal government should have its finger on the scale of finance by being involved in the banking business. (Public Domain)
Jefferson pointed out that the Constitutional Convention had discussed — and rejected — Hamilton’s proposal for a national bank, and that no such thing was included in the delegated powers (assigned by the states to the federal government) in Article I, Section 8 of the Constitution. In what may be the very first significant snub of the constitutional limits on government, George Washington signed legislation creating the first central bank, the Bank of the United States (BUS), in 1791. The BUS was 80-percent privately owned, with the government owning the other 20 percent. It was the first great monopolistic collusion scheme between business and government in America. The BUS promptly did what Jefferson and the Jeffersonians feared: It inflated the currency, causing 72-percent price inflation from 1791 to 1796, and continued to do so for the next 15 years. Consequently, its 20-year charter was not renewed by Congress.
The War of 1812 was used as an excuse to revive the BUS in 1816 as a means of helping to pay for the war debt, and the BUS quickly became known for its “mismanagement, speculation, and fraud,” wrote James J. Kilpatrick in The Sovereign States. Its monetary expansion created bubbles in the economy, and when they burst — as economic bubbles inevitably do — the result was the first great depression in America, known as the “Panic of 1819.” The revived BUS also extended cheap credit to politically favored borrowers, causing great corruption — so much so that President Andrew Jackson claimed that it “impaired the morals of our people, corrupted our statesmen, and threatened our liberty. It bought up members of Congress by the Dozen ... subverted the electoral process, and sought to destroy republican institutions.” This last claim by Jackson referred to how the BUS had subsidized the campaigns of its favored political candidates.
President Jackson famously vetoed the renewal charter of the Second BUS in 1832, and it eventually went out of business and into the dustbin of history. In his veto message to Congress, Jackson said that the BUS was an example of how “the rich and powerful too often bend the acts of government to their selfish purposes.” Such institutions “make the rich richer and the potent more powerful.... The humble members of society ... who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their government.”
It would take another eight decades or so before the banking industry’s cabal of corruption could get the government to create another central bank that would benefit the cabal at the expense of the rest of the population. That was the Federal Reserve System, or simply “the Fed.”
Inherent Corruption
To understand the essential nature of the Fed and central banking in America, it will be helpful to examine it in light of the government/business relationship, often referred to as “crony capitalism.” As the name suggests, crony capitalism is not real, free-market capitalism, but a system whereby government coercion is employed to benefit not the public in general, but politically connected businesses — usually against the public’s interests — by creating some type of monopoly and, subsequently, higher prices.
From the beginning of the Republic to the Civil War, the great economic debates in American politics were mostly about whether or not the United States should adopt elements of the British “mercantilist” system that the American Revolution was fought to secede from. This British system was given the name “The American System” by Alexander Hamilton. It was later championed by Henry Clay, and then by Abraham Lincoln, who considered Clay to be his political role model or, as he once put it, his “beau ideal of a statesman.”
The system involved what we today call tax-funded corporate welfare for politically connected businesses, tariffs to protect mostly Northern state manufacturers from foreign competition (and to “protect” consumers from lower prices), and a national bank — controlled by politicians even if it was partly privately owned. This was really the Hamiltonian/British system, not an American system, that was championed by Hamilton and his political descendants and opposed by Jefferson and the Jeffersonians for roughly the first 75 years of the American Republic. By the eve of the Civil War, almost none of it had been adopted, as the Jeffersonians had more or less prevailed. Things, however, were about to change.
With the Republican Party holding monopolistic control of the federal government during the war and for decades thereafter, all of the Hamiltonian system was put into place. The average tariff rate went from 15 percent to more than 50 percent, and remained there until the federal income tax was adopted in 1913. The floodgates of corporate welfare were opened with massive subsidies to railroad corporations to build transcontinental railroads. There was no central bank, but the Legal Tender Act of 1862 created the “greenback” dollar and taxed competing currencies out of existence. The National Currency Acts of 1863 and 1864 created a regime, if not an actual central bank, that had regulatory powers over banking. These regulatory powers were steppingstones to a central bank, albeit not the real thing.
The subsidies to the railroad corporations championed by the old general counsel of the Illinois Central Railroad, President Lincoln, led to massive mismanagement and corruption, as the Jeffersonians had always warned would happen. The fraud — known as the Crédit Mobilier scandal — was exposed during the administration of Ulysses Grant. The waste and corruption were so colossal that the politicians and corporations responsible for it learned a lesson: They must find more subversive ways for government to use its powers to create monopolistic profits for its political supporters and campaign financiers than simply writing them checks. So they turned to government regulation as the means of creating monopolies and monopoly profits (presumably in return for veiled kickbacks of all types, including campaign “contributions”).
They could not, of course, tell the public the truth — that their real objective was to disguise corporate welfare to their political benefactors. They needed to bamboozle the people with talk of how government regulation would supposedly be enforced to serve “the public interest.” This was pure Hamiltonianism, for Hamilton himself used “public interest,” “national interest,” and other such rhetoric to describe his quintessentially special-interest politics, such as corporate welfare and protectionist tariffs. Such policies would drive up the prices of certain products while enriching politically connected corporations at the expense of their hapless customers forced to pay higher prices for the same or shoddier products.
The very first federal regulatory agency was the Interstate Commerce Commission (ICC), created in 1887 — 26 years before the founding of the Fed. There was a railroad-building boom after the Civil War, and competition among railroad corporations was fierce, causing passenger rates to plummet year after year. The corporations complained bitterly of “cutthroat competition” and attempted to create price-fixing cartels, but they invariably failed because of cheating with secret rebates by members of the cartels, proving once again the old adage that there’s no honor among thieves.
