Chapter One: The Journey to Jekyll Island

The secret meeting on Jekyll Island in Georgia at which the Federal Reserve was conceived; the birth of a banking cartel to protect its members from competition; the strategy of how to convince Congress and the public that this cartel was an agency of the United States government.

The New Jersey railway station was bitterly cold that night. Flurries of the year’s first snow swirled around street lights. November wind rattled roof panels above the track shed and gave a long, mournful sound among the rafters.

It was approaching ten p.m., and the station was nearly empty except for a few passengers scurrying to board the last Southbound of the day. The rail equipment was typical for that year of 1910, mostly chair cars that converted into sleepers with cramped upper and lower berths. For those with limited funds, coach cars were coupled to the front. They would take the brunt of the engine’s noise and smoke that, somehow, always managed to seep through unseen cracks. A dining car was placed between the sections as a subtle barrier between the two classes of travelers. By today’s standards, the environment was drab. Chairs and mattresses were hard. Surfaces were metal or scarred wood. Colors were dark green and gray.

In their hurry to board the train and escape the chill of the wind, few passengers noticed the activity at the far end of the platform. At a gate seldom used at this hour of the night was a spectacular sight. Nudged against the end-rail bumper was a long car that caused those few who saw it to stop and stare. Its gleaming black paint was accented with polished brass hand rails, knobs, frames, and filigrees. The shades were drawn, but through the open door, one could see mahogany paneling, velvet drapes, plush armchairs, and a well stocked bar. Porters with white serving coats were busying themselves with routine chores. And there was the distinct aroma of expensive cigars. Other cars in the station bore numbers on each end to distinguish them from their dull brothers. But numbers were not needed for this beauty. On the center of each side was a small plaque bearing but a single word: ALDRICH.

The name of Nelson Aldrich, senator from Rhode Island, was well known even in New Jersey. By 1910, he was one of the most powerful men in Washington, D.C., and his private railway car often was seen at the New York and New Jersey rail terminals during frequent trips to Wall Street. Aldrich was far more than a senator. He was considered to be the political spokesman for big business. As an investment associate of J.F. Morgan, he had extensive holdings in banking, manufacturing, and public utilities. His son-in-law was John D. Rockefeller, Jr. Sixty years later, his grandson, Nelson Aldrich Rockefeller, would become Vice-President of the United States.

When Aldrich arrived at the station, there was no doubt he was the commander of the private car. Wearing a long, fur-collared coat, a silk top hat, and carrying a silver-tipped walking stick, he strode briskly down the platform with his private secretary, Shelton, and a cluster of porters behind them hauling assorted trunks and cases.

No sooner had the Senator boarded his car when several more passengers arrived with similar collections of luggage. The last man appeared just moments before the final aaall aboarrrd. He was carrying a shotgun case.

While Aldrich was easily recognized by most of the travelers who saw him stride through the station, the other faces were not familiar. These strangers had been instructed to arrive separately, to avoid reporters, and, should they meet inside the station, to pretend they did not know each other. After boarding the train, they had been told to use first names only so as not to reveal each other’s identity. As a result of these precautions, not even the private-car porters and servants knew the names of these guests.

Back at the main gate, there was a double blast from the engine’s whistle. Suddenly, the gentle sensation of motion; the excitement of a journey begun. But, no sooner had the train cleared the platform when it shuttered to a stop. Then, to everyone’s surprise, it reversed direction and began moving toward the station again. Had they forgotten something? Was there a problem with the engine?

A sudden lurch and the slam of couplers gave the answer. They had picked up another car at the end of the train. Possibly the mail car? In an instant the forward motion was resumed, and all thoughts returned to the hip ahead and to the minimal comforts of the accommodations.

And so, as the passengers drifted off to sleep that night to the rhythmic clicking of steel wheels against rail, little did they dream that, riding in the car at the end of their train, were seven men who represented an estimated one-fourth of the total wealth of the entire world.

This was the roster of the Aldrich car that night:

  1. Nelson W. Aldrich, Republican whip in the Senate, Chairman of the National Monetary Commission, business associate of J.P, Morgan, father-in-law to John D. Rockefeller, Jr.;
  2. Abraham Piatt Andrew, Assistant Secretary of the United States Treasury;
  3. Frank A. Vanderlip, president of the National City Bank of New York, the most powerful of the banks at that time, representing William Rockefeller and the international investment banking house of Kuhn, Loeb & Company;
  4. Henry P. Davison, senior partner of the J. P. Morgan Company;
  5. Charles D. Norton, president of J. P. Morgan’s First National Bank of New York;
  6. Benjamin Strong, head of J. P. Morgan’s Bankers Trust Company; and
  7. Paul M. Warburg, a partner in Kuhn, Loeb & Company, a representative of the Rothschild banking dynasty in England and France, and brother to Max Warburg who was head of the Warburg banking consortium in Germany and the Netherlands.

Concentration of Wealth

Centralization of control over financial resources was far advanced by 1910. In the United States, there were two main focal points of this control: the Morgan group and the Rockefeller group. Within each orbit was a maze of commercial banks, acceptance banks, and investment firms. In Europe, the same process had proceeded even further and had coalesced into the Rothschild group and the Warburg group. An article appeared in The New York Times on May 3, 1931, commenting on the death of George Baker, one of Morgan’s closest associates. It said: One-sixth of the total wealth of the world was represented by members of the Jekyll Island Club. The reference was only to those in the Morgan group, (members of the Jekyll Island Club), It did not include the Rockefeller group or the European financiers. When all of these are combined, the previous estimate that one-fourth of the world’s wealth was represented by these groups is probably conservative.

In 1913, the year that the Federal Reserve Act became law, a subcommittee of the House Committee on Currency and Banking, under the chairmanship of Arsene Pujo of Louisiana, completed its investigation into the concentration of financial power in the United States. Pujo was considered to be a spokesman for the oil interests, part of the very group under investigation, and did everything possible to sabotage the hearings. In spite of his efforts, however, the final report of the committee at large was devastating:

Your committee is satisfied from the proofs submitted … that there is an established and well defined identity and community of interest between a few leaders of finance … which has resulted in great and rapidly growing concentration of the control of money and credit in the hands of these few men …

Under our system of issuing and distributing corporate securities the investing public does not buy directly from the corporation. The securities travel from the issuing house through middlemen to the investor. It is only the great banks or bankers with access to the mainsprings of the concentrated resources made up of other people’s money, in the banks, trust companies, and life insurance companies, and with control of the machinery for creating markets and distributing securities, who have had the power to underwrite or guarantee the sale of large-scale security issues. The men who through their control over the funds of our railroad and industrial companies are able to direct where such funds shall be kept, and thus to create these great reservoirs of the people’s money are the ones who are in a position to tap those reservoirs for the ventures in which they are interested and to prevent their being tapped for purposes which they do not approve …

When we consider, also, in this connection that into these reservoirs of money and credit there flow a large part of the reserves of the banks of the country, that they are also the agents and correspondents of the out-of-town banks in the loaning of their surplus funds in the only public money market of the country, and that a small group of men and their partners and associates have now further strengthened their hold upon the resources of these institutions by acquiring large stock holdings therein, by representation on their boards and through valuable patronage, we begin to realize something of the extent to which this practical and effective domination and control over our greatest financial, railroad and industrial corporations has developed, largely within the past five years, and that it is fraught with peril to the welfare of the country.

Such was the nature of the wealth and power represented by those seven men who gathered in secret that night and traveled in the luxury of Senator Aldrich’s private car.

Destination Jekyll Island

As the train neared its destination of Raleigh, North Carolina, the next afternoon, it slowed and then stopped in the switching yard just outside the station terminal. Quickly, the crew threw a switch, and the engine nudged the last car onto a siding where, just as quickly, it was uncoupled and left behind. When passengers stepped onto the platform at the terminal a few moments later, their train appeared exactly as it had been when they boarded. They could not know that their travelling companions for the night, at that very instant, were joining still another train which, within the hour, would depart Southbound once again.

The elite group of financiers was embarked on a thousand-mile journey that led them to Atlanta, then to Savannah and, finally, to the small town of Brunswick, Georgia. At first, it would seem that Brunswick was an unlikely destination. Located on the Atlantic seaboard, it was primarily a fishing village with a small but lively port for cotton and lumber. It had a population of only a few thousand people. But, by that time, the Sea Islands that sheltered the coast from South Carolina to Florida already had become popular as winter resorts for the very wealthy. One such island, just off the coast of Brunswick, had recently been purchased by J. P. Morgan and several of his business associates, and it was here that they came in the fall and winter to hunt ducks or deer and to escape the rigors of cold weather in the North. It was called Jekyll Island.

When the Aldrich car was uncoupled onto a siding at the small Brunswick station, it was, indeed, conspicuous. Word traveled quickly to the office of the town’s weekly newspaper. While the group was waiting to be transferred to the dock, several people from the paper approached and began asking questions. Who were Mr. Aldrich’s guests? Why were they here? Was there anything special happening? Mr. Davison, who was one of the owners of Jekyll Island and who was well known to the local paper, told them that these were merely personal friends and that they had come for the simple amusement of duck hunting. Satisfied that there was no real news in the event, the reporters returned to their office.

Even after arrival at the remote island lodge, the secrecy continued. For nine days the rule for first-names-only remained in effect. Full-time caretakers and servants had been given vacation, and an entirely new, carefully screened staff was brought in for the occasion. This was done to make absolutely sure that none of the servants might recognize by sight the identities of these guests. It is difficult to imagine any event in history — including preparation for war — that was shielded from public view with greater mystery and secrecy.

The purpose of this meeting on lekyll Island was not to hunt ducks. Simply stated, it was to come to an agreement on the structure and operation of a banking cartel. The goal of the cartel, as is true with all of them, was to maximize profits by minimizing competition between members, to make it difficult for new competitors to enter the field, and to utilize the police power of government to enforce the cartel agreement. In more specific terms, the purpose and, indeed, the actual outcome of this meeting was to create the blueprint for the Federal Reserve System.

The Story Is Confirmed

For many years after the event, educators, commentators, and historians denied that the Jekyll Island meeting ever took place. Even now, the accepted view is that the meeting was relatively unimportant, and only paranoid unsophisticates would try to make anything out of it. Ron Chemow writes: The Jekyll Island meeting would be the fountain of a thousand conspiracy theories. Little by little, however, the story has been pieced together in amazing detail, and it has come directly or indirectly from those who actually were there. Furthermore, if what they say about their own purposes and actions does not constitute a classic conspiracy, then there is little meaning to that word.

The first leak regarding this meeting found its way into print in 1916. It appeared in Leslie’s Weekly and was written by a young financial reporter by the name of B. C. Forbes, who later founded Forbes Magazine. The article was primarily in praise of Paul Warburg, and it is likely that Warburg let the story out during conversations with the writer. At any rate, the opening paragraph contained a dramatic but highly accurate summary of both the nature and purpose of the 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.

In 1930, Paul Warburg wrote a massive book — 1,750 pages in all — entitled The Federal Reserve System, Its Origin and Growth. In this tome, he described the meeting and its purpose but did not mention either*its location or the names of those who attended. But he did say: The results of the conference were entirely confidential. Even the fact there had been a meeting was not permitted to I become public. Then, in a footnote he added: 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.

An interesting insight to Paul Warburg’s attendance at the Jekyll Island meeting came thirty-four years later, in a book written by his son, James. James had been appointed by F.D.R. as Director of the Budget and, during World War II, as head of the Office of War Information. In his book he described how his father, who didn’t know one end of a gun from the other, borrowed a shotgun from a friend and carried it with him to the train to disguise himself as a duck hunter.

This part of the story was corroborated in the official biography of Senator Aldrich, written by Nathaniel Wright Stephenson:

In the autumn of 1910, six men [in addition to Aldrich] went out to shoot ducks. That is to say, they told the world that was their purpose. Mr. Warburg, who was of the number, gives an amusing account of his feelings when he boarded a private car in Jersey City, bringing with him all the accoutrements of a duck shooter. The joke was in the fact that he had never shot a duck in his life and had no intention of shooting any … The duck shoot was a blind.

Stephenson continues with a description of the encounter at Brunswick station. He tells us that, shortly after they arrived, the station master walked into the private car and shocked them by his apparent knowledge of the identities of everyone on board. To make matters even worse, he said that a group of reporters were waiting outside. Davison took charge. Come outside, old man, he said, and I will tell you a story. No one claims to know what story was told standing on the railroad ties that morning, but a few moments later Davison returned with a broad smile on his face. It’s all right, he said reassuringly. They won’t give us away.

Stephenson continues: The rest is silence. The reporters dispersed, and the secret of the strange journey was not divulged. No one asked him how he managed it and he did not volunteer the information.

In the February 9, 1935, issue of the Saturday Evening Post, an article appeared written by Frank Vanderlip. In it he said:

Despite my views about the value to society of greater publicity for the affairs of corporations, 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 told, further, that we should avoid dining together on the night of our departure. We were instructed to come one at a time and as unobtrusively as possible to the railroad tenninal on the New Jersey littoral of the Hudson, where Senator Aldrich’s private car would be in readiness, attached to the rear end of a train for the South …

Once aboard the private car we began to observe the taboo that had been fixed on last names. We addressed one another as Ben, Paul, Nelson, Abe — it is Abraham Piatt Andrew. Davison and I adopted even deeper disguises, abandoning our first names. On the theory that we were always right, he became Wilbur and I became Orville, after those two aviation pioneers, the Wright brothers …

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.

The Structure Was Pure Cartel

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 Kuhn-Loeb. 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.

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 twenty thousand in just the previous ten 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. Almost all banks in the 1880s were national banks, which means they were chartered by the federal government. Generally, they were located in the big cities, and were allowed by law to issue their own currency in the form of bank notes. Even as early as 1896, however, the number of non-national banks had grown to sixty-one percent, and they already held fifty-four percent of the country’s total banking deposits. By 1913, when the Federal Reserve Act was passed, those numbers were seventy-one percent non-national banks holding fifty-seven percent of the deposits. In the eyes of those duck hunters from New York, this was a trend that simply had to be reversed.

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, seventy percent 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.

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 Specter of Bank Failure

The greatest threat, however, came, not from rivals or private capital formation, but from the public at large in the form of what bankers call a run on the bank. This is because, when banks accept a customer’s deposit, they give in return a balance in his account. This is the equivalent of a promise to pay back the deposit anytime he wants. Likewise, when another customer borrows money from the bank, he also is given an account balance which usually is withdrawn immediately to satisfy the purpose of the loan. This creates a ticking time bomb because, at that point, the bank has issued more promises to pay-on-demand than it has money in the vault. Even though the depositing customer thinks he can get his money any time he wants, in reality it has been given to the borrowing customer and no longer is available at the bank.

The problem is compounded further by the fact that banks are allowed to loan even more money than they have received in deposit. The mechanism for accomplishing this seemingly impossible feat will be described in a later chapter, but it is a fact of modern banking that promises-to-pay often exceed savings deposits by a factor of ten-to-one. And, because only about three percent of these accounts are actually retained in the vault in the form of cash — the rest having been put into even more loans and investments — the bank’s promises exceed its ability to keep those promises by a factor of over three hundred-to-one. As long as only a small percentage of depositors request their money at one time, no one is the wiser. But if public confidence is shaken, and if more than a few percent attempt to withdraw their funds, the scheme is finally exposed. The bank cannot keep all its promises and is forced to close its doors. Bankruptcy usually follows in due course.

Currency Drains

The same result could happen — and, prior to the Federal Reserve System, often did happen — even without depositors making a run on the bank. Instead of withdrawing their funds at the teller’s window, they simply wrote checks to purchase goods or services. People receiving those checks took them to a bank for deposit. If that bank happened to be the same one from which the check was drawn, then all was well, because it was not necessary to remove any real money from the vault. But if the holder of the check took it to another bank, it was quickly passed back to the issuing bank and settlement was demanded between banks.

This is not a one-way street, however. While the Downtown Bank is demanding payment from the Uptown Bank, the Uptown Bank is also clearing checks and demanding payment from the Downtown bank. As long as the money flow in both directions is equal, then everything can be handled with simple bookkeeping. But if the flow is not equal, then one of the banks will have to actually send money to the other to make up the difference. If the amount of money required exceeds a few percentage points of the bank’s total deposits, the result is the same as a run on the bank by depositors. This demand of money by other banks rather than by depositors is called a currency drain.

In 1910, the most common cause of a bank having to declare bankruptcy due to a currency drain was that it followed a loan policy that was more reckless than that of its competitors. More money was demanded from it because more money was loaned by it. It was dangerous enough to loan ninety percent of their customers’ savings (keeping only one dollar in reserve out of every ten), but that had proven to be adequate most of the time. Some banks, however, were tempted to walk even closer to the precipice. They pushed the ratio to ninety-two percent, ninety-five percent, ninety-nine percent. After all, the way a bank makes money is to collect interest, and the only way to do that is to make loans. The more loans, the better. And, so, there was a practice among some of the more reckless banks to loan up, as they call it. Which was another way of saying to push down their reserve ratios.

A Bankers’ Utopia

If all banks could be forced to issue loans in the same ratio to their reserves as other banks did, then, regardless of how small that ratio was, the amount of checks to be cleared between them would balance in the long run. No major currency drains would ever occur. The entire banking industry might collapse under such a system, but not individual banks — at least not those that were part of the cartel. All would walk the same distance from the edge, regardless of how close it was. Under such uniformity, no individual bank could be blamed for failure to meet its obligations. The blame could be shifted, instead, to the economy or government policy or interest rates or trade deficits or the exchange-value of the dollar or even to the capitalist system itself.

But, in 1910, such a bankers’ utopia had not yet been created. If the Downtown bank began to loan at a greater ratio to its reserves than its competitors, the amount of checks which would come back to it for payment also would be greater. Thus, the bank which pursued a more reckless lending policy had to draw against its reserves in order to make payments to the more conservative banks and, when those funds were exhausted, it usually was forced into bankruptcy. Historian John Klein tells us that The financial panics of 1873, 1884, 1893, and 1907 were in large part an outgrowth of … reserve pyramiding and excessive deposit creation by reserve city … banks. These panics were triggered by the currency drains that took place in periods of relative prosperity when banks were loaned up. In other words, the panics and resulting bank failures were caused, not by negative factors in the economy, but by currency drains on the banks which were loaned up to the point where they had practically no reserves at all. The banks did not fail because the system was weak. The system failed because the banks were weak. This was another common problem that brought these seven men over a thousand miles to a tiny island off the shore of Georgia. Each was a potentially fierce competitor, but uppermost in their minds were the so-called panics and the very real 1,748 bank failures of the preceding two decades. Somehow, they had to join forces. A method had to be devised to enable them to continue to make more promises to pay-on-demand than they could keep. To do this, they had to find a way to force all banks to walk the same distance from the edge, and, when the inevitable disasters happened, to shift public blame away from themselves. By making it appear to be a problem of the national economy rather than of private banking practice, the door then could be opened for the use of tax money rather than their own funds for paying off the losses.

Here, then, were the main challenges that faced that tiny but powerful group assembled on Jekyll Island:

  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.

The Cartel Adopts a Name

Everyone knew that the solution to all these problems was a cartel mechanism that had been devised and already put into similar operation in Europe. As with all cartels, it had to be created by legislation and sustained by the power of government under the deception of protecting the consumer. The most important task before them, therefore, can be stated as objective number five:

  1. How to convince Congress that the scheme was a measure to protect the public.

The task was a delicate one. The American people did not like the concept of a cartel. The idea of business enterprises joining together to fix prices and prevent competition was alien to the free-enterprise system. It could never be sold to the voters. But, if the word cartel was not used, if the venture could be described with words which are emotionally neutral — perhaps even alluring — then half the battle would be won.

The first decision, therefore, was to follow the practice adopted in Europe. Henceforth, the cartel would operate as a central bank. And even that was to be but a generic expression. For purposes of public relations and legislation, they would devise a name that would avoid the word bank altogether and which would conjure the image of the federal government itself. Furthermore, to create the impression that there would be no concentration of power, they would establish regional branches of the cartel and make that a main selling point. Stephenson tells us: Aldrich entered this discussion at Jekyll Island an ardent convert to the idea of a central bank His desire was to transplant the system of one of the great European banks, say the Bank of England, bodily to America. But political expediency required that such plans be concealed from the public. As John Kenneth Galbraith explained it, It was his [Aldrich’s] thought to outflank the opposition by having not one central bank but many. And the word bank would itself be avoided.

With the exception of Aldrich, all of those present were bankers, but only one was an expert on the European model of a central bank. Because of this knowledge, Paul Warburg became the dominant and guiding mind throughout all of the discussions. Even a casual perusal of the literature on the creation of the Federal Reserve System is sufficient to find that he was, indeed, the cartel’s mastermind. Galbraith says … Warburg has, with some justice, been called the father of the system. Professor Edwin Seligman, a member of the international banking family of J. & W. Seligman, and head of the Department of Economics at Columbia University, writes that … in its fundamental features, the Federal Reserve Act is the work of Mr. Warburg more than any other man in the country.

The Real Daddy Warbucks

Paul Moritz Warburg was a leading member of the investment banking firm of MM. Warburg & Company of Hamburg, Germany, and Amsterdam, the Netherlands. He had come to the United States only nine years previously. Soon after arrival, however, and with funding provided mostly by the Rothschild group, he and his brother, Felix, had been able to buy partnerships in the New York investment banking firm of Kuhn, Loeb & Company, while continuing as partners in Warburg of Hamburg. Within twenty years, Paul would become one of the wealthiest men in America with an unchallenged domination over the country’s railroad system.

At this distance in history, it is difficult to appreciate the importance of this man. But some understanding may be had from the fact that the legendary character, Daddy Warbucks, in the comic strip Little Orphan Annie, was a contemporary commentary on the presumed benevolence of Paul Warburg, and the almost magic ability to accomplish good through the power of his unlimited wealth.

A third brother, Max Warburg, was the financial adviser of the Kaiser and became Director of the Reichsbank in Germany. This was, of course, a central bank, and it was one of the cartel models used in the construction of the Federal Reserve System. The Reichsbank, incidentally, a few years later would create the massive hyperinflation that occurred in Germany, wiping out the middle class and the entire German economy as well.

Paul Warburg soon became well known on Wall Street as a persuasive advocate for a central bank in America. Three years before the Jekyll Island meeting, he had published several pamphlets. One was entitled Defects and Needs of Our Banking System, and the other was A Plan for A Modified Central Bank. These attracted wide attention in both financial and academic circles and set the intellectual climate for all future discussions regarding banking legislation. In these treatises, Warburg complained that the American monetary system was crippled by its dependency on gold and government bonds, both of which were in limited supply. What America needed, he argued, was an elastic money supply that could be expanded and contracted to accommodate the fluctuating needs of commerce. The solution, he said, was to follow the German example whereby banks could create currency solely on the basis of commercial paper, which is banker language for I.O.U.s from corporations.

Warburg was tireless in his efforts. He was a featured speaker before scores of influential audiences and wrote a steady stream of published articles on the subject. In March of that year, for example, The New York Times published an eleven-part series written by Warburg explaining and expounding what he called the Reserve Bank of the United States.

The Message Was Plain for Those Who Understood

Most of Warburg’s writing and lecturing on this topic was eyewash for the public. To cover the fact that a central bank is merely a cartel which has been legalized, its proponents had to lay down a thick smoke screen of technical jargon focusing always on how it would supposedly benefit commerce, the public, and the nation; how it would lower interest rates, provide funding for needed industrial projects, and prevent panics in the economy. There was not the slightest glimmer that, underneath it all, was a master plan which was designed from top to bottom to serve private interests at the expense of the public.

This was, nevertheless, the cold reality, and the more perceptive bankers were well aware of it. In an address before the American Bankers Association the following year, Aldrich laid it out for anyone who was really listening to the meaning of his words. He said: The organization proposed is not a bank, but a cooperative union of all the banks of the country for definite purposes. Precisely. A union of banks.

Two years later, in a speech before that same group of bankers, A. Barton Hepburn of Chase National Bank was even more candid. He said: The measure recognizes and adopts the principles of a central bank. Indeed, if it works out as the sponsors of the law hope, it will make all incorporated banks together joint owners of a central dominating power. And that is about as good a definition of a cartel as one is likely to find.

In 1914, one year after the Federal Reserve Act was passed into law, Senator Aldrich could afford to be less guarded in his remarks. In an article published in July of that year in a magazine called The Independent, he boasted: Before the passage of this Act, the New York bankers could only dominate the reserves of New York. Now we are able to dominate the bank reserves of the entire country.

Myth Accepted as History

The accepted version of history is that the Federal Reserve was created to stabilize our economy. One of the most widely-used textbooks on this subject says: It sprang from the panic of 1907, with its alarming epidemic of bank failures: the country was fed up once and for all with the anarchy of unstable private banking. Even the most naive student must sense a grave contradiction between this cherished view and the System’s actual performance. Since its inception, it has presided over the crashes of 1921 and 1929; the Great Depression of ’29 to ’39; recessions in ’53, ’57, ’69, ’75, and ’81; a stock market Black Monday in ’87; and a 1,000% inflation which has destroyed 90% of the dollar’s purchasing power.

Let us be more specific on that last point. By 1990, an annual income of $10,000 was required to buy what took only $1,000 in 1914. That incredible loss in value was quietly transferred to the federal government in the form of hidden taxation, and the Federal Reserve System was the mechanism by which it was accomplished.

Actions have consequences. The consequences of wealth confiscation by the Federal-Reserve mechanism are now upon us. In the current decade, corporate debt is soaring; personal debt is greater than ever; both business and personal bankruptcies are at an all-time high; banks and savings and loan associations are failing in larger numbers than ever before; interest on the national debt is consuming half of our tax dollars; heavy industry has been largely replaced by overseas competitors; we are facing an international trade deficit for the first time in our history; 75% of downtown Los Angeles and other metropolitan areas is now owned by foreigners; and over half of our nation is in a state of economic recession.

First Reason to Abolish the System

That is the scorecard eighty years after the Federal Reserve was created supposedly to stabilize our economy! There can be no argument that the System has failed in its stated objectives. Furthermore, after all this time, after repeated changes in personnel, after operating under both political parties, after numerous experiments in monetary philosophy, after almost a hundred revisions to its charter, and after the development of countless new formulas and techniques, there has been more than ample opportunity to work out mere procedural flaws. It is not unreasonable to conclude, therefore, that the System has failed, not because it needs a new set of rules or more intelligent directors, but because it is incapable of achieving its stated objectives.

If an institution is incapable of achieving its objectives, there is no reason to preserve it — unless it can be altered in some way to change its capability. That leads to the question: why is the System incapable of achieving its stated objectives? The painful answer is: those were never its true objectives. When one realizes the circumstances under which it was created, when one contemplates the identities of those who authored it, and when one studies its actual performance over the years, it becomes obvious that the System is merely a cartel with a government facade. There is no doubt that those who run it are motivated to maintain full employment, high productivity, low inflation, and a generally sound economy. They are not interested in killing the goose that lays such beautiful golden eggs. But, when there is a conflict between the public interest and the private needs of the cartel — a conflict that arises almost daily — the public will be sacrificed. That is the nature of the beast. It is foolish to expect a cartel to act in any other way.

This view is not encouraged by Establishment institutions and publishers. It has become their apparent mission to convince the American people that the system is not intrinsically flawed. It merely has been in the hands of bumbling oafs. For example,

William Greider was a former Assistant Managing Editor for The Washington Post. His book, Secrets of The Temple, was published in 1987 by Simon and Schuster. It was critical of the Federal Reserve because of its failures, but, according to Greider, these were not caused by any defect in the System itself, but merely because the economic factors are sooo complicated that the good men who have struggled to make the System work have just not yet been able to figure it all out. But, don’t worry, folks, they’re working on it! That is exactly the kind of powder-puff criticism which is acceptable in our mainstream media. Yet, Greider’s own research points to an entirely different interpretation. Speaking of the System’s origin, he says:

As new companies prospered without Wall Street, so did the hew regional banks that handled their funds, New York’s concentrated share of bank deposits was still huge, about half the nation’s total, but it was declining steadily. Wall Street was still the biggest kid on the block, but less and less able to bully the others.

This trend was a crucial fact of history, a misunderstood reality that completely alters the political meaning of the reform legislation that created the Federal Reserve. At the time, the conventional wisdom in Congress, widely shared and sincerely espoused by Progressive reformers, was that a government institution would finally harness the money trust, disarm its powers, and establish broad democratic control over money and credit … The results were nearly the opposite. The money reforms enacted in 1913, in fact, helped to preserve the status quo, to stabilize the old order. Money-center bankers would not only gain dominance over the new central bank, but would also enjoy new insulation against instability and their own decline. Once the Fed was in operation, the steady diffusion of financial power halted. Wall Street maintained its dominant position — and even enhanced it.

Anthony Sutton, former Research Fellow at the Hoover Institution for War, Revolution and Peace, and also Professor of Economics at California State University, Los Angeles, provides a somewhat deeper analysis. He writes:

Warburg’s revolutionary plan to get American Society to go to work for Wall Street was astonishingly simple. Even today,… academic theoreticians cover their blackboards with meaningless equations, and the general public struggles in bewildered confusion with inflation and the coming credit collapse, while the quite simple explanation of the problem goes undiscussed and almost entirely uncomprehended. The Federal Reserve System is a legal private monopoly of the money supply operated for the benefit of the few under the guise of protecting and promoting the public interest.

The real significance of the journey to Jekyll Island and the creature that was hatched there was inadvertently summarized by the words of Paul Warburg’s admiring biographer, Harold Kellock:

Paul M. Warburg is probably the mildest-mannered man that ever personally conducted a revolution. It was a bloodless revolution: he did not attempt to rouse the populace to arms. He stepped forth armed simply with an idea. And he conquered. That’s the amazing thing. A shy, sensitive man, he imposed his idea on a nation of a hundred million people.


The basic plan for the Federal Reserve System was drafted at a secret meeting held in November of 1910 at the private resort of J. P. Morgan on Jekyll Island off the coast of Georgia. Those who attended represented the great financial institutions of Wall Street and, indirectly, Europe as well. The reason for secrecy was simple. Had it been known that rival factions of the banking community had joined together, the public would have been alerted to the possibility that the bankers were plotting an agreement in restraint of trade — which, of course, is exactly what they were doing. What emerged was a cartel agreement with five objectives: stop the growing competition from the nation’s newer banks; obtain a franchise to create money out of nothing for the purpose of lending; get control of the reserves of all banks so that the more reckless ones would not be exposed to currency drains and bank runs; get the taxpayer to pick up the cartel’s inevitable losses; and convince Congress that the purpose was to protect the public. It was realized that the bankers would have to become partners with the politicians and that the structure of the cartel would have to be a central bank. The record shows that the Fed has failed to achieve its stated objectives. That is because those were never its true goals. As a banking cartel, and in terms of the five objectives stated above, it has been an unqualified success.