Vipers and Thieves

“You are a den of vipers and thieves. I intend to rout you out, and by the Eternal God, I will rout you out.”

President Andrew Jackson, stated in reference to the wildcat bankers

The Fed is guilty…

…guilty of “swindling the U.S. Treasury…”;

…guilty of “conspiring with their foreign principals and others to defraud the U.S. Government…”;

…guilty of “having robbed the U.S. Government and the people of the U.S. by their theft and sale of the gold reserves of the U.S. and other unlawful transactions…”;

…and guilty “of having reduced the U.S. from a first-class power to one that is dependent, and…having reduced the U.S. from a rich and powerful nation to one that is internationally poor; and…”

Louis McFadden: Charges Pending

These are but a few of the charges leveled at the Federal Reserve Board on the floor of Congress, by the Honorable Louis T. McFadden…in 1933. The charges remain open and are pending (after all this time) at the Judiciary.

So claims a juicy bit of conspiracy theory detritus making its way around the Internet.

Getting information off the Internet is a dubious proposition, at best. It calls to mind the college expression, “beer goggles” – in which a young man goes to a party, drinks too many beers, and falls instantly in love with the most beautiful woman in the room…only to discover, the day after, that she has buck teeth, a third eye, and a particularly bad case of 5 o’clock shadow.

Likewise, when you finally find the right bit of information on the Internet, you think it’s the smoking gun…the perfect coup de grace to polish off your argument, put away your opponent, and lay the issue, at last, to rest…only to discover that said bit has been debunked, discarded and exposed as a hoax by half a dozen critics, whose credibility remains equally in question. (Forthwith: the term “beer google” – in honor of our favorite search engine – will be added to the Contrarian Glossary on the Daily Reckoning website, defining the act of finding then debunking exciting bits of dubious information on the Internet).

It is in the spirit of the “beer google” in which we offer today’s observation. Not that we agree with the litany of conspiracy sites on which we’ve discovered the legendary tirades of Louis McFadden. Rather, the sentiment behind McFadden’s lawsuit, crackpot though he may – or may not – have been, seems laudable…praiseworthy, even.

Louis McFadden: 25% Unemployment

The story begins in the days when the neo-cons were still fantasizing about a Trotskyite revolution in America…that is to say, during the Great Depression and the birth of the New Deal. The unemployment rate was inching its way toward 25% – the worst in the nation’s history. Homelessness and starvation, honors usually reserved for the poor, were being bestowed at an ever-quickening pace on those who formerly thought of themselves as “middle class”.

“On June 10, 1932,” explains the economic historian Edward Flaherty, “the House was debating a bill which would expand the types of securities the Federal Reserve could trade when conducting monetary policy. McFadden used this opportunity to launch a twenty-five minute tirade against the Federal Reserve, and in so doing, became a legendary champion amongst conspiracy theorists. McFadden began…

“‘Mr. Chairman, we have, in this country, one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal reserve banks. The Federal Reserve Board, a Government board, has cheated the Government of the United States out of enough money to pay the national debt. The depredations and the iniquities of the Federal Reserve Board and the Federal reserve banks acting together have cost this country enough money to pay the national debt several times over. This evil institution has impoverished and ruined the people of the United States; has bankrupted itself, and has practically bankrupted our Government. It has done this through defects of the law under which it operates, through the maladministration of that law by the Federal Reserve Board and through the corrupt practices of the moneyed vultures who control it.’

“However,” Flaherty points out, “just because a claim appears in the Congressional Record does not necessarily mean it is true. Once the hyperbole and histrionics are deducted, there is little remaining of substance in the above quotation.”

Louis McFadden: $359 Million Profit

Flaherty goes on to show that from 1914 to 1931, the Federal Reserve system collectively earned profits totaling $607 million. About $102 million of which was distributed to member banks as dividends, and about $147 million of which was paid to the Treasury as a “franchise tax.”

The Federal Reserve banks kept the remaining $359 million in profits.

“The national debt in 1932 was $19.5 billion,” writes Flaherty. “So even if the Federal Reserve had been paying all its profits to the government during this time, it would have been enough to pay only 3 percent of the national debt – a far cry from McFadden’s ‘several times over’. Moreover, the Federal Reserve’s total revenues for the period were $971 million, so if the entirety of the System’s revenues had gone straight to the Treasury, it still would not have been sufficient to make McFadden’s claim even remotely accurate.”

As Flaherty points out, the speech has made McFadden a hero of “The Creature from Jekyll Island” crowd (a book penned by G. Edward Griffin on the conspiratorial origins of the privately-held, for-profit Federal Reserve Board). Among other things, conspiracy buffs like the Jekyll crowd suggest that the Fed went so far as to have McFadden ‘offed’.

Days after former Congressman McFadden’s demise, “Pelley’s Weekly” of Oct. 14 commented: “Now that this sterling American patriot has made the Passing, it can be revealed that not long after his public utterance against the encroaching powers of Judah, it became known among his intimates that he had suffered two attacks against his life. The first attack came in the form of two revolver shots fired at him from ambush as he was alighting from a cab in front of one of the Capital hotels. Fortunately both shots missed him, the bullets burying themselves in the structure of the cab.

Louis McFadden: Heart Failure

“He [then] became violently ill after partaking of food at a political banquet at Washington. His life was only saved from what was subsequently announced as a poisoning by the presence of a physician friend at the banquet, who at once procured a stomach pump and subjected the Congressman to emergency treatment.”

Ultimately, as Pelley’s Weekly reported, McFadden fell prey to “heart-failure sudden-death” on Oct. 3, 1936, after a “dose” of “intestinal flu.”

To some, however, the conspiracy theory seems a little curious. According to Flaherty, following McFadden’s twenty-five minute tirade, Senator Benjamin Strong of Kansas stood to address the Congress:

“There is a disease that afflicts mankind which is very vicious. It warps the judgment, it narrows the vision; it even causes men to see red, to make mountains out of molehills. This disease has sometimes been referred to as B.A. Ladies may refer to it – ‘tummy’ ache, but out in the wide-open spaces, men call it the ‘belly’ ache, and I know of no man of my acquaintance that has this disease in so violent a form as the gentleman from Pennsylvania, Mr. McFadden.

“I have not the time to refer to the many charges he makes against the Federal Reserve system, but I call attention to the fact that for 12 years he has been the chairman of the Banking and Currency Committee of this House and did not see fit during that time to remedy any of the evils of which he now complains. It seems to me entirely out of place to wait until he is retired as chairman of that great committee and then assault all of the institutions of which it has control.”

“Strong’s statement suggested that McFadden’s rant was little more than political bluster,” writes Flaherty.

Louis McFadden: Bringing Formal Charges

“If McFadden had really been the anti-Fed crusader some people today make him out to have been,” Flaherty continues, “then why did he not do anything about the Fed when he had the chance? More likely, he was making political points with his constituents by placing blame for the Great Depression at the door of the Federal Reserve. While this may have been justifiable, he went too far by implying the Fed intended to wreck the economy.”

Still, on May 23rd, 1933 – less than a year after his initial tirade – Congressman McFadden brought formal charges against the Board of Governors of the Federal Reserve Bank system, The Comptroller of the Currency and the Secretary of United States Treasury for “numerous criminal acts, including but not limited to, CONSPIRACY, FRAUD, UNLAWFUL CONVERSION, AND TREASON.”

“The petition for Articles of Impeachment,” claims the E- Booklet we received from a reader, “was thereafter referred to the Judiciary Committee and has YET TO BE ACTED ON. So, this ELECTRONIC BOOKLET should be reprinted, reposted, set up on web pages and circulated far and wide.”

Politically motivated? No doubt. Justifiable? Perhaps. If the suit is pending, perhaps there’s still time to take a look…even add a few new names to the list of defendants.


Addison Wiggin
The Daily Reckoning
June 11, 2003


Another day of strikes in Paris. We saw a few buses and subway trains running…but two major unions have walked off the job, and teachers have gone on strike for the 11th time this year.

We mention the strikes because we believe they are not merely comic, but historic.

The strikers’ beef is that they do not want to submit to the government’s pension reforms. Promises get politicians elected. And, as in all developed democracies, French politicians made promises that can’t be kept. Unless the pension system is reformed, the French treasury will crack under the weight of baby boomer retirees.

The situation is little different in the U.S., as Eric explains below. In America, the politicians are as craven and imbecilic…and the voters are every bit as larcenous, happily voting themselves someone else’s money every time they approach the ballot box.

Everyone, everywhere knows you can’t get ‘something for nothing’. But that doesn’t seem to stop anyone from trying. Government offers pensions it can’t pay for…central bankers offer ‘money’ out of thin air…and stock markets promise rates of return that can’t possibly be sustained.

The big question is: how does it end? Can a sophisticated democracy reform itself before it is too late? Or does every boom have to end in a bust?

We don’t know. There have been few attempts at popular democracy. Like paper money, they all degenerated and collapsed. But maybe this time, it will be different…

Right Eric? Over to you…


Eric Fry in New York…

– The stock market stumbled yesterday…If only stocks would go up each and every day, investing would be easy and EVERY American would be rich. But, alas, life is not so egalitarian. Stocks sometimes fall, and stock market profits, like so many of life’s most delicious delights, are sometimes fleeting…especially during bear market rallies. Like the euphoria of young love or the hot fudge on a sundae, the capital gains of bear market rallies tend to melt away as quickly as they appear. Yesterday, the Dow slipped 83 points to 8,980, while the Nasdaq faded 1.4% to 1,603.

– Freddie Mac, the government-coddled mortgage lender, “bummed out” investors yesterday with the disclosure that it has been “smoothing” its earnings – a.k.a. “massaging the numbers.” The stock tumbled a breathtaking 17% on the news.

– The company forced chairman and chief executive, Leland Brendsel, to resign, along with Freddie Mac’s chief financial officer and its chief operating officer. It seems that one or more of these fellows may have been smoothing the company’s earnings. To smooth earnings, companies use various quasi-legal accounting techniques to “stockpile” earnings in good times in order to apply those earnings to future quarters when business conditions deteriorate. The object is to produce the sort of “consistently growing” earnings that Wall Street analysts crave.

– Smoothing, therefore, is the corporate equivalent of blood-doping – a company “extracts” its actual earnings, tweaks them a bit and then re-injects them into the income statement as flawless, consistently growing numbers…and Wall Street loves it!

– In the real world, of course, earnings that grow consistently year after year are as rare a poor Republican…or a flawless diamond, which is why some investors eagerly pay a rich valuation for any company that purports to produce such a financial rarity. Coca-cola and Starbucks are examples of companies that have actually managed this rare feat. Freddie Mac, apparently, is not. Which is why investors slashed away 17% of the company’s market capitalization on a single day, as soon as its “consistent-earnings” fraud came to light.

– Smoothing earnings is but one of Wall Street’s many “open secrets.” (The community of professional short-sellers has been aware of – and critical of – the practice for years). Many well-known companies engage in this practice to some extent. But the line between accounting creativity and criminality is not exactly black and white.

– Freddie Mac, however, seems to have crossed the line. The company promises to restate prior financial results to reflect the correct information. Which “correct information” might now be forthcoming, we wonder?

– Meanwhile, out in the real world – far, far away from Wall Street – more Americans fell behind on their credit card payments in April than a year ago, according to Moody’s Investors Services.

– Moody’s delinquency index on credit card payments 30 days past due rose to 5.25% in April from 5.04% a year earlier, but down a bit from March’s 5.44%. But hold the applause…April’s rate of charge-offs – the annualized rate that issuers write off card accounts as uncollectable – rose to its highest level in than a year, up a whopping 47% from last year.

– “My country ’tis of debt,” the Seattle Times quips, referring to the new calculation of the nation’s debt load reported here last week. The real national debt totes to a hefty $43 trillion, and NOT the piddling $3.8 trillion shown in our official documents. The mind-numbing $43 trillion number includes all the formal debt of the U.S. Treasury, along with all the government promises to provide retirement income and medical care. – When Kent Smetters, one of the economists responsible for calculating the government’s massive all-in-all debt, testified before the House Subcommittee on the Constitution of the United States, he stated matter-of-factly, “The government reports that the national debt in 2003 was about $3.8 trillion in the form of government ‘debt held by the public.’ But that number ignores massive imbalances in Medicare and Social Security programs and the government’s other programs. When the liabilities associated with those programs are taken into account, the nation’s fiscal policy is currently off-balance by over $43.4 trillion in present value, a number that is not reported in standard budget documents.”

– Hmmm…it might be little tricky to sweep that elephant under the carpet.


Bill Bonner, back in Paris…

*** “Wow…look at this…Who would have thought you could get five and half percent mortgages? We probably refinanced too soon.”

Everybody in America seems to have refinanced his house and bought a huge SUV land barge – at least twice. At least, that was our conclusion after attending another wedding, this one in Southwestern Virginia.

The lines quoted above were overheard at breakfast on Sunday, at a small Bed & Breakfast in Scottsville. Checking the paper, the couple at the next table discovered that rates had hit a new low, 5.26%. Later in the day, almost everyone we talked to had either refinanced recently or financed for the first time.

“It doesn’t make sense to not have a mortgage,” said a friend. “They’re lending money at these rates, fixed, for 15 years. You’ve got to take advantage of it.”

*** If the economy picks up, and inflation rates rise, people with large, fixed-rate loans will look like geniuses. They’ll pay off their mortgages with cheaper money.

Almost every living, breathing soul in America is counting on it – higher inflation rates, that is.

“As I speak with investors around the world,” comments Stephen Roach, “I find few who are willing to doubt the reflationary endgame. After all, goes the logic, never before has the modern-day global economy received such a massive dose of stimulus. Policy interest rates have been slashed to near-historic lows – zero in the case of Japan – and budget deficits are high and rising in all the major economies of the world. Most presume that it’s only a matter of when, not if, these actions boost aggregate demand and bring the deflation nightmare scenario to an end. Global equity markets are rallying in anticipation of just such an outcome in the next 6-12 months. And global bond markets are taking heart in the possibility that central banks will do everything in their power to ensure such a result by remaining accommodative for an indefinite period of time. Policy traction is widely thought to be a foregone conclusion.”

And yet, the inflationary boomlet that was supposed to follow the conclusion of the war against Iraq never showed up. A Financial Times article tells us that Fed economists have seen “no evidence of an accelerated upturn.”

The best spin Alan Greenspan could put on it was that the situation had “stabilized.”

Perhaps it is neither accelerating to the upside nor stabilizing. Joblessness, for example, seems to be accelerating to the downside. In the last 3 months, for example, 168,000 jobs were lost. That compares to just 99,000 lost in the same period last year.

But wouldn’t that be just like Mr. Market? We mean, to disappoint so many people…to give borrowers a good kick in the pants with a dose of Japanese-style deflation? They would pay down their debts, fear deflation…and buy bonds. Then, he could destroy the currency, too.

The Daily Reckoning