The Triumph of Debt

Forbes founder B.C. Forbes, writing in 1916:

Picture a party of the nation’s greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily riding 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 foundation of our new currency system, was written.

Picture it indeed.

We maintain our occupation of Jekyll Island, Georgia. This we do in order to penetrate the mystery-laden origins of the Federal Reserve… as a police detective may visit a crime scene in search of clues.

Today Jim Rickards and former adviser to the Dallas outpost of the Federal Reserve Bank — Danielle DiMartino Booth — donned their gumshoes… and reached into their sleuth kits.

They traced the origins of the Federal Reserve (to the great San Francisco earthquake, incidentally).

They proceeded to tackle the banking unpleasantness presently unfolding, the looming threat of “Biden Bucks” and specific steps you can take today to guard your money.

‘We Need to Create a Cartel’

Why did seven prominent money men steal away to Jekyll Island in darkest secrecy 113 years ago?

Here is the answer: To plot a cartel — a banking cartel.

Here we cite G. Edward Griffin’s The Creature From Jekyll Island:

The composition of the Jekyll Island meeting was a classic example of cartel structure. A cartel is a group of independent businesses which join together to coordinate the production, pricing or marketing of their members. The purpose of a cartel is to reduce competition and thereby increase profitability. This is accomplished through a shared monopoly over their industry which forces the public to pay higher prices for their goods or services than would be otherwise required under free-enterprise competition.

Here were representatives of the world’s leading banking consortia: Morgan, Rockefeller, Rothschild, Warburg and KuhnLoeb. They were often competitors, and there is little doubt that there was considerable distrust between them and skillful maneuvering for favored position in any agreement. But they were driven together by one overriding desire to fight their common enemy. The enemy was competition.

Competition is the implacable and eternal foe of monopolists and aspiring monopolists.

A monopolistic bloc may endeavor to offer product X for $10 the unit. Yet what if a renegade is willing to offer product X for $9 the unit?

The monopolistic plot suffers a catastrophic rupturing. It cannot endure the undercutting competition.

For these are sappers dynamiting the monopolist’s anti-competition earthworks. The structures cannot endure the blasts.

The Triumph of Debt Over Thrift

As with business in the generality, so with banking in the particularity. Griffin:

In 1910, the number of banks in the United States was growing at a phenomenal rate. In fact, it had more than doubled to over 20,000 in just the previous 10 years. Furthermore, most of them were springing up in the South and West, causing the New York banks to suffer a steady decline of market share.

This the behemoth New York banks could not abide. They were out to throttle and choke the mushrooming banks, the competition:

In the eyes of those duck hunters from New York, this was a trend that simply had to be reversed.

Recall, the Jekyll Island expedition was initiated beneath the ruse of a duck hunt. Not one single duck absorbed a dose of buckshot. Not one shotgun blasted one leaden round.

“Elastic” Money Stretched to the Breaking Point

Yet rival and proliferating banks were not the sole menace to the New York banks. Capitalism itself was undoing them:

Competition also was coming from a new trend in industry to finance future growth out of profits rather than from borrowed capital. This was the outgrowth of free-market interest rates which set a realistic balance between debt and thrift. Rates were low enough to attract serious borrowers who were confident of the success of their business ventures and of their ability to repay, but they were high enough to discourage loans for frivolous ventures or those for which there were alternative sources of funding — for example, one’s own capital.

That balance between debt and thrift was the result of a limited money supply. Banks could create loans in excess of their actual deposits, as we shall see, but there was a limit to that process. And that limit was ultimately determined by the supply of gold they held. Consequently, between 1900 and 1910, 70% of the funding for American corporate growth was generated internally, making industry increasingly independent of the banks.

Even the federal government was becoming thrifty. It had a growing stockpile of gold, was systematically redeeming the greenbacks — which had been issued during the Civil War — and was rapidly reducing the national debt.

Can you imagine it? This too the mighty banks could not bless. It was debt they were hot for — not the free market’s natural thrift.

Thus they were out to scissor the dollar’s tethering to gold. It was an expandable money they were after — an elastic money:

Here was another trend that had to be halted. What the bankers wanted — and what many businessmen wanted also — was to intervene in the free market and tip the balance of interest rates downward, to favor debt over thrift. To accomplish this, the money supply simply had to be disconnected from gold and made more plentiful or, as they described it, more elastic.

The plot succeeded beyond all reasonable expectation. It bequeathed to us a dollar so elastic… it presently stretches to dimensions truly obscene.

The United States dollar has hemorrhaged some 99% of its value since the Federal Reserve acquired existence in 1913.

Mission Accomplished

Here, Griffin cites the four central ambitions of the Jekyll Island duck hunters:

1. How to stop the growing influence of small, rival banks and to ensure that control over the nation’s financial resources would remain in the hands of those present;

2. How to make the money supply more elastic in order to reverse the trend of private capital formation and to recapture the industrial loan market;

3. How to pool the meager reserves of the nation’s banks into one large reserve so that all banks will be motivated to follow the same loan-to-deposit ratios. This would protect at least some of them from currency drains and bank runs;

4. Should this lead eventually to the collapse of the whole banking system, then how to shift the losses from the owners of the banks to the taxpayers.

That is, to “socialize” the banks’ losses — while “privatizing” their gains.

This all required a tremendous shrouding, a tremendous secrecy.

That is because the vast bulk of the American public was against them. The American people harbored terrific suspicion of the centralized banking under proposal.

They sniffed a rodent — and for cause. A rodent was present.

It is still present…and gives off a stench mightier yet.

More tomorrow…

The Daily Reckoning