December 2015

An InterAnalyst Publication

The Federal Reserve Act of 1913 was crafted by Wall Street bankers and a few
senators in a secret meeting.
On the Georgian resort hideaway of Jekyll Island (which has some excellent golf courses, by the
way), there once met a coalition of Wall Street bankers and U.S. senators. This secret 1910
meeting had a sinister purpose, the conspiracy theorists say. The bankers wanted to establish a
new central bank under the direct control of New York's financial elite. Such a plan would give the
Wall Street bankers near total control of the financial system and allow them to manipulate it for
their personal gain.
G. Edward Griffin lays out this conspiratorial version of history in his book The Creature from Jekyll
Island. His amateurish take on history is highly suspect, however. Gerry Rough, in a series of wellresearched essays on U.S. banking history, reveals many historical inaccuracies, inconsistencies,
and even contradictions in Griffin's book and others of its genre. Instead of reproducing Rough's
work here, I offer the reader a substantially more accurate view of the events leading up to the
creation of the Federal Reserve System in 1913. To get a proper historical perspective, the story
of begins just prior to the Civil War...

The National Banking Acts of 1863 & 1864

Prior to the Civil war there were thousands of banks in operation throughout the Union, all of
them chartered, that is, licensed by the state governments. Banking regulations were virtually
nonexistent. The federal government had no meaningful controls on banking practices, and state
regulations were spotty and poorly enforced at best. Economic historians call the era leading up
to the Civil War as the 'state banking era' or the 'free banking era.'
The problems with state banking were numerous, but three were conspicuous. First, the nation
had no unified currency. State banks issued their own bank notes as currency, a system which at
worst invited severe bouts of counterfeiting and at best introduced additional uncertainty in the
task of determining the relative value of each bank note. Second, with no mitigating influence on
the issuance of bank notes, the money supply and the price level were highly unstable, introducing
and perhaps causing additional volatility in the business cycle. This was due in part to the fact that
bank note issuance was frequently tied to the market value of the bank's bond portfolio which
they were required to have by law. Third, frequent bank runs resulted in substantial depositor
losses and severe crises of confidence in the payments system.
The National Banking Acts of 1863 and 1864 were attempts to assert some degree of federal
control over the banking system without the formation of another central bank. The Act had three
primary purposes: (1) create a system of national banks, (2) to create a uniform national currency,

and (3) to create an active secondary market for Treasury securities to help finance the Civil War
(for the Unions side).
The first provision of the Acts was to allow for the incorporation of national banks. These banks
were essentially the same as state banks, except national banks received their charter from the
federal government and not a state government. This arrangement gave the federal government
regulatory jurisdiction over the national banks it created, whereas it asserted no control over
state-chartered banks. National banks had higher capital requirements and higher reserve
requirements than their state bank counterparts. To improve liquidity and safety they were
restricted from making real estate loans and could not lend to any single person an amount
exceeding ten percent of the bank's capital. The National Banking Acts also created under the
Treasury Department the office of Comptroller of the Currency. The duties of the office were to
inspect the books of the national banks to insure compliance with the above regulations, to hold
Treasury securities deposited there by national banks, and, via the Bureau of Engraving, to design
and print all national banknotes.
The second goal of the National Banking Acts was to create a uniform national currency. Rather
than have several hundred, or several thousand, forms of currency circulating in the states,
conducting transactions could be greatly simplified if there were a uniform currency. To achieve
this all national banks were required to accept at par the bank notes of other national banks. This
insured that national bank notes would not suffer from the same discounting problem with which
state bank notes were afflicted. In addition, all national bank notes were printed by the
Comptroller of the Currency on behalf of the national banks to guarantee standardization in
appearance and quality. This reduced the possibility of counterfeiting, an understandable wartime
concern.
The third goal of the Acts was to help finance the Civil War. The volume of notes which a national
bank issued was based on the market value of the U.S. Treasury securities the bank held. A
national bank was required to keep on deposit with the Comptroller of the Currency a sizable
volume of Treasury securities. In exchange the bank received bank notes worth 90 percent, and
later 100 percent, of the market value of the deposited bonds. If the bank wished to extend
additional loans to generate more profits, then the bank had to increase its holdings of Treasury
bonds. This provision had its roots in the Michigan Act, and it was designed to create a more
active secondary market for Treasury bonds and thus lower the cost of borrowing for the federal
government.
It was the hope of Secretary of the Treasury Chase that national banks would replace state banks,
and that this would create the uniform currency he desired and ease the financing of the Civil
War. By 1865 there were 1,500 national banks, about 800 of which had converted from state
banking charters. The remainder were new banks. However, this still meant that state bank notes
were dominating the currency because most of them were discounted. Accordingly, the public
hoarded the national bank notes. To reduce the proliferation of state banking and the notes it
generated, Congress imposed a ten percent tax on all outstanding state bank notes. There was no

corresponding tax of national bank notes. Many state banks decided to convert to national bank
charters because the tax made state banking unprofitable. By 1870 there were 1,638 national
banks and only 325 state banks.
While the tax eventually eliminated the circulation of state bank notes, it did not entirely kill state
banking because state banks began to use checking accounts as a substitute for bank
notes. Checking accounts became so popular that by 1890 the Comptroller of the Currency
estimated that only ten percent of the nation's money supply was in the form of
currency. Combined with lower capital and reserve requirements, as well as the ease with which
states issued banking charters, state banks again became the dominant banking form by the late
1880s. Consequently, the improvements to safety that the national banking system offered were
mitigated somewhat by the return of state banking.
There were two major defects remaining in the banking system in the post-Civil War era despite
the mild success of the National Banking Acts. The first was the inelastic currency problem. The
amount of currency which a national bank could have circulating was based on the market value of
the Treasury securities it had deposited with the Comptroller of the Currency, not the par value of
the bonds. If prices in the Treasury bond market declined substantially, then the national banks
had to reduce the amount of currency they had in circulation. This could be done be refusing new
loans or, in a more draconian way, by calling-in loans already outstanding. In either case, the effect
on the money supply is a restrictive one. Consequently, the size of the money supply was tied
more closely to the performance of the bond market rather than needs of the economy.5
Another closely related defect was the liquidity problem. Small rural banks often kept deposits at
larger urban banks. The liquidity needs of the rural banks were driven by the liquidity demands of
its primary customer, the farmers. In the planting season the was a high demand for currency by
farmers so they could make their purchases of farming implements, whereas in harvest season
there was an increase in cash deposits as farmers sold their crops. Consequently, the rural banks
would take deposits from the urban banks in the spring to meet farmers withdrawal demands and
deposit the additional liquidity in the autumn. Larger urban banks could anticipate this seasonal
demand and prepare for it most of the time. However, in 1873, 1884, 1893, and 1907 this reserve
pyramid precipitated a financial crisis.
When national banks experienced a drain on their reserves as rural banks made deposit
withdrawals, new reserves had to be acquired in accordance with the federal law. A national bank
could do this by selling bonds and stocks, by borrowing from a clearinghouse, or by calling-in a few
loans. As long as only a few national banks at a time tried to do this, liquidity was easily supplied to
the needy banks. However, an attempt en masse to sell bonds or stocks caused a market crash,
which in turn forced national banks to call in loans to comply with Treasury regulations. Many
businesses, farmers, or households who had these loans were unable to pay on demand and were
forced into bankruptcy. The recessionary vortex became apparent. Frightened by the specter of
losing their deposits, in each episode the public stormed any bank rumored, true or not, to be in
financial straits. Anyone unable to withdraw their deposits before the banks till ran dry lost their

savings or later received only pennies on the dollar. Private deposit insurance was scant and
unreliable. Federal deposit insurance was non-existent.

The 1907 Banking Panic

The 1907 crisis, also called the Wall Street Panic, was especially severe. The Panic caused what
was at that time the worst economic depression in the countrys history. It appears to have begun
with a stock market crash brought about by a combination of a modest speculative bubble, the
liquidity problem, and reserve pyramiding. Centered on New York City, the scale of the crisis
reached a proportion so great that banks across the country nearly suspended all withdrawals -- a
kind of self-imposed bank holiday. Several long-standing New York banks fell. The unemployment
rate reached 20 percent at the peak of the crisis. Millions lost their deposits as thousands of banks
collapsed. The crisis was terminated when J.P. Morgan, a man of sometimes suspicious business
tactics and phenomenal wealth, personally made temporary loans to key New York banks and
other financial institutions to help them weather the storm. He also made an appeal to the clergy
of New York to employ their Sunday sermons to calm the publics fears.
Morgans emergency injection of liquidity into the banking system undoubtedly prevented an
already bad situation from getting still worse. Although private clearinghouses were able to
supply adequate temporary liquidity for their members, only a small portion of banks were
members of such organizations. What would happen if there were no J.P. Morgan around during
the next financial crisis? Just how bad could things really get? There began to emerge both on
Wall Street and in Washington a consensus for a kind of institutionalized J.P. Morgan, that is, a
public institution that could provide emergency liquidity to the banking system to prevent such
panics. The final result of the Panic of 1907 would be the Federal Reserve Act of 1913.

The Federal Reserve Act of 1913

Following the near catastrophic financial disaster of 1907, the movement for banking reform
picked up steam among Wall Street bankers, Republicans, and eastern Democrats. However,
much of the country was still distrustful of bankers and of banking in general, especially after
1907. After two decades of minority status, Democrats regained control of Congress in 1910 and
were able to block several Republican attempts at reform, even though they recognized the need
for some kind of currency and banking changes. In 1912 Woodrow Wilson won the Democratic
Partys nomination for President, and in his populist-friendly acceptance speech he warned
against the "money trusts," and advised that "a concentration of the control of credit ... may at any
time become infinitely dangerous to free enterprise."
Also in 1910, Senator Nelson Aldrich, Frank Vanderlip of National City (today know as Citibank),
Henry Davison of Morgan Bank, and Paul Warburg of the Kuhn, Loeb Investment House met
secretly at Jeckyll Island, a resort island off the coast of Georgia, to discuss and formulate banking
reform, including plans for a form of central banking. The meeting was held in secret because the
participants knew that any plan they generated would be rejected automatically in the House of
Representatives if it were associated with Wall Street. Because it was secret and because it

involved Wall Street, the Jekyll Island affair has always been a favorite source of conspiracy
theories. However, the movement toward significant banking and monetary reform was wellknown. It is hardly surprising that given the real possibility of substantial reform, the banking
industry would want some sort of input into the nature of the reforms. The Aldrich Plan which the
secret meeting produced was even defeated in the House, so even if the Jekyll Island affair was a
genuine conspiracy, it clearly failed.
The Aldrich Plan called for a system of fifteen regional central banks, called National Reserve
Associations, whose actions would be coordinated by a national board of commercial
bankers. The Reserve Association would make emergency loans to member banks, create money
to provide an elastic currency that could be exchanged equally for demand deposits, and would act
as a fiscal agent for the federal government. Although it was defeated, the Aldrich Plan served as
an outline for the bill that eventually was adopted.
The problem with the Aldrich Plan was that the regional banks would be controlled individually
and nationally by bankers, a prospect that did not sit well with the populist Democratic Party or
with Wilson. As the debate began to take shape in the spring of 1913, Congressman Arsene Pujo
provided good evidence that the nations credit markets were under the tight control of a handful
of banks the "money trusts" against which Wilson warned. Wilson and the Democrats wanted a
reform measure which would decentralize control away from the money trusts.
The legislation that eventually emerged was the Federal Reserve Act, also known at the time as
the Currency Bill, or the Owen-Glass Act. The bill called for a system of eight to twelve mostly
autonomous regional Reserve Banks that would be owned by the banks in their region and whose
actions would be coordinated by a Federal Reserve Board appointed by the President. The
Boards members originally included the Secretary of the Treasury, the Comptroller of the
Currency, and other officials appointed by the President to represent public interests. The
proposed Federal Reserve System would therefore be privately owned, but publicly
controlled. Wilson signed the bill on December 23, 1913 and the Federal Reserve System was
born.
Conspiracy theorists have long viewed the Federal Reserve Act as a means of giving control of the
banking system to the money trusts, when in reality the intent and effect was to wrestle control
away from them. History clearly demonstrates that in the decades prior to the Federal Reserve
Act the decisions of a few large New York banks had, at times, enormous repercussions for banks
throughout the country and the economy in general. Following the return to central banking, at
least some measure of control was removed from them and placed with the Federal Reserve.

The Federal Reserve Act of 1913 was crafted by Wall Street bankers and a few
senators in a secret meeting.

The Federal Reserve Act never actually passed Congress. The Senate voted on
the bill without a quorum, so the Act is null and void.
The silliest of the Federal Reserve conspiracy theories is that the Federal Reserve Act of
December 23, 1913 passed illegally. The constitution stipulates that both the House and the
Senate must have at least half their members present, a quorum, to vote on any bill. According to
this myth, the Senate voted on the Federal Reserve Act (known as the Currency Bill at the time)
deviously in a late night session when most of its members had gone home or had left town for the
holiday. This was done to impose the will of a pro-banker minority on the objecting
majority. Since no quorum was present, the Federal Reserve Act is not valid.
This idea is better described as folklore than a full-blown conspiracy theory because I've never
been able to find it in print, only on occasion on Usenet or in e-mail from readers. Gary Kah,
author of En Route to Global Occupation, came close when he wrote that the bill's supporters
waited until its opponents were out of town and it was passed under "suspicious circumstances"
(Kah, p. 13-14). Nevertheless, the myth has no basis in fact. The House passed the bill 298-60 on
the evening of Dec. 22, 1913. The Senate began debate the following day at 10am, and passed it
43-25 at 2:30pm.
What of the missing Senators? Since there were 48 states in 1913, forty eight votes plus the tiebreaking vote of Vice-President Thomas Marshall would have been sufficient to approve the bill
even if all absent votes had been cast against the bill. However, many of the missing Senators had
their positions recorded in the Congressional Record. Of the 27 votes not cast, there were 11
'yeas' (in favor of the bill) and 12 'nays. Even if the absentee Senators had been there, the
Currency Bill would have passed easily.
President Wilson signed the Currency Bill into law in an "enthusiastic" public ceremony on Dec.
23, 1913.

The Federal Reserve Act never actually passed Congress. The Senate voted on
the bill without a quorum, so the Act is null and void.

The Federal Reserve Act and paper money are unconstitutional. Gold and silver
coins are the only constitutional forms of money.
Those who hold that the constitution should be interpreted very strictly believe the Federal
Reserve System and paper money are unconstitutional. Sharing the interpretive philosophy of
Thomas Jefferson, they argue that Congress has only those powers which the constitution
specifically enumerates. If the power is not explicitly granted, then the federal government simply
does not have it. Therefore, the Federal Reserve is unconstitutional because Congress does not
have the specific power to create a central bank. In addition, the federal government's power to
create money -- lawful money -- is limited only to minting gold or silver coins; paper currency is
forbidden.

The Constitutional Basis for Central Banking

First, the constitution grants the Congress the right to coin money and to regulate its value. It is
not clear from the constitution or the Federalist Papers what the authors meant by the term
'value.' Traditionally, it has meant the weight and metallic content of the coin. No one challenges
this interpretation. On the other hand, the only relevant meaning of 'value' in the context of
money is its value in trade, also known as its purchasing power. This a government cannot
regulate merely by an act of Congress. The government's only tool for regulating this latter value
is altering the money supply.
Second, Congress has the right to regulate interstate commerce. Banking and other financial
services clearly involves interstate commerce as the courts have come to define it.
Finally, and perhaps most importantly, Congress has the right to make any law that is 'necessary
and proper' for the execution of its enumerated powers (Art. I, Sec. 8, Cl. 18). A law creating a
Bureau of the Mint, for example, is necessary and proper for the Congress to exercise its right to
coin money. A similar argument may justify a central bank. It facilitates the expansion and
contraction of the money supply and it serves as means to regulate the banking industry.
Is this a reasonable use of the necessary and proper clause? I do not know, but a test of its
meaning came early. The history of central banking in the United States does not begin with the
Federal Reserve. The Bank of the United States received its charter in 1791 from the U.S.
Congress and Washington signed it. Secretary of State Alexander Hamilton designed the Bank's
charter by modeling it after the Bank of England, the British central bank. Secretary of State
Thomas Jefferson believed the Bank was unconstitutional because it was an unauthorized
extension of federal power. Congress, Jefferson argued, possessed only delegated powers that
were specifically enumerated in the constitution. The only possible source of authority to charter

the Bank, Jefferson believed, was in the necessary and proper clause. However, he cautioned that
if the clause could be interpreted so broadly in this case, then there was no real limit to what
Congress could do.2
Hamilton conceded that the constitution was silent on banking. He asserted, however, that
Congress clearly had the power to tax, to borrow money, and to regulate interstate and foreign
commerce. Would it be reasonable for Congress to charter a corporation to assist in carrying out
these powers? He argued that the necessary and proper clause gave Congress implied powers -the power to enact any law that is necessary to execute its specific powers. A necessary law in
this context Hamilton did not take to mean one that was absolutely indispensable. Instead, he
argued that it meant a law that was needful, requisite, incidental, useful, or conducive to the
primary Congressional power which it supported. Then Hamilton offered a proposed rule of
discretion: Does the proposed measure abridge a pre-existing right of any State or of any
individual? (Dunne, 19). If not, then it probably is constitutionally proper on these
grounds. Hamiltons arguments carried the day and convinced Washington.
The Supreme Court had its say on the matter in McCulloch v. Maryland (1819). It voted 9-0 to
uphold the Second Bank of the United States as constitutional. The Court argued with the
doctrine of implied powers, stating that to be necessary and proper the Bank needed only to be
useful in helping the government meet its responsibilities in maintaining the public credit and
regulating the money supply. Chief Justice Marshall wrote, After the most deliberate
consideration, it is the unanimous and decided opinion of this court that the act to incorporate the
Bank of the United States is a law made in pursuance of the Constitution, and is part of the
supreme law of the land (Hixson, 117). The Court affirmed this opinion in the 1824 case Osborn v.
Bank of the United States (Ibid, 14).
Therefore, the historical legal precedent exists for Congress' power to create a central bank. It
formed the Federal Reserve system in 1913 to perform many of the same functions as its
predecessors. As before, the courts have agreed that a central bank, and the Federal Reserve in
particular, is constitutional.

The Constitutional Basis for Paper Money

Even if the Federal Reserve is a constitutionally proper institution, what of paper money? The
federal government has issued many forms and denominations of paper currency since 1812. It
first made paper a legal tender in 1862. Does not the constitution require the Congress to coin
money, not to print it? Is this not what the authors of the constitution intended? Perhaps, but it's
not an air-tight issue. S.P. Breckenridge wrote in Legal Tender of the significant disagreements
the delegates to the constitutional convention had over the issue, and even over the
interpretation of the wording that they eventually adopted.
Prior to the constitutional convention in the summer of 1787, the States exercised their sovereign
powers over monetary matters. Most States had issued their own forms of paper money, typically
called bills of credit at the time, and had declared some foreign coins as a legal tender. By legal

tender we mean a form of money which a government specifies may be used to settle debts and to
pay taxes due to it. During the Revolutionary War many States issued paper money to excess. The
Congress of the Articles of Confederation had also relied heavily on using paper money to fund its
war expenditures. The States had also declared various forms of paper currency, including the
Congress emissions, a legal tender. Severe price inflation was the necessary result of this overindulgence in paper, and by the time the constitutional convention convened paper money had
many enemies.
The primary foes of paper money were commercial and banking interests. When a lender agrees
to fund a loan, he charges a rate of interest which, among other factors, includes a premium for any
expected loss in the purchasing power of the principal during the life of the loan. If the price level
is expected to rise, say, five percent then the lender will insist on an interest of at least that
amount. If in actuality the price level increases eight percent, then the lender stands to lose as
much as three percent of his principal. If a government has the power to issue paper money, then
the potential abuse of this power increases the probability of an unexpected
inflation. Commercial concerns also were generally against allowing paper, and for similar
reasons. The sour inflationary experience of the previous decades made the business climate less
stable than it might otherwise be with a constitutionally guaranteed gold or silver monetary
standard. In addition, such a standard would protect the integrity of commercial contracts that
specified fixed payments in specie. These interests at the convention therefore had two
objectives: To forbid both the States and the federal government from issuing bills of credit -- the
common term for paper money at the time -- and to base the monetary system on gold or silver.
Paper money was not without its partisans, however. Agricultural interests and debtors were
fond of paper money, as well as Ben Franklin, and for many of the same reasons. The losses a
lender is likely to suffer at the hands of a paper-induced inflation are exactly offset by the gains of
the borrower. The debtor would then be able to repay a fixed debt in less valuable
currency. Farmers also generally favored paper money because it tended to create an economic
climate of rising commodity prices relative to other goods, thereby increasing their real
income. Their monetary goal at the convention was to give the government the right to issue bills
of credit or, at the very least, not to deny it the power.
Charles Pinckney of South Carolina produced a draft of a constitution that had two interesting
features for our purposes. From Art. VII. Sec. 1 of his draft we read The legislature of the United
States shall have power (4) To coin money (5) To regulate the value of foreign coin (8) To
borrow money and emit bills on the credit of the United States Also we find in Article XII: No
state shall coin money. We further read in Article XIII: No state, without the consent of the
legislature of the United States, shall emit bills of credit, or make anything but specie a tender in
payment of debts. We can glean some indication of the Founders intent concerning paper money
from the debate on the matter in Madisons notes on the convention. What follows below is an
excerpt of those notes on this debate:

MR. GOUVERNEUR MORRIS [PA.] moved to strike out and emit bills on the credit of the United
States. If the United States had credit such bills would be unnecessary; if they had not, unjust and
useless.
MR. BUTLER [S.C.] seconds the motion.
The fundamental theory on which the Founders created the U.S. constitution is of a government of
limited powers. The federal government would have only those powers specifically enumerated
and those reasonably necessary to enact them. If a power is not expressly given to it, then it is
denied. What Robert Morris of Pennsylvania seeks to do with the above motion is to deny the
federal government the specific right to issue paper money. The discussion continued:
MR. MADISON [Va.] Will it not be sufficient to prohibit making them a tender? This will remove
the temptation to emit them with unjust views; and promissory notes in that shape may in some
emergencies be best.
MR. GOUVERNEUR MORRIS: Striking out the words will still leave room for the notes of a
responsible minister, which will do all the good without the mischief. The moneyed interests will
oppose the plan of government if paper emissions be not prohibited.
MR. GORHAM [Mass.] had doubts on the subject. Congress, he thought, would not have the
power unless it was expressed. Though he had a mortal hatred to paper money, yet, as he could
not foresee all emergencies, he was unwilling to tie the hands of the legislature. He observed the
late war could not have been carried on had such a prohibition existed.
Gorhams thoughts on this are key to interpreting how the Founders would eventually resolve this
issue. The Revolutionary War was financed to a great extent on paper money the Continental
Congress and later the Congress of the Articles of Confederation had issued. The Congress had
no taxing authority of its own and the newly independent States were unwilling to contribute any
significant funds of their own for the war effort. The Congress, with limited credit, was therefore
left to emitting paper money. Although its over-issuance was largely responsible for the severe
inflation of the time, it was also clear to the Founders and to later historians the States could not
have funded their effort in any other way. The personal financial losses many of the delegates
suffered at the hands of the paper money did much to alienate them from the medium, but it did
not erase from their memory the acknowledgment of its financial contribution to their
independence. Gorham, like others at the convention, disliked paper, but were hesitant in denying
forever the governments ability to use it. Madisons notes continued:
MR. MERCER [Md.] was a friend to paper money, though in the present state and temper of
America he should neither propose nor approve of such a measure. He was consequently
opposed to a prohibition of it altogether. It will stamp suspicion on the government to deny it
discretion on this point. It was impolitic also to excite the opposition of all those who were friends
to paper money. The people of property would be sure to be on the side of the plan, and it was
impolitic to purchase their further attachment with the loss of the opposite class of citizens.

MR. ELLSWORTH [Conn.] thought this a favorable moment to shut and bar the door against paper
money. The mischiefs of the various experiments which been made were now fresh in the public
mind, and had excited the disgust of all the respectable part of America. By withholding the power
from the new government, more friends of influence would be gained to it than by almost anything
else. Paper money can in no case be necessary. Give the government credit, and other resources
will offer. The power may do harm, never good.
MR. RANDOLPH [Va.], notwithstanding his antipathy to paper money, could not agree to strike
out the words, as he could not foresee all the occasions that might arise.
Here in a microcosm is the debate on whether to deny the federal government the right to issue
paper money. Mercer and Ellsworth clearly represented the agricultural and commercial
interests, respectively, and their positions are understandable within this context. Randolph,
however, took the middle ground, wondering whether it was wise to tie the hands of future
legislatures.
Eventually, the convention voted 9-2 to strike the clause, thereby denying the federal government
the specific power to emit bills of credit. The relevant sections of the constitution eventually
approved read: Art. I. Sec. 8.: The Congress shall have power (2) to borrow money on the
credit of the United States (5) To coin money, regulate the value thereof, and of foreign coin, and
fix the standard weight and measures. Art. II. Sec 10.: No state shall coin money nor emit bills of
credit nor make anything but gold and silver coin a legal tender in payment of debts
These clauses have several implications relevant to the question of whether todays paper money
is constitutional. Among the lesser effects for our purposes is that it removed from the States
their previous sovereign power to coin money or to emit paper money. It also restricted what they
could declare a legal tender. The question, though, is whether the Congress may legally issue
paper money. Some argue that it was the Founders intent to bar the door to paper money
permanently and the vote to strike the bills of credit clause from Pinckneys draft is evidence of
this intent. This may be a hasty interpretation, however.
Although several members of the convention wanted to deny paper money to the federal
government and believed the act of striking the 'bills of credit' clause accomplished the task, not
all delegates shared either this intent or this interpretation. Several members, as shown above,
were either friends of paper money or did not want to tie the hands of the Congress for all
time. The interpretation of their action varies widely. Mason believed that if the power was not
expressly given, it was denied. As far as he was concerned, the Congress could not authorize
paper money. Morris, though, believed it to be permissible for a responsible minister. Madison,
who cast the deciding vote in the Virginia delegation to strike the clause, still viewed it as legal
provided the notes were safe and proper. Madison wrote, Nothing very definite can be inferred
from this record as to the views of the convention on this matter. As President, Madison
approved of a $36 million non-legal tender paper money issue to help finance the War of
1812. His actions seem to have spoken louder than his words. Luther Martin, a delegate from
Maryland, explained his views to the Maryland legislature and stated:

Against this motion we urged that it would be improper to deprive the Congress of that power;
that it would be a novelty unprecedented to establish a government which should not have such
authority; that it would be impossible to look forward into futurity so far as to decide that events
might not happen that should render the exercise of such a power absolutely necessary; and that
we doubted whether if a war should take place it would be possible for this country to defend
itself without resort to paper credit, in which case there would be a necessity of becoming a prey
to our enemies or violating the constitution of our government; and that, considering that our
government would be principally in the hands of the wealthy, there could be little reason to fear an
abuse of the power by an unnecessary or injurous exercise of it.
It is clear the intent of the Founders was to prohibit the States from issuing paper money. It is not
clear whether the same intent applied to the Congress. Wrote Breckenridge, the clause granting
to Congress the power to emit bills was stricken out, and no prohibition was laid. Silence as to that
was maintained; and all that can be said as to the interpretation of that silence is that, although
there was a strong and well-nigh universal dread of paper issues, there was a stronger dread of too
narrowly limiting the powers of the new legislature; and that there was neither a very definite nor
a unanimous opinion as to the effect of striking out the clause, or as to the extent of the power
granted (p.84). It appears the Founders, whether intentionally or not, left the paper money issue
to be settled by future generations.

Federal Court Rulings on the Federal Reserve and Paper Money

Below are some recent court rulings on the issues of the Federal Reserve and paper money.
U.S. v. Rickman, 638 F.2d 182, C.A.Kan. 1980:
Federal Reserve Notes in which the defendant, charged with failure to file federal income tax
returns, was paid were lawful money within the meaning of the United States Constitution. 26
USCA 7203; USCA Const. Art. 1, 8, cl. 5.
U.S. v. Wangrund, 533 F.2d 495; C.A.Cal. 1976
The statute establishing Federal Reserve Notes as legal tender for all debts, public and private,
including taxes, is within the constitutional authority of Congress; thus the defendant could not
overturn his conviction on two counts of wilful failure to make an income tax return on the theory
that he did not receive money since checks he received as compensation for his services could be
cashed only for Federal Reserve Notes which were not redeemable in specie. 26 USCA 61,
7203; USCA Const. art. 1, 8; Coinage Act of 1965, 102; 31 USCA 392.
Nixon v. Individual Head of St. Joseph Mortgage Company, 615 F.Supp. 890, affirmed 787 F.2d
596. D.C.Ind. 1985.
Federal Reserve notes are legal tender.
Ginter v. Southern, 611 F.2d 1226, certiorari denied 100 S.Ct 2946, 446 US 967, 64 L.E.d.2d 827.
C.A.Ark. 1979.

Tax protestor's claims concerning the constitutionality of the Federal Reserve System, Internal
Revenue Code and establishment of tax court were so frivolous as not to require discussion and
detail. USCA Const. Amends. 5, 13; 28 USCA 1346; 26 USCA 6532, 26 USCA 7422.
U.S. v. Schmitz, 542 F.2d 782 certiorari denied 97 S.Ct. 1134, 429 US 1105, 51 L.Ed.2d 556.
C.A.Cal. 1976.
Federal Reserve Notes constitute legal tender and are taxable dollars. USCA Const. Art. 1, 10.
Milam v. U.S., 524 F.2d 629. C.A.Cal. 1974.
The statute which delegates to the Federal Reserve System the power to issue circulating notes
for money borrowed and the power to define the quality and force of those notes as currency is
valid ... Although golden eagles, double eagles, and silver dollars were lovely to look at and
delightful to hold, the holder of a $50 Federal Reserve Bank Note, although entitled to redeem his
note, was not entitled to do so in precious metal. Federal Reserve Act, 16, 12 USCA 411;
Coinage Act of 1965, 102, 31 USCA 392.
Moreover, the paper money issue is an irrelevant one. If we replace each all paper that has "one
dollar" printed on it with a coin that has "one dollar" stamped on it, what will we gain? We willl
have achieved compliance with the literal words of the constitution at the expense of a convenient
and popular form of money.

Gold and Silver Coin

It is also sometimes argued that the constitution permits the minting only of gold or silver
coins. This is a misinterpretation, as a federal court makes clear in U.S. v. Rifen, 577 F.2d 1111.
C.A.Mo. 1978:
The United States Constitution prohibits states from declaring legal tender anything other than
gold or silver but does not limit Congress' power to declare what shall be legal tender for all debts
... Federal Reserve Notes are taxable dollars. Coinage Act of 1965, 102, 31 USCA 392; USCA
Const. Art. 1, 10.
This point is made further in Nixon v. Phillipoff, 615 F.Supp. 890, affirmed 787 F.2d 596. D.C.Ind.
1985:
The provision of the Constitution [USCA Const Art. 1, 8, cl. 5] which gives Congress the right to coin
money, and regulate the value thereof, gives Congress exclusive ability to determine what will be legal
tender throughout the country ... The provision of the Constitution [USCA Const. Art. 1, 10, cl. 1] which
mandates that no state shall make anything but gold or silver coin tender in payment of debts acts only to
remove from states inherent soverign power to declare currency, thus leaving Congress as the
sole declarant of what constitutes legal tender; the provision does not require states to accept only gold
and silver as tender ... Federal Reserve Notes are legal tender for any debt or public charge ... Using or
accepting Federal Reserve Notes as payment for state court filing fees was completely proper under the
Constitution. USCA Const. Art. 1, 8, cl. 5; 31 USCA 5103.

The court made the point again somewhat humourously in Foret v. Wilson, 725 F.2d 400. C.A.La.
1984:
Gold and silver coin do not constitute the only legal tender by the United States; thus, the appellant, who
bid $2.80 in silver dimes on a foreclosed property requiring a minimum bid of $80,000 under Louisiana
law, was not entitled to the deed to the property.

Are Gold and Silver Practical Metals for Coins?

We could replace all our paper money with coins containing the appropriate amount of a precious
metal. Gone would be the $1 Federal Reserve Note, and in its place a coin with $1 stamped on
it. Apparently, this would make the paper money opponents happy. Or would it? As it turns out,
the amount of gold that would need to be in a $1 coin would be so tiny it would barely be there at
all.
In the summer of 1999, the price of gold is about $250/oz. Therefore, a $1 coin would need
1/250ths ounce of gold in it; that is to say, it would contain 0.4% gold and 99.6% base metals. A
quarter-dollar would have 0.1% gold and 99.9% base metals. A $20 coin would have 8.0% gold and
92% base metals. If any more gold than that were included, then it would pay to melt the coins and
sell the gold, and then we'd be without a physical medium of exchange.
Silver has the same problem. The price of silver is about $5/oz., so we could mint a $5 coin
containing 100% silver. A $1 coin would have 20% silver. A quarter would have about 5% silver
and 95% base metals. Could anyone honestly tell the difference between the quarter we have
now and one with 5% silver?

The Federal Reserve Act and paper money are unconstitutional. Gold and silver
coins are the only constitutional forms of money.

The Federal Reserve is a privately owned bank out to make a profit at the
taxpayers' expense.
This myth claims that the 12 Federal Reserve banks are privately owned and therefore want to
earn a profit just like any other company. Of course, the Fed holds the reigns of monetary policy,
so naturally they will use it for the benefit of their owners and not the economy at large. And
finally, since the Fed owns lots of government bonds, much of the Fed's profits come at the
taxpayers' expense through the interest paid to the Fed on those bonds. Like many of the other
Federal Reserve myths, this one has a small degree of truth to it, but also has a fair amount of
misinterpretation and it leaves out a number of crucial details.

Organization of the Federal Reserve System

The Federal Reserve System is sometimes described as a quasi-government agency because it
contains elements of both the private sector and of government control. The System has three
organization levels: member banks, Federal Reserve Banks, and the Board of Governors. Let's
examine each briefly.
Member banks are at the bottom of the organization chart. These are commercial banks and S&Ls
who have joined the Federal Reserve System (FRS). By law, all nationally chartered banks must
join, and any state chartered bank has the option to join (12 USCA 282). By joining the FRS a
member bank is becoming a shareholder -- an owner -- in its regional Federal Reserve Bank. For
example, suppose you and I open a new nationally chartered bank in Charlotte, North
Carolina. According to the district map, we see that Charlotte is in the Richmond Federal Reserve
district, so our new bank will have to become a member of the Richmond Federal Reserve
Bank. So, the claim that the "Fed is privately owned" is correct -- each Federal Reserve Bank is
owned by private for-profit commercial banks and S&Ls.
Why are member banks -- the owners -- at the bottom of the organization chart? They are at the
bottom because unlike the shareholders of a typical corporation such as IBM, member banks have
very little power over how their regional Federal Reserve Bank is run. And they have no control at
all over monetary policy. Shareholders of IBM elect the company's board of directors who in turn
choose the firm's CEO, so they have a collective say on the company's operations. Member banks
also get to select 6 of the 9 directors of their regional Federal Reserve Bank, but these directors
control only the Bank's daily operations, not monetary policy which is the most important function
of the Federal Reserve System (12 USCA 301 and 12 USCA 302).
At the middle level in the organization chart are the 12 regional Federal Reserve Banks. They
have a variety of powers and duties, some of which are:

Buy and sell government bonds in the secondary markets (open market operations)
Lend reserves to member banks
Offer check-clearing services to member and non-member banks
Issue Federal Reserve Notes and collect worn-out ones for destruction
Enforce reserve requirements and other regulations of the member banks
Monitor banking and economic activity within their respective district

In terms of monetary policy, the most important power is the first one -- open market
operations. Buying government bonds in the secondary markets increases the amount of reserves
in the banking system, puts downward pressure on interest rates, and tends to expand the money
supply. Selling government bonds does the opposite. This is the monetary policy function that is
most often associated with the Fed (What is monetary policy?). However, a Federal Reserve Bank
can only employ open market operations with the explicit approval of the Board of Governors (12
USCA 355).
Finally, at the top of the structure chart is the Board of Governors. The Board is a 7-member panel
who is appointed by the President of the United States and confirmed by the Senate (12 USCA
241). The Board's current Chair is Alan Greenspan. Among its responsibilities:

Determine open market policies

Set the required reserve ratio for member banks
Set the Discount Rate
Deciding how much new currency to print
Monitor the health of the U.S. economy
Report to Congress periodically on the state of the U.S. economy

It's single most important duty is deciding its open market policy, that is, whether it should order
the Federal Reserve Banks to buy or sell government bonds, and if so, how much. This decision is
made in conjunction with the Federal Open Market Committee. The FOMC is a 12-member panel
can consists of all the Board members, the president of the New York Federal Reserve Bank, and 4
presidents from the other Federal Reserve Banks on a rotating basis. The presidents are
appointed by each Bank's board of directors, pending approval from the Board of Governors (12
USCA 341).
Thus, all the key monetary policy decisions -- the ones that affect interest rates -- are made by a
government agency whose members are selected by the President of the United States. The Fed
may be privately owned, but it is controlled by the government.

The Fed and Taxpayers

The second part of this myth is that the Fed is a drain on the Treasury, and therefore a drain on
taxpayers. This is untrue. The Federal Reserve Banks are entirely self-financing institutions; they
do not receive any tax dollars allocated to them from the federal budget. Let's take a look at the
table below to see exactly where they get their money and how they spend it:

1999 Combined Statements of Income of the Federal Reserve Banks (in millions)
Interest income
Interest on U.S. government securities
$28,216
Interest on foreign securities
225
Interest on loans to depository institutions
11
Other income
688
Total operating income
$29,140
Operating expenses
Salaries and benefits
1,446
Occupancy expense
189
Assessments by Board of Governors
699
Equipment expense
242
Other
302
Total operating expenses
$2,878
Net Income Prior to Distribution
Distribution of Net Income Dividends paid to member banks
Transferred to surplus
Payments to U.S. Treasury
Total distribution

$26,262
374
479
25,409
$26,262

We can see from the top of the table that the Fed's primary source of income is interest from
government bonds. This money is paid to the Fed by the U.S. Treasury. Is this not de facto
evidence the Fed is leaching off the taxpayers? No, it is not. The Treasury is obligated to pay
interest to whomever owns those bonds. If the Fed did not own them, then the interest would
have been paid to someone else. In fact, from the Treasury's perspective, it is a good thing the Fed
holds those bonds. At the bottom of the table, we see the Fed makes a substantial annual payment
to the Treasury. The higher the Fed's net income is, the larger the payment to the Treasury. In
other words, the Treasury gets back a significant amount of the interest paid to the Fed. Thus,
government bonds held by the Fed are essentially interest-free loans to the government.

Conclusion
The regional Federal Reserve Banks are private owned, but they are controlled by the Board of
Governors -- a federal agency whose members are appointed by the President and confirmed by
the Senate. The Board sets monetary policy and the Federal Reserve Banks execute it. In
addition, the Fed does not use any taxpayer money to fund its operations. While the Fed does
collect interest on government bonds, the Treasury would have had to make such payment even if
they Fed did not hold any bonds. Moreover, the Fed rebates a significant share of its net income to
the Treasury each year, revenues the government would not have at all if the Fed owned no
government bonds.

The Federal Reserve is a privately owned bank out to make a profit at the
taxpayers' expense.

The Federal Reserve is owned and controlled by foreigners.

The Federal Reserve System is the primary regulatory agency governing the U.S. banking
industry. It has singular importance in setting monetary policy and many economists believe it has
substantial influence on the course of the business cycle. Yet, could it be that the most important
economic institution in the United States is actually owned by foreigners? Gary Kah (1991) and
Eustace Mullins (1983) authored separate books alleging that a secretive international banking
elite owns and controls the Fed. Furthermore, his shadowy group uses its power to manipulate
financial markets and to control the U.S. economy.
The focus of both books is the Federal Reserve Bank of New York. What we typically call the Fed
is actually a two level system: 12 regional Federal Reserve Banks (the New York Fed is one of
them) and the Board of Governors that runs them (Alan Greenspan is the Boards chair). Gary Kah
claimed foreigners directly own the New York Fed, the largest and most important of the dozen
regional institutions. Through it the international collaborators control the entire Federal
Reserve System and reap its gigantic profits. Eustace Mullins agreed on the importance of the
New York Fed, but instead claimed it is owned indirectly by foreigners through a European
banking club he termed the London Connection which controls the Feds policies from abroad.
Are any of allegations true? In this article I focus on whether foreigners own the Federal Reserve
Bank of New York either directly or indirectly, whether it controls the entire of the Federal
Reserve System, and whether foreigners receive the Feds large annual profits.

Who Owns the New York Federal Reserve?

Each of the twelve Federal Reserve Banks is organized as a corporation in much the same way as
many other firms. According to Kah, foreigners own a controlling interest in the shares of the New
York Fed. He claimed that Swiss and Saudi Arabian contacts identified the top eight
shareholders as

Rothschild Banks of London and Berlin

Lazard Brothers Banks of Paris
Israel Moses Seif Banks of Italy
Warburg Bank of Hamburg and Amsterdam
Lehman Brothers of New York
Kuhn, Loeb Bank of New York
Chase Manhatten Bank, and
Goldman, Sachs of New York (Kah, p. 13).

He also described these groups as the banks Class A shareholders (p. 14). This is curious
because Federal Reserve stock is not classified in this manner. It can be either member stock or
public stock, but there are no such things as Class A shares. However, the directors of a Federal
Reserve Bank are separated into classes A, B, and C depending on how they are appointed (12
USCA 302). This may have been the source of Kahs confusion.
Eustace Mullins compiled a very different list. He reported that the top 8 stockholders of the New
York Fed were

Citibank
Chase Manhatten Bank
Morgan Guaranty Trust
Chemical Bank
Manufacturers Hanover Trust
Bankers Trust Company
National Bank of North America, and
Bank of New York.

According to Mullins these institutions in 1983 owned a combined 63% of the New York Feds
stock. These American banks, in turn, were owned by European financial institutions. Since the
commercial banks in the New York Fed's district elect its board of directors, the London
Connection is able to use their American agents to pick the Bank's directors and ultimately control
the whole Federal Reserve System. He explained,
The most powerful men in the United States were themselves answerable to another power, a
foreign power, and a power which had been steadfastly seeking to extend its control over the
young republic since its very inception. The power was the financial power of England,
centered in the London Branch of the House of Rothschild. The fact was that in 1910, the
United States was for all practical purposes being ruled from England, and so it is today
(Mullins, p. 47-48).
He remarked further that the day the Federal Reserve Act was passed in 1913, the Constitution
ceased to be the governing covenant of the American people, and our liberties were handed over
to a small group of international bankers (p. 29).
Clearly, there is a discrepancy between the two lists. According to Kah, foreigners own shares of
the New York Fed directly, but Mullins stated they owned and controlled the Fed indirectly
through ownership of American banks. So who is right? Mullins cited the Federal Reserve Bulletin
for his information on share ownership, but that publication has never reported the shareholder
list of any Federal Reserve Bank. Kahs source is equally elusive unnamed Swiss and Saudi
Arabian contacts. Despite the difficulty in verifying their sources, it may be possible that both men
are correct. The two authors published their lists eight years apart. Since Mullins was the earlier
of the two, it may be possible that sometime between 1983 and 1991 foreigners acquired a
substantial amount of stock in the New York Fed. Of course, it is also possible that they're both
wrong.

To clarify this mystery, lets first look at the Federal Reserve Act of 1913. The law requires that all
nationally chartered commercial banks and S&Ls buy stock in their regional Federal Reserve Bank,
thereby becoming member banks (12 USCA 282). State chartered banks may also join
voluntarily. The amount of stock a given bank must purchase is proportional to the banks size, so
we would expect that the largest shareholders to be the biggest commercial banks operating in
the district. This agrees with Mullins since all of the banks on his list were the largest banks in the
New York region in 1983.
Gary Kahs list of alleged shareholders is more suspect. The law does not permit the stock of a
Federal Reserve Bank to be traded publicly like the stock of a typical corporation (12 USCA
286). The original Federal Reserve Act called for each regional Bank to sell stock to raise at least
$4 million to begin operations (12 USCA 281). The stock was to be sold only to banks, not to the
public. Only in the event that sales to member banks did not raise the necessary $4 million would
the regional Fed Banks be permitted to sell shares to the public. However, all Banks raised the
requisite amount of capital. No stock in any Federal Reserve Bank has ever been sold to the
public, to foreigners, or to any non-bank U.S. firm (Woodward, 1996). Foreign interests comprise
half of the alleged owners on Kahs list. Moreover, three of the hypothesized American owners
are not even banks: Goldman-Sachs, Lehman Brothers, and Kuhn-Loeb are all investment banks,
not commercial banks, and so are ineligible to own any shares of a Federal Reserve Bank. The law
prohibits the general public, non-bank firms, and foreigners from owning anything more than a
trivial amount of stock in any Federal Reserve Bank (12 USCA 283). The only institution on Kah's
list that could possibly own shares of the New York Fed is Chase Manhatten. All the others named
on the list are incorrect. Kah's list is mostly bunk.
Fortunately, we can take a more direct approach to the question of ownership of the New York
Fed and the other Federal Reserve Banks. The New York Fed reports that its eight largest
member banks on June 30, 1997 were:

Chase Manhatten Bank

Citibank
Morgan Guaranty Trust Company
Fleet Bank
Bankers Trust
Bank of New York
Marine Midland Bank, and
Summit Bank.3

All of the major shareholders seen here and all of the banks on the complete list are either
nationally- or state-charted banks. All of them are American-owned. Kahs claim that foreigners
directly own the N.Y. Fed is completely wrong. This list is consistent, however, with Mullins in that
all the owners are domestic banks functioning within the N.Y. Federal Reserve district. The
discrepancies are likely due to mergers or other significant changes in the size of district banks

since the publication of Mullins list. To obtain a list of member banks of other Federal Reserve
banks, click here.

Global Domination Through the Back Door?

Although foreigners do not own the New York Federal Reserve Bank directly, perhaps, Mullins
argued, they own and control it indirectly via ownership of domestic banks. Since the moneycenter banks of New York own the largest portion of stock in the New York Fed, they hand-pick its
board of directors and president. This would give them, and hence the London Connection,
control over Fed operations and U.S. monetary policy.
The Securities and Exchange Commission requires that firms whose stock is traded publicly report
their major stockholders each year. The reports identify all institutional shareholders (primarily,
firms owning stock in other companies), all company officials who own shares in their firm, and any
individual or institution owning more than 5% of the firms stock. These reports show that only
one of the N.Y. Feds current largest shareholders, Citicorp, has any major foreign
stockholders. As of January 1996, Price Alwaleed Bin Talad of Saudi Arabia owned 8.9% of
Citicorp stock.2 None of the member banks on the above list have any significant portion of
shares held by any foreign individual or institution. Mullins' claim that foreigners own the N.Y.
Federal Reserve indirectly is also wrong.
Moreover, the ownership rights of Federal Reserve Bank stock are different than the common
stock of typical corporations. Usually, the number of votes a shareholder has is proportional to
the number of shares he owns. However, ownership of Federal Reserve Bank stock entitles the
shareholder to one vote when voting for its regional Federal Reserve Bank officials regardless of
how many total shares the member bank may own. A group of international conspirators would
need to purchase a controlling interest in a majority of the banks operating in the N.Y. district to
guarantee the election of their desired minions to the N.Y. Feds board of directors. Buying that
much stock in so many U.S. banks would require an outlay of hundreds of billions of dollars. Surely
there must be a cheaper path to global domination.
Mullins premise here is that the member banks control the policies of the N.Y. Fed. In the next
section I detail why this is wrong, but an historical example also illustrates the fault of this
assumption. Galbraith (1990) recounts that in the spring of 1929 the New York Stock Exchange
was booming. Prices there had been rising considerably, extending the bull market that began in
1924. The Federal Reserve Board decided to take steps to arrest the speculative bubble that
appeared to be forming: It raised the cost banks had to pay to borrow from the Federal Reserve
and it increased speculators margin requirements. Charles Mitchell, then the head of National
City Bank (now Citicorp, one of the largest shareholders of the N.Y. Fed at the time), was so
irritated by this decision that in a bank statement he wrote, We feel that we have an obligation
which is paramount to any Federal Reserve warning, or anything else, to avert any dangerous
crisis in the money market (Galbraith, p. 57). National City Bank promised to increase lending to
offset any restrictive policies of the Federal Reserve. Wrote Galbraith, The effect was more than

satisfactory: the market took off again. In the three summer months, the increase in prices outran
all of the quite impressive increase that had occurred during the entire previous year (Ibid). If the
Fed and its policies were really under the control of its major stockholders, then why did the
Federal Reserve Board clearly defy the intent of its single largest shareholder?

Does the New York Fed Call the Shots?

Mullins and Kah both argue that by controlling the New York Federal Reserve Bank, the
international banking elite command the entire Federal Reserve System and thus direct U.S.
monetary policy for their own profit. For all practical purposes, Kah writes, the Federal Reserve
Bank of New York is the Federal Reserve (Kah, p.13; emphasis his). This is the linchpin of their
conspiracy theory because it provides the mechanism by which the international bankers can
execute their plans. A brief look at how the Feds powers are actually distributed shows that this
key assumption in the conspiracy theory is wrong.
The Federal Reserve System is controlled not by the New York Federal Reserve Bank, but by the
Board of Governors (the Board) and the Federal Open Market Committee (FOMC). The Board is a
seven-member panel appointed by the President and approved by the Senate. It determines the
interest rate for loans to commercial banks and thrifts, selects the required reserve ratio which
determines how much of customer deposits a bank must keep on hand (a factor that significantly
affects a banks ability create new credit), and also decides how much new currency Federal
Reserve Banks may issue each year (12 USCA 248). The FOMC consists of the members of the
Board, the president of the New York Fed, and four presidents from other regional Federal
Reserve Banks. It formulates open market policy which determines how much in government
bonds the Fed Banks may buy or sell the major tool of monetary policy (12 USCA 263).
The key point is that a Federal Reserve Bank cannot change its discount rate or required reserve
ratio, issue additional currency, or purchase government bonds without the explicit approval of
either the Board or the FOMC. The New York Federal Reserve Bank, through its direct and
permanent representation on the FOMC, has more say on monetary policy than any other Federal
Reserve Bank, but it still only has one vote of twelve on the FOMC and no say at all in setting the
discount rate or the required reserve ratio. If it wanted monetary policy to go in one direction,
while the Board and the rest of the FOMC wanted policy to go another, then the New York Fed
would be out-voted. The powers over U.S. monetary policy rest firmly with the publicly-appointed
Board of Governors and the Federal Open Market Committee, not with the New York Federal
Reserve Bank or a group of international conspirators.
Mullins also made a great to-do about the Federal Advisory Council. This is a panel of twelve
representatives appointed by the board of directors of each Fed Bank. The Council meets at least
four times each year with the members of the Board to give them their advice and to discuss
general economic conditions (12 USCA 261). Many of the members have been bankers, a point
not at all missed by Mullins.

A point Mullins neglects entirely is that the Council has no voting power in Board meetings, and
thus has no direct input into monetary policy. In support of his hypothesis Mullins offers no
evidence, not even an anecdote. Moreover, his Council theory is inconsistent with his general
thesis that the London Connection runs the Federal Reserve System via their imagined control of
the N.Y. Fed. If this were true, then why would they also need the Council?

Who Gets the Feds Profits?

Gary Kah and Thomas Schauf (1992) also maintain that the huge profits of the Federal Reserve
System are diverted to its foreign owners through the dividends paid to its stockholders. Kah
reports Each year billions of dollars are earned by Class A stockholders of the Federal Reserve
(Kah, p. 20). Schauf further laments by asking, When are the profits of the Fed going to start
flowing into the Treasury so that average Americans are no longer burdened with excessive,
unnecessary taxes?
The Federal Reserve System certainly makes large profits. According to the Boards 1999 Annual
Report, the System had net income totaling $26.2 billion, which would qualify it as one of the most
profitable companies in the world if the System were a typical corporation. How were these
profits distributed? $342 million, or 1.4% of the profits, were paid to member banks as
dividends. Another $479 million, or 1.8%, was retained by the 12 Reserve Banks. The balance of
$25.4 billion -- or 96.9% of the profits -- was paid to the Treasury. Obviously, Schauf's statement
that the member banks are getting "billions" in dividends every year is absurd. In addition, the Fed
has been rebating its profits to the Treasury since 1947.

Conclusion
The allegation that an international banking cartel controls the Federal Reserve is
wrong. Contrary to Kahs claim, foreigners do not own any stock in the New York Federal Reserve
Bank. Neither do they currently own any significant shares of the domestic banks that actually do
own shares in the N.Y. Fed. Moreover, the central assumption that control of the New York
Federal Reserve is the same as control of the whole System is badly mistaken. Also, the profits of
the Federal Reserve System, again contrary to the conspiracy theorists, are funneled almost
entirely back to the federal government, not to an international banking elite. If the U.S. central
bank is in the grip of an international conspiracy, then Mullins, Kah, et al have certainly not
uncovered it.

The Federal Reserve is owned and controlled by foreigners.

The Federal Reserve has never been audited.

An often repeated Federal Reserve conspiracy theory is that the Fed has never been
audited. "Every year Congress introduces legislation to audit the FED," wrote Thomas Schauf,
"and every year it is defeated."7 Why? Conspiracy theorists such as Schauf, Gary Kah (1991), and
Pat Robertson (1994) say the reason is that the Fed is involved in an international plot to subvert
U.S. sovereignty and create a one-world government. Naturally, the Fed will not permit Congress
to audit its activities, lest it discover this treasonous plan and shut it down.
How much truth is there to this claim? Has the Fed ever been audited by Congress or anyone
else? The Fed controls U.S. monetary policy and can act with a great deal of independence from
Congress and the executive branch. Clearly, such awesome power requires some sort of regular
public oversight at the very least to insure that the Fed is doing its job efficiently and effectively,
and to detect any abuses of power or fraud. This essay explores the claim that the Fed has never
been audited and finds that it is completely false.

A Brief History of Federal Reserve Audits

Since its inception in 1913 the Federal Reserve System has been subjected to a variety of financial
and performance audits by Congress, the executive branch, and private accounting firms, although
responsibility for this task has shifted from time to time. From 1913 to 1921 the Board of
Governors, then known as the Federal Reserve Board which sets monetary policy and regulates
the activities of the Federal Reserve Banks, was audited annually by the U.S. Treasury
Department. In 1921 Congress created the Government Accounting Office (GAO) and assigned it
to audit the Board until 1933. In the Banking Act of 1933, Congress voted specifically to remove
the Board from the GAO's jurisdiction. From 1933 to 1952 audit teams from the twelve Federal
Reserve Banks performed the annual examination of the BOG's books. From 1952 to 1978, the
Board, under authorization from Congress, decided to employ nationally recognize accounting
firms to conduct the audits of itself to insure independent oversight. This provided an external
evaluation of the adequacy and effectiveness of the examination procedures.
In 1978 Congress passed the Federal Banking Agency Audit Act (31 USCA 714). It placed the
Federal Reserve System back under the auditing authority of the GAO. The Act significantly
increased the access of the GAO to the Federal Reserve Banks, the Board, and the Federal Open
Market Committee (the FOMC). Since then, the GAO has conducted over 100 financial audits and
performance audits of the three Federal Reserve bodies.

Scope of GAO Audits

Some of the more important GAO performance audits of the Fed have been in the areas of bank
supervision, payment systems activities, and government securities activities. In the first area, the
GAO examined how well the Fed was enforcing its regulatory powers over its member banks. In
1992 it drew attention to the Fed's sluggish compliance with regulatory reforms mandated by the
Foreign Bank Supervision Act of 1991. In examining the Fed's payment system activities, the GAO
made the Fed aware of how its pricing policies for such services as check-clearing affected private
suppliers of check-clearing services, and also suggested ways to speed up the process of check
collections. Security markets for government debt is a crucial market, and GAO performance
audits of the Fed have lead to more openness in the primary dealer system, particularly
concerning the disclosure of price information. The GAO is also involved in several ongoing
performance audits of the Fed such as analysis of risks and benefits of interstate banking,
regulation of derivatives, and the budget of the Federal Reserve system.2

Audits By Private Accounting Firms

Financial audits of the Fed are also conducted regularly. Each Reserve Bank is audited every year
by independent General Auditors who report directly to the Board of Governors. These
examinations involve financial statement audits and reviews on the effectiveness of financial
controls. Each Reserve Bank also has its own internal audit mechanisms. The Board contracts
each year with an outside accounting firm to evaluate the audit program's effectiveness. Price
Waterhouse conducted an audit of the Board's 1994, 1995, 1996, 1997, and 1998 financial
statements and filed this report in the Board's 1996 Annual Report (nearly identical ones appear
in other Annual Reports):
We have audited the accompanying balance sheets of the Board of Governors of the Federal
Reserve System (the Board) as of December 31, 1995 and 1994, and the related statements of
revenues and expenses for the years then ended. These financial statements are the
responsibility of the Board's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted accounting standards and
Government Accounting Standards issued by the Comptroller General of the United
States. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all material respects,
the financial position of the Board as of December 31, 1995 and 1994, and the results of its

operations and its cash flows for the years then ended in conformity with generally accepted
accounting principles.
As discussed in Notes 1 and 3 to the financial statements, the Board implemented Statement of
Financial Accounting Standards No. 112, Employers Accounting for Postemployment Benefits,
effective January 1, 1994. In accordance with Government Accounting Standards, we have also
issued a report dated March 25, 1996 on our consideration of the Board's internal control
structure and a report dated March 25, 1996 on its compliance with laws and regulations.
The Board has also contracted with Coopers & Lybrand to conduct annual financial audits of the
Board and the individual Federal Reserve Banks.
Exemptions to the Scope of GAO Audits
The Government Accounting Office does not have complete access to all aspects of the Federal
Reserve System. The law excludes the following areas from GAO inspections (31 USCA 714):
1) transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization;
2) deliberations, decisions, or actions on monetary policy matters, including discount window
operations, reserves of member banks, securities credit, interest on deposits, open market
operations;
3) transactions made under the direction of the Federal Open Market Committee; or
4) a part of a discussion or communication among or between members of the Board of
Governors and officers and employees of the Federal Reserve System related to items.
In 1993 Wayne D. Angell, then a member of the Board of Governors, submitted testimony before
a House subcommittee on the reasons for the restrictions on GAO access. He commented,
By excluding these areas, the Act attempts to balance the need for public accountability of the
Federal Reserve through GAO audits against the need to insulate the central bank's monetary
policy functions from short-term political pressures and to ensure that foreign central banks and
governmental entities can transact business in the U.S. financial markets through the Federal
Reserve on a confidential basis.2
In reference to a bill that would lift the constraints placed on the GAO's audit authority over the
Federal Reserve, Angell stated,
The benefits, if any, of broadening the GAO's authority into the areas of monetary policy and
transactions with foreign official entities would be small. With regard to purely financial audits,
the Federal Reserve Act already requires that the Board conduct an annual financial examination
of each Reserve Bank...The process of conducting financial audits is reviewed by a public
accounting firm to confirm that the methods and techniques being employed are effective and
that the program follows generally accepted auditing standards...Further, a private accounting
firm audits the Board's balance sheet...Finally, and more broadly, the Congress has, in effect,
mandated its own review of monetary policy by requiring semiannual reports to Congress on

monetary policy under the Full Employment and Balanced Growth Act of 1978...In addition, there
is a vast and continuously updated body of literature and expert evaluation of U.S. monetary
policy. In this environment, the contribution that a GAO audit would make to the active public
discussion of the conduct of monetary policy is not likely to outweigh the disadvantages of
expanding GAO audit authority in this area.2
For more on GAO restrictions, you can search the Government Printing Office website for GAO
report T-GGD-94-44, entitled "Federal Reserve System Audits: Restrictions on GAO's Access."

The Budget of the Federal Reserve and Other Oversight

The budget of the Federal Reserve system is determined by each Bank and the Board of
Governors. Stephen L. Neal, the Chair of the House Subcommittee on Domestic Monetary Policy
in 1991, stated that "Congress plays no direct role in setting or authorizing the Fed's
budget. Control of its own budget is an essential component of the independence the Fed must
enjoy."1 Additional oversight of the Federal Reserve System derives from the ability of Congress
to expand or to contract the Fed's powers. On numerous occasions Congress has seen fit to
change the Fed's structure, alter its mission, and grant it new or different powers. In 1935
Congress changed the composition of the Board of Governors to give it more independence, and it
allowed the Board to determine the discount rate for all Federal Reserve Banks rather than allow
each Bank to set its own rate. In1978 Congress mandated the Fed's new goal to be full
employment and price stability. In 1980 Congress granted the Fed new regulatory powers over
non-member banks.
Many other government reports on the audits of the Federal Reserve system are available on-line
through the Government Printing Office website. Three interesting GAO reports on Federal
Reserve finances and performance are:

Federal Reserve Banks: Inaccurate Reporting of Currency at the Los Angeles Branch, (9/30/96,
GAO report AMID-96-146).
Federal Reserve Banks: Internal Control, Accounting, and Auditing Issues, (2/9/96, GAO report
AMID-96-5).
Federal Reserve System: Current and Future Challenges Require Systemwide Attention, (6/17/96,
GGD-96-128).

Conclusion
It is obvious that the Federal Reserve System is and has always been audited. It is difficult to
imagine how Kah, Schauf, and other conspiracy theorists could not have come across this evidence
in the course of their research. Perhaps they are merely poor researchers. Or maybe they are
reluctant to acknowledge facts which contradict their basic thesis. Either way, their credibility
among skeptical readers takes a sharp hit by making such obvious factual errors. For more on how
the Federal Reserve System is audited, see the New York Federal Reserve's FedPoints.

The Federal Reserve has never been audited.

The Federal Reserve charges interest on the currency we use.

In my experience this particular myth has alarmed more people than any other. The Federal
Reserve is a bank, no? Banks do not lend money for free, right? Our currency comes into
circulation only when the government borrows currency from the Fed -- at interest -- and then
spends it into the economy, right? This means we, as citizens, pay interest on the very currency
that we use. Conspiracy theorists believe this is part of the alleged "New World Order" plot to
bankrupt the United States.
What is the truth here? Does the government really pay interest on our paper money, Federal
Reserve Notes? Thomas Schauf of FED-UP, Inc. circulates an information letter in which he
writes:
Why pay interest on our currency? A typical incorrect answer is - the FED profits are returned to
the U.S. Treasury. The truth is, the FED is a private bank in business for profit. We pay roughly
$300 billion in interest on our artificial debt and by special agreement, the U.S. Treasury receives
$20 billion in return. Taxpayers lose $280 billion to the FED banking system per year ... Your local
library has these dollar figures. The numbers don't lie.
Schauf also argues that the Federal Reserve System is part of an international banking conspiracy,
and that President Kennedy might have been assassinated because he allegedly attempted to curb
the power of the Federal Reserve. This currency interest issue is also raised by other conspiracy
theorists. Television evangelist Pat Robertson in his book The New World Order and Jacques
Jaikaran in Debt Virus make identical claims.
How accurate are these claims? Some of Schauf's statement is correct. The Treasury Department
prints Federal Reserve Notes and then sells them to the Federal Reserve system for an average
cost of about 4 cents per bill However, the Fed must present as collateral for the currency an
amount of Treasury securities that is equivalent in value to the currency purchased. The Federal
Reserve collects interest on all the Treasury securities it owns, including the ones held as
collateral. This is as far into the realm of fact as Schauf's statement can take his reader.
What Schauf doesn't say is that nearly all the Federal Reserve's net earnings are repaid to the
Treasury. This is done per an agreement between the Board of Governors and the
Treasury. Schauf even says this "typical" answer is incorrect. The table below indicates
otherwise.

1999 Combined Statements of Income of the Federal Reserve Banks (in millions)
Interest income
Interest on U.S. government securities
$28,216
Interest on foreign securities
225
Interest on loans to depository institutions
11
Other income
688
Total operating income
$29,140
Operating expenses
Salaries and benefits
1,446
Occupancy expense
189
Assessments by Board of Governors
699
Equipment expense
242
Other
302
Total operating expenses
$2,878
Net Income Prior to Distribution
Distribution of Net Income Dividends paid to member banks
Transferred to surplus
Payments to U.S. Treasury
Total distribution

$26,262
374
479
25,409
$26,262

We can see from the table that the Fed's chief source of income is interest on government
bonds. However, we can also see that 97% of the Fed's net income goes back to the Treasury.
Shauf is barking up the wrong tree when he complains that the Fed's portfolio of government
bonds is costly to the Treasury. The Treasury would have to pay interest on those bonds
regardless of who owns them. At least when the Fed owns a bond, the Treasury is going to get
back a substantial portion of the interest. From the Treasury's point of view, the more bonds the
Fed owns, the better.
Moreover, it is unclear how Schauf believes the Fed drains $280 billion from taxpayers every
year. The Fed is entirely self-financed as the data above shows; it receives no outlay from
Congress. Perhaps he thinks the Fed receives all the interest payments on the national debt,
which in 1999 summed $353 billion.6 That's not true, either. The Fed owns only about 8.7% of the
total national debt, so the vast bulk of the interest payments are going elsewhere.
Schauf believes the Treasury ought to issue its own currency in the form of United States Notes, a
form of currency issued on a few occasions in the past (there are still some in circulation, although
the total amount is limited by law). A 1953 series A note is shown below.
Current paper money has the inscription "Federal Reserve Note" across the top, whereas the bill
above has "United States Note."
Schauf and the Coalition argue this would be an "interest-free" form of currency. However, there
is no functional difference between U.S. Notes and the Federal Reserve notes we now
use. Neither impose a net interest burden on the Treasury. The key difference between the two
currencies is who controls the issuance. The publicly-appointed Board of Governors now controls

the emissions of Federal Reserve Notes and can make monetary policy decisions largely
independent of political pressure. The issuance of U.S. Notes, on the other hand, would be
controlled by the Treasury Department, an arm of the executive branch and a purely political
entity. Monetary policy, in this economist's view, ought to be based on the needs of the economy,
not on the needs of current incumbent political party.
Like many others, this Federal Reserve myth is also incorrect. Schauf and the Coalition err in the
argument by ignoring entirely the funds rebated from the Fed to the Treasury each year. This key
detail essentially means that the bonds held by the Federal Reserve are interest-free loans to the
federal government -- the equivalent of printing money. Federal Reserve Notes do not cost the
Treasury any net interest. Indeed, Mr. Schauf, the numbers do not lie.

The Federal Reserve charges interest on the currency we use.

If it were not for the Federal Reserve charging the government interest, the
budget would be balanced and we would have no national debt.
A popular misconception about the Federal Reserve is that it has something to do with the
national debt. The argument is that because the government must pay interest on the money it
has borrowed over the years, today's budget deficit is higher than what it would otherwise be. If
only the Fed wouldn't charge interest on the debt, the government would not have a deficit.
Several things make this argument wrong. First, the Federal Reserve holds very little of the
national debt. Of the $5.7 trillion in government bonds currently outstanding, the Fed holds only
about 8.7%. 2 This means that the bulk of the interest payments go not to the Federal Reserve,
but to the other bondholders.
Second, nearly all the interest paid to the Federal Reserve is rebated to the Treasury. This means
that the bonds held by the Fed carry no net interest obligation for the Treasury. For example, in
1999 the Fed collected $28.2 billion in interest on its portfolio of government bonds, but it
rebated $25.4 billion to the Treasury.1
Third, to say that the budget deficit would be smaller but for the interest payments is an exersize
in absurd logic. One could just as easily say that the deficit is caused by defense spending,
Medicare, or any other combination of programs with spending that sums to the amount of the
budget deficit. One could also blame Congress for not raising enough taxes to cover their
spending plans or for spending too much in the first place.

If it were not for the Federal Reserve charging the government interest, the
budget would be balanced and we would have no national debt.

Placing blame for the national debt at the door

of the Federal Reserve demonstrates an
ignorance of how our government works.
The national debt has but one cause:
Congress.
The debt is the sum of all the budget deficits
and budget surpluses the federal government
has ever had.
It is Congress, not the Federal Reserve, that
determines federal spending and tax rates.
Therefore, it is Congress, not the Federal
Reserve, who is responsible for it. `

Federal Resrve Myth References

Davidson, James West, Mark A. Lytle, et al, (1998), Nation of Nations, New York: McGraw-Hill.
Galbraith, John K. (1995), Money: Whence it Came, Where it Went, Boston: Houghton Mifflin.
Greider, William (1987), Secrets of the Temple, New York: Simon & Schuster.
Griffin, G. Edward (1995), The Creature from Jekyll Island, Appleton: American Opinion Publishing, Inc.
Kidwell, David S. and Richard Peterson (1997), Financial Institutions, Markets, and Money, 6th edition, Fort
Worth: Dryden Press.
Congressional Record, 63rd Congress, 2nd Session, Dec. 23, 1913, pp. 1487-1488.
Kah, Gary (1991), En Route to Global Occupation, Layfayette, La.: Huntington Press.
"Money bill goes to Wilson today," New York Times, pp. 1-3, Dec. 23, 1913.
"Wilson signs currency bill," New York Times, pp. 1-2, Dec. 24, 1913.
Breckenridge, S.P., Legal Tender, N.Y.: Greenwood Press, 1903, 1969.
Dunne, Gerald T., Monetary Decisions of the Supreme Court, Rutgers Univ. Press, 1960.
Hixson, William F., Triumph of the Bankers: Money and Banking in the Eighteenth and Nineteenth
Centuries, Praeger, 1993.
"The Budget of the Federal Reserve System," Hearing before the Subcommittee on Domestic Monetary
Policy... [House], July 18, 1991, U.S. Government Printing Office, Serial no. 102-59.
H.R. 28: "Federal Reserve Accountability Act of 1993," Hearing before the Subcommittee on Domestic
Monetary Policy... [House], October 27, 1993, U.S. Government Printing Office, Serial no. 103-86.
Public Law 95-320, "Federal Banking Agency Audit Act," July 21, 1978.
Annual Report, 1996, Board of Governors of the Federal Reserve System.
Kah, Gary (1991), En Route to Global Occupation. Layfayette, La.: Huntington House.
Robertson, Pat (1994). The Turning Tide. Dallas: Word Publishing.
Schauf, Thomas (1992). The Federal Reserve. Streamwood, IL: FED-UP, Inc.
United States Code Annotated, U.S. Government Printing Office.
Board of Governors of the Federal Reserve System, Annual Report, 1999.
Jaikaran, Jacques (1995), Debt Virus: A Compelling Solution to the World's Debt Problems, Lakewood, Co.:
Glenbridge Publishing.
Robertson, Pat (1994), the New World Order, Dallas: Word Publishing.
Schauf, Thomas (1992), the Federal Reserve. Streamwood, IL: FED-UP, Inc.
Office of the Public Debt, U.S. Treasury.
Ownership of Federal Securities, Treasury Bulletin, June 2000.
82nd Annual Report, 1995, Board of Governors of the Federal Reserve System, U.S. Government Printing
Office.
Galbraith, John K. (1990), a Short History of Financial Euphoria. New York: Whittle Direct Books.
Kah, Gary (1991), En Route to Global Occupation. Lafayette, La.: Huntington House.
Mullins, Eustace (1983), Secrets of the Federal Reserve. Staunton, Va.: Bankers Research Institute.
Schauf, Thomas (1992), the Federal Reserve, Streamwood, IL: FED-UP, Inc.
Woodward, G. Thomas (1996), Money and the Federal Reserve System: Myth and Reality. Congressional
Research Service.
86th Annual Report of the Board of Governors
Treasury Bulletin, June 2000, p.49.

Baltic Dry Goods Index

It was stunning to learn that the Baltic Dry Shipping Index had plummeted to a new all-time record
low of 504 at one point in November. I have written a number of articles lately about the dramatic
slowdown in global trade, but I didnt realize that things had gotten quite this bad already. Not
even during the darkest moments of the last financial crisis did the Baltic Dry Shipping Index drop
this low. Something doesnt seem to be adding up, because the mainstream media keeps telling us
that the global economy is doing just fine. In fact, the Federal Reserve is so confident in our
economic recovery that they are getting ready to raise interest rates. Of course the truth is that
there is no economic recovery on the horizon. In fact, there are signs all around us that are
indicating that we are heading directly into another major economic crisis.
This staggering decline of the Baltic Dry Shipping Index is just another confirmation of what is
directly ahead of us.
Overall, the Baltic Dry Index is down more than 60 percent over the past 12 months. Global
demand for shipping is absolutely collapsing, and yet very few experts seem alarmed by this. If
you are not familiar with the Baltic Dry Shipping Index, the following is a pretty good definition
from Investopedia
A shipping and trade index created by the London-based Baltic Exchange that measures
changes in the cost to transport raw materials such as metals, grains and fossil fuels by sea.
The Baltic Exchange directly contacts shipping brokers to assessprice levels for a given route,
product to transport and time to delivery (speed).
The Baltic Dry Index is a composite of three sub-indexes that measure different sizes of dry
bulk carriers (merchant ships) Capesize, Supramax and Panamax. Multiple geographic
routes are evaluated for each index to give depth to the indexscomposite measurement.
It is also known as the Dry Bulk Index.
Much of the decline of the Baltic Dry Shipping Index is being blamed on China. The following
comes from a Bloomberg report that was posted on Thursday
The cost of shipping commodities fell to a record, amid signs that Chinese demand growth for
iron ore and coal is slowing, hurting the industrys biggest source of cargoes.
The Baltic Dry Index, a measure of shipping rates for everything from coal to ore to grains, fell
to 504 points on Thursday, the lowest data from the London-based Baltic Exchange going back
to 1985. Among the causes of shipowners pain is slowing economic growth in China, which is
translating into weakening demand for imported iron ore thats used to make the steel.

So many of the exact same patterns that we witnessed back in 2008 are playing out once again in
front of our very eyes. Below, I have shared a chart that was posted by Zero Hedge, and it shows
how the Baltic Dry Shipping Index absolutely collapsed in 2008 as we headed into a major financial
crisis. Well, now the Index is collapsing again, and it is already lower than it was at any point back
in 2008

The evidence continues to mount that we are steamrolling toward a deflationary economic
slowdown that is worldwide in scope.
Just look at the price of U.S. oil. It just keeps on falling, and as I write this article it is sitting at
$40.40.
The price of oil collapsed just before the financial crisis of 2008, and the same pattern is happening
again.
And look at what is happening to commodities. The Thomson Reuters/CoreCommodity CRB
Commodity Index has plummeted to the lowest level that we have seen since the last recession. It
is now down more than 30 percent over the past 12 months, and it continues to fall.
So dont be fooled by the temporary stock market recovery that we have witnessed. The
underlying economic fundamentals continue to decline. We are entering a global deflationary
recession, and the stock market will get the memo at some point just like we saw in 2008.
At this moment, global financial markets are teetering on the brink, and all it is going to take is
some kind of major trigger event to send them tumbling over the edge.
And such an event may be coming sooner than you may think. We live at a time when global
terrorism is surging, relationships between nations are deteriorating and our planet is shaking in
wild and unpredictable ways.
It wouldnt take much to push the financial world into full-blown panic mode. A major regional war
in the Middle East, a terror attack that kills thousands, or an earthquake or volcanic eruption that
affects a large U.S. city are all potential examples of black swan events which could fit the bill.

Technically, the third quarter earnings season is not exactly over: 2% of companies are still left to
report. Untechnically, it is, and with 98% of S&P500 companies now in the history books, 74% of
the companies in the index have reported earnings above the mean estimate but 45%
of the companies have reported sales above the mean estimate.
But while gaming analyst estimates is the oldest trick in the book (and even so more than half of
companies are failing to beat on sales), a truly dire picture is revealed when one steps back and
looks at the data in historical basis.
That is precisely what Ellington Management did recently in their note looking at the last stretch
of the junk bubble. This is what they said.
Corporations are now running out of steam in terms of their ability to generate earnings. As of Q2
2015, the year-over-year change in annual corporate earnings dropped to -$8.21 per share for the
S&P 500 and to -$4.79 per share for the Russell 2000. The previous three times this metric fell
that far into negative territory on the S&P 500 were Q1 1990, Q1 2001, and Q4 2007, coinciding
with the start of each of the last three high yield default cycles. According to a recent article in
The Economist, in the most recent quarter less than half of S&P 500 companies recorded
increasing profit year-over-year.
And here is Ellington's chart showing where "You" are right now.

And since it is not where you "are" that matters but where you "are headed", the place is very
scary indeed.
So keep your eyes open within weeks our world could be completely and totally different.
The global financial system has never been more primed for another 2008-style crisis. Thanks to
the fragility of the system, it could literally happen any time now so stay in preservation mode.

In 1986, Livio S. Nespoli wrote is first Investment Book called Invest

with History. In it, he revealed how an investor could use historical
precedent along with social mood and demographic trends to
accurately predict the direction of the markets, sometimes decades in
advance.
Since then, Livio had delivered countless seminars to thousands of
professional and amateur investors teaching them how to accurately
identify booms and busts well ahead of the mainstream. He gained
international national attention for his warning investors of the 2000 peak and 2008 stock market
collapse months before they happened. But this was not the first time he was on the money with his
big picture forecast.
For example, in February of 2000 Livio accurately forecast the stock market collapse and the multidecade economic collapse that would begin. In other words, his proprietary indicators, which are now
available to all investors, accurately predicted the major economic and stock market events that could
have made you substantially richer over the past 18 years.
How does he do it? Well, while most economists focus on short-term trends, policy changes, elections,
things that are volatile, unstable and can change from day-to-day. Livio has always focused on longterm trends and cycles, not the day trader mentality. Demographics. Business cycles. Socionomic
patterns. Things that have demonstrated themselves over hundreds and even thousands of years to be
consistent, predictable and measurable.
In addition, through over 80 years of research he has found that most of the largest financiers have
known of these proven and predictable Socionomic patterns. He has provided devastatingly accurate
market entry and exit points by helping you follow those historically proven cycles.
He studies the past to forecast the future, an approach that enables subscribers to position themselves
with an incredible degree of accuracy. Then he makes minor tweaks and adjustments in response to
intermediate term events that occur along the way.
And thats what he brings to you on his InterAnalyst subscriptions so youll know whats coming next,
where the immediate opportunities are, and where to park your money for the longer term.
As an InterAnalyst subscriber, you will know, for example, when its time to start profiting from the rise
of specific economies and exactly what investments will hand you the fastest profits.
Youll learn when commodities will likely reach their peak in their cycle and how to ride the gains. Youll
also learn when theyll turn down and what investments to make to profit from any moves down.

And youll learn when the property market will turn up again. Youll learn when, money markets and
bonds would be a better investment than equity allocations and when not. Youll be ahead of the
markets on every boom and bust and access the tools you can use to prepare yourself to profusion.

Our Point Of View

A body of research in positive psychology suggests that optimism has a number of benefits: social,
psychological and physical (Schneider, Gruman, & Coutts, 2011). Optimism has been correlated
with improved mental and physical health, better work and educational outcomes, and richer
social relationships.
While optimism appears to be a healthy orientation, things are not quite so simple. Some
researchers identify two classes of optimism: realistic and unrealistic (Weinstein, 1980).
Unrealistic optimists are at risk for self-deception, especially in domains such as risk assessment
(Collingwood, n.d.). Realistic optimists, on the other hand, more successfully incorporate data
about situations and events, balancing the best of optimistic and pessimistic perspectives. The
realistic optimist point of view could be summed up by the adage: "hope for the best, prepare for
the worst".

To make matters more complex, the idea of optimism and pessimism as dispositional attributes is
giving way to a more nuanced view of these constructs (Paul, 2011). Neither perspective is

inherently good nor "bad", both can be adopted as needed, both may be considered highly
functional depending on the situational context.
In some situations, "defensive pessimism" can be a powerful motivator to make better choices. For
example, being pessimistic about the economy may be a motivator to avoid debt and manage your
money more effectively.
Personally, I've always considered myself something of a realist.
On a scale of half-empty to half-full, most of the time I think "oh, there's a glass with some water in
it, let's measure it".
In some contexts, I'm more optimistic (e.g., if I'm working on this newsletter and I have a sufficient
degree of control over it, I'm usually reasonably optimistic that it will succeed), in other contexts,
I'm less optimistic (e.g., if I'm out fishing on a Sunday morning, and the tides are all wrong and I'm
out of bait, I'm reasonably pessimistic about bringing home dinner).

InsidersPower
I believe socionomics, social mood, and capital flows drive economies in cycles globally. Because of
the World Wide Web there is no time in history that allows for easier data gathering and tracking
because all countries are now highly correlated.
This InsidersPower Newsletter is a compilation of current economic articles written, not by us, but
by global authors within the last 90 days. They represent the current global social mood and
creates a global Point of View that has, by the way, been extremely accurate from ancient
Greece and Rome to our own current society.
It represents current economic reality on a global scale whether its positive or negative.
Ultimately, through the Current Investment Guideline found at the bottom of the Wealth
Preserver InsidersPower page. It delivers the opportunity of an optimistic, positive and profitable
outcome for you.
Based on the criteria already outlined, I believe InsidersPower to be an extremely REALISTIC
newsletter that carries both OPTIMISTIC and PESSIMISTIC content that delivers an
OPPORTUNISTIC outcome.
Ultimately, I just hope you enjoy its content and profit handsomely.
InsidersPower has received both positive and negative comments by readers and we appreciate
both so please opine anytime to [email protected].
By the way . . . which point of view dominates your personality? Now ask your friend or spouse to
see if they agree!

DISCLOSURE
This publication represents the opinion of the author regarding the subject matter covered. It is for educational
purposes only. The publisher and author neither imply nor intend any guarantee of accuracy. While every effort has
been made to make this document as complete and accurate as possible, there may be mistakes, both typographical and
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This document may contain information that includes or is based upon forward- looking statements within the meaning
of the securities litigation reform act of 1995. Forward looking statements give expectations of future events. You can
identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such
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Any and all forward looking statements contained herein, on our website, or on any sales material are intended to
express an opinion of potential financial performance. Many factors will influence your actual results and no guarantees
are made that you will achieve results similar to ours or anybody elses. In fact, no guarantees are made that you will
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The information in this document is, to the best of my ability to determine, all true and accurate. They were provided
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as interpreted and implemented by everyone, is going to achieve for everyone the kinds of results it's helped the folks
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represent or guarantee that everyone will achieve the same results. Each individual's success will be determined by his
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The author and publisher particularly disclaim any liability, loss or risk taken by individuals who directly or indirectly act
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