CHAPTER TEN
The Money Creators
The editorial page of The New York Times, January 18, 1920, carried an
interesting comment on the Federal Reserve System. The unidentified writer,
perhaps Paul Warburg, stated, "The Federal Reserve is a fount of credit, not
of capital." This is one of the most revealing statements ever made about the
Federal Reserve System. It says that the Federal Reserve System will never
add anything to our capital structure, or to the formation of capital, because
it is organized to produce credit, to create money for credit money and
speculations, instead of providing capital funds for the improvement of
commerce and industry. Simply stated, capitalization would mean the
providing of notes backed by a precious metal or other commodity. Reserve
notes are unbacked paper loaned at interest.
On July 25, 1921, Senator Owen stated on the editorial page of The New
York Times, The Federal Reserve Board is the most gigantic financial power
in all the world. Instead of using this great power as the Federal Reserve Act
intended that it should, the board....delegated this power to the banks, threw
the weight of its influence toward the support of the policy of German
inflation." The senator whose name was on the Act saw that it was not
performing as promised.
After the Agricultural Depression of 1920-21, the Federal Reserve Board of
Governors settled down to eight years of providing rapid credit expansion of
the New York bankers, a policy which culminated in the Great Depression of
1929-31 and helped paralyze the economic structure of the world. Paul
Warburg had resigned in May, 1918, after the monetary system of the United
States had been changed from a bond-secured currency to a currency based
upon commercial paper and the shares of the Federal Reserve Banks.
Warburg returned to his five hundred thousand dollar a year job with Kuhn,
Loeb Company, but he continued to determine the policy of the Federal
Reserve System, as President of the Federal Advisory Council and as
Chairman of the Executive Committee of the American Acceptance Council.
From 1921 to 1929, Paul Warburg organized three of the greatest trusts in
the United States, the International Acceptance Bank, largest acceptance
bank in the world, Agfa Ansco Film Corporation, with headquarters in
Belgium, and I.G. Farben Corporation whose American
branch Warburg set up as I.G. Chemical Corporation. The Westinghouse
Corporation is also one of his creations.
In the early 1920s, the Federal Reserve System played the decisive role in the
re-entry of Russia into the international finance structure. Winthrop and
Stimson continued to be the correspondents between Russian and American
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bankers, and Henry L. Stimson handled the negotiations concluding in our
recognition of the Soviet after Roosevelt's election in 1932. This was an anti-
climax, because we had long before resumed exchange relations with Russian
financiers.
The Federal Reserve System began purchasing Russian gold in 1920, and
Russian currency was accepted on the Exchanges. According to Colonel Ely
Garrison, in his autobiography, and according to the United States Naval
Secret Service Report on Paul Warburg, the Russian Revolution had been
financed by the Rothschilds and Warburgs, with a member of the Warburg
family carrying the actual funds used by Lenin and Trotsky in Stockholm in
1918.
An article in the English monthly "Fortnightly", July, 1922, says:
"During the past year, practically every single capitalistic institution has
been restored. This is
true of the State Bank, private banking, the Stock Exchange, the right to
possess money to
unlimited amount, the right of inheritance, the bill of exchange system, and
other institutions and
practices involved in the conduct of private industry and trade. A great part
of the former
nationalized industries are now found in semi-independent trusts."
The organization of powerful trusts in Russia under the guise of Communism
made possible the receipt of large amounts of financial and technical help
from the United States. The Russian aristocracy had been wiped out because
it was too inefficient to manage a modern industrial state. The international
financiers provided funds for Lenin and Trotsky to overthrow the Czarist
regime and keep Russia in the First World War. Peter Drucker, spokesman
for the oligarchy in America, declared in an article in the Saturday Evening
Post in 1948, that:
"RUSSIA IS THE IDEAL OF THE MANAGED ECONOMY TOWARDS
WHICH WE ARE
MOVING."
In Russia, the issuance of sufficient currency to handle the needs of their
economy occurred only after a government had been put in power which had
absolute control of the people. During the 1920s, Russia issued large
quantities of so-called "inflation money", a managed currency. The same
"Fortnightly" article (of July, 1922) observed that:
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"As economic pressure produced the 'astronomical dimensions system' of
currency; it can never
destroy it. Taken alone, the system is self-contained, logically perfected, even
intelligent. And it
can perish only through the collapse or destruction of the political edifice
which it decorates."
"Fortnightly" also remarked, in 1929, that:
"Since 1921, the daily life of the Soviet citizen is no different from that of the
American citizen,
and the Soviet system of government is more economical."
Admiral Kolchak, leader of the White Russian armies, was supported by the
international bankers, who sent British and American troops to Siberia in
order to have a pretext for printing Kolchak rubles. At one time in 1920, the
bankers were manipulating on the London Exchange the old Czarist rubles,
Kerensky rubles and Kolchak rubles, the values of all three fluctuating
according to the movements of the Allied troops aiding Kolchak. Kolchak
also was in possession of considerable amounts of gold which had been seized
by his armies. After his defeat, a trainload of this gold disappeared in
Siberia. At the Senate Hearings in 1921 on the Federal Reserve System, it
was brought out that the System had been receiving this gold. Congressman
Dunbar questioned Governor W.P.G. Harding of the Federal Reserve Board
as follows:
DUNBAR: "In other words, Russia is sending a great deal of gold to the
European countries, which in turn send it to us?"
HARDING: "This is done to pay for the stuff bought in this country and to
create dollar exchange."
DUNBAR: "At the same time, that gold came from Russia through Europe?"
HARDING: "Some of it is thought to be Kolchak gold, coming through
Siberia, but it is none of the Federal Reserve Banks' business. The Secretary
of the Treasury has issued instructions to the assay office not to take any gold
which does not bear the mint mark of a friendly nation."
Just what Governor Harding meant by "a friendly nation" is not clear. In
1921, we were not at war with any country, but Congress was already
beginning to question the international gold dealings of the Federal Reserve
System. Governor Harding could very well shrug his shoulders and say that
it was none of the Federal Reserve Banks' business where the gold came
from. Gold knows no nationality or race. The United States by law had
ceased to be interested in where its gold came from in 1906, when Secretary
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of the Treasury Shaw made arrangements with several of the larger New York
banks (ones in which he had interests) to purchase gold with advances of
cash from the United States Treasury, which would then purchase the gold
from these banks. The Treasury could claim that it did not know where its
gold came from since their office only registers the bank from which it made
the purchase. Since 1906, the Treasury has not known from which of the
international gold merchants it was buying its gold.
The international gold dealings of the Federal Reserve System, and its active
support in helping the League of Nations to force all the nations
of Europe and South America back on the gold standard for the benefit of
international gold merchants like Eugene Meyer, Jr. and Albert Strauss, is
best demonstrated by a classic incident, the sterling credit of 1925.
J.E. Darling wrote, in the English periodical, "Spectator", on January 10,
1925 that:
"Obviously, it is of the first importance to the United States to induce
England to resume the gold
standard as early as possible. An American controlled Gold Standard, which
must inevitably
result in the United States becoming the world's supreme financial power,
makes England a
tributary and satellite, and New York the world's financial centre."
Mr. Darling fails to point out that the American people have as little to do
with this as the British people, and that resumption of the gold standard by
Britain would benefit only that small group of international gold merchants
who own the world's gold. No wonder that "Banker's Magazine" gleefully
remarked in July, 1925 that:
"The outstanding event of the past half year in the banking world was the
restoration of the gold
standard."
The First World War changed the status of the United States from that of a
debtor nation to the position of the world's greatest creditor nation, a title
formerly occupied by England. Since debt is money, according to the
Governor Marriner Eccles of the Federal Reserve Board, this also made us
the richest nation of the world. The war also caused the removal of the
headquarters of the world's acceptance market from London to New York,
and Paul Warburg became the most powerful trade acceptance banker in the
world. The mainstay of the international financiers, however, remained the
same. The gold standard was still the basis of foreign exchange, and the small
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group of internationals who owned the gold controlled the monetary system of
the Western nations.
Professor Gustav Cassel wrote in 1928:
"The American dollar, not the gold standard, is the world's monetary
standard. The American
Federal Reserve Board has the power to determine the purchasing power of
the dollar by making
changes in the rate of discount, and thus controls the monetary standard of
the world."
If this were true, the members of the Federal Reserve Board would be the
most powerful financiers in the world. Occasionally their membership
includes such influential men as Paul Warburg or Eugene Meyer, Jr., but
usually they are a rubber-stamp committee for the Federal Advisory Council
and the London bankers.
In May, 1925, the British Parliament passed the Gold Standard Act, putting
Great Britain back on the gold standard. The Federal Reserve System's
major role in this event came out on March 16, 1926, when George Seay,
Governor of the Federal Reserve Bank of Richmond, testified before the
House Banking and Currency Committee that:
"A verbal understanding confirmed by correspondence, extended Great
Britain a two hundred
million dollar gold loan or credit. All negotiations were conducted between
Benjamin Strong,
Governor of the Federal Reserve Bank of New York and Mr. Montagu
Norman, Governor of the
Bank of England. The purpose of this loan was to help England get back on
the gold standard,
and the loan was to be met by investment of Federal Reserve funds in bills of
exchange and
foreign securities."
The Federal Reserve Bulletin of June, 1925, stated that:
"Under its arrangement with the Bank of England the Federal Reserve Bank
of New York
undertakes to sell gold on credit to the Bank of England from time to time
during the next two
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years, but not to exceed $200,000,000 outstanding at any one time."
A two hundred million dollar gold credit had been arranged by a verbal
understanding between the international bankers, Benjamin Strong and
Montagu Norman. It was apparent by this time that the Federal Reserve
System had other interests at heart than the financial needs of American
business and industry. Great Britain's return to the gold standard was
further facilitated by an additional gold loan of a hundred million dollars
from J.P. Morgan Company. Winston Churchill, British Chancellor of the
Exchequer, complained later that the cost to the British government of this
loan was $1,125,000 the first year, this sum representing the profit to J.P.
Morgan Company in that time.
The matter of changing the discount rate, for instance, has never been
satisfactorily explained. Inquiry at the Federal Reserve Board in Washington
elicited the reply that "the condition of the money market is the prime
consideration behind changes in the rate." Since the money market is in New
York, it takes no imagination to deduce that New York bankers may be
interested in changes of the rate and often attempt to influence it.
Norman Lombard, in the periodical "World's Work" writes that:
"In their consideration and disposal of proposed changes of policy, the
Federal Reserve Board
should follow the procedure and ethics observed by our court of law.
Suggestions that there
should be a change of rate or that the Reserve Banks should buy or sell
securities may come from
anyone and with no formality or written argument. The suggestion may be
made to a Governor or
Director of the Federal Reserve System over the telephone or at his club over
the luncheon table,
or it may be made in the course of a casual call on a member of the Federal
Reserve Board. The
interests of the one proposing the change need not be revealed, and his name
and any suggestions
he makes are usually kept secret. If it concerns the matter of open market
operations, the public
has no inkling of the decision until the regular weekly statement appears,
showing changes in the
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holdings of the Federal Reserve Banks. Meanwhile, there is no public discussion,
there is no
statement of the reasons for the decision, or of the names of those opposing
or favoring it."
The chances of the average citizen meeting a Governor of the Federal
Reserve System at his club are also slight.
The House Hearings on Stabilization of the Purchasing Power of the Dollar
in 1928 proved conclusively that the Federal Reserve Board worked in close
cooperation with the heads of European central banks, and that the
Depression of 1929-31 was planned at a secret luncheon of the Federal
Reserve Board and those heads of European central banks in 1927. The
Board has never been made responsible to the public for its decisions or
actions. The constitutional checks and balances seem not to operate in
finance.
The true allegiance of the members of the Federal Reserve Board has always
been to the central bankers. The three features of the central bank, its
ownership by private stockholders who receive rent and profit for their use
of the nation's credit, absolute control of the nation's financial resources, and
mobilization of the nation's credit to finance foreigners, all were
demonstrated by the Federal Reserve System during the first fifteen years of
its operations.
Further demonstration of the international purposes of the Federal Reserve
Act of 1913 is provided by the "Edge Amendment" of December 24, 1919,
which authorizes the organization of corporations expressly for "engaging in
international foreign banking and other international or foreign financial
operations, including the dealing in gold or bullion, and the holding of stock
in foreign corporations." In commenting on this amendment, E.W.
Kemmerer, economist from Princeton University, remarked that:
"The federal reserve system is proving to be a great influence in the
internationalizing of
American trade and American finance."
The fact that this internationalizing of American trade and American finance
has been a direct cause for involving us in two world wars does not disturb
Mr. Kemmerer. There is plenty of evidence to show how Paul Warburg used
the Federal Reserve System as the instrument for getting trade acceptance
adopted on a wide scale by American businessmen.
The use of trade acceptances, (which are the currency of international trade)
by bankers and corporations in the United States prior to 1915 was
practically unknown. The rise of the Federal Reserve System exactly
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parallels the increase in the use of acceptances in this country, nor is this a
coincidence. The men who wanted the Federal Reserve System were the men
who set up acceptance banks and profited by the use of acceptances.
As early as 1910, the National Monetary Commission began to issue
pamphlets and other propaganda urging bankers and businessmen in this
country to adopt trade acceptances in their transactions. For three
years the Commission carried on this campaign, and the Aldrich Plan
included a broad provision authorizing the introduction and use of bankers'
acceptances into the American system of commercial paper.
The Federal Reserve Act of 1913 as passed by Congress did not specifically
authorize the use of acceptances, but the Federal Reserve Board in 1915 and
1916 defined "trade acceptance", further defined by Regulation A Series of
1920, and further defined by Series 1924. One of the first official acts of the
Board of Governors in 1914 was to grant acceptances a preferentially low
rate of discount at Federal Reserve Banks. Since acceptances were not being
used in this country at that time, no explanation of business exigency could
be advanced for this action. It was apparent that someone in power on the
Board of Governors wanted the adoptance of acceptances.
The National Bank Act of 1864, which was the determining financial
authority of the United States until November, 1914, did not permit banks to
lend their credit. Consequently, the power of banks to create money was
greatly limited. We did not have a bank of issue, that is, a central bank,
which could create money. To get a central bank, the bankers caused money
panic after money panic on the business people of the United States, by
shipping gold out of the country, creating a money shortage, and then
importing it back. After we got our central bank, the Federal Reserve
System, there was no longer any need for a money panic, because the banks
could create money. However, the panic as an instrument of power over the
business and financial community was used again on two important
occasions, in 1920, causing the Agricultural Depression, because state banks
and trust companies had refused to join the Federal Reserve System, and in
1929, causing the Great Depression, which centralized nearly all power in
this country in the hands of a few great trusts.
A trade acceptance is a draft drawn by the seller of goods on the purchaser,
and accepted by the purchaser, with a time of expiration stamped upon it.
The use of trade acceptances in the wholesale market supplies short-term,
assured credit to carry goods in process of production, storage, transit, and
marketing. It facilitates domestic and foreign commerce. Seemingly, then, the
bankers who wished to replace the open-book account system with the trade
acceptance system were progressive men who wished to help American
import-export trade. Much propaganda was issued to that effect, but this was
not really the story.
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The open-book system, heretofore used entirely by American business people,
allowed a discount for cash. The acceptance system discourages the use of
cash, by allowing a discount for credit. The open-book system also allowed
much easier terms of payment, with liberal extensions on the debt. The
acceptance does not allow this, since it is
a short-term credit with the time-date stamped upon it. It is out of the seller's
hands, and in the hands of a bank, usually an acceptance bank, which does
not allow any extension of time. Thus, the adoption of acceptances by
American businessmen during the 1920's greatly facilitated the domination
and swallowing up of small business into huge trusts, which accelerated the
crash of 1929.
Trade acceptances had been used to some extent in the United States before
the Civil War. During that war, exigencies of trade had destroyed the
acceptance as a credit medium, and it had not come back into favor in this
country, our people preferring the simplicity and generosity of the open-book
system. Open-book accounts are a single-name commercial paper, bearing
only the name of the debtor. Acceptances are two-name paper, bearing the
name of the debtor and the creditor. Thus they became commodities to be
bought and sold by banks. To the creditor, under the open-book system, the
debt is a liability. To the acceptance bank holding an acceptance, the debt is
an asset. The men who set up acceptance banks in this country, under the
leadership of Paul Warburg, secured control of the billions of dollars of
credit existing as open accounts on the books of American businessmen.
Governor Marriner Eccles of the Federal Reserve Board stated before the
House Banking and Currency Committee that: "Debt is the basis for the
creation of money."
Large holders of trade acceptances got the use of billions of dollars worth of
credit-money, besides the rate of interest charged upon the acceptance itself.
It is obvious why Paul Warburg should have devoted so much time, money,
and energy to getting acceptances adopted by this country's banking
machinery.
On September 4, 1914, the National City Bank accepted the first time-draft
drawn on a national bank under provisions of the Federal Reserve Act of
1913. This was the beginning of the end of the open-book account system as
an important factor in wholesale trade. Beverly Harris, vice-president of the
National City Bank of New York, issued a pamphlet in 1915 stating that:
"Merchants using the open account system are usurping the functions of
bankers."
In The New York Times on June 14, 1920, Paul Warburg, Chairman of the
American Acceptance Council, said:
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"Unless the Federal Reserve Board puts itself heart and soul behind the
untrammeled
development of acceptances as a prime investment for banks of the Federal
Reserve Banks the
future safe and sound development of the system will be jeopardized."
This was a statement of the purpose of Warburg and his bunch who wanted
"monetary reform" in this country. They were out to get control
of all credit in the United States, and they got it, by means of the Federal
Reserve System, the acceptance system, and the lack of concern by the
citizens.
The First World War was a boon to the introduction of trade acceptances,
and the volume jumped to four hundred million dollars in 1917, growing
through the 1920s to more than a billion dollars a year, which culminated in
a high peak just before the Great Depression of 1929-31. The Federal
Reserve Bank of New York's charts show that its use of acceptances reached
a peak in November, 1929, the month of the stock market crash, and declined
sharply thereafter. The acceptance people by then had gotten what they
wanted, which was control of American business and industry. "Fortune
Magazine" in February of 1950 pointed out that:
"Volume of acceptances declined from $1,732 million in 1929 to $209 million
in 1940, because
of the concentration of acceptance banking in a few hands, and the
Treasury's low-interest
policy, which made direct loans cheaper than acceptance. There has been a
slight upturn since
the war, but it is often cheaper for large companies to finance imports from
their own coffers."
In other words, the "large companies" more accurately, the great trusts, now
have control of credit and have not needed acceptances. Besides the barrage
of propaganda issued by the Federal Reserve System itself, the National
Association of Credit Men, the American Bankers' Association, and other
fraternal organizations of the New York bankers devoted much time and
money to distributing acceptance propaganda. Even their flood of lectures
and pamphlets proved insufficient, and in 1919 Paul Warburg organized the
American Acceptance Council, which was devoted entirely to acceptance
propaganda.
The first convention held by this association at Detroit, Michigan, on June 9,
1919, coincided with the annual convention of the National Association of
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Credit Men, held there on that date, so that "interested observers might with
facility participate in the lectures and meetings of both groups," according to
a pamphlet issued by the American Acceptance Council.
Paul Warburg was elected President of this organization, and later became
chairman of the Executive Committee of the American Acceptance Council,
a position which he held until his death in 1932. The Council published lists
of corporations using trade acceptances, all of them businesses in which
Kuhn, Loeb Co. or its affiliates held control. Lectures given before the
Council or by members of the Council were attractively bound and
distributed free by the National City Bank of New York to the country's
businessmen.
Louis T. McFadden, Chairman of the House Banking and Currency
Committee, charged in 1922 that the American Acceptance Council was
exercising undue influence on the Federal Reserve Board and called for a
Congressional investigation, but Congress was not interested.
At the second annual convention of the American Acceptance Council, held
in New York on December 2, 1920, President Paul Warburg stated:
"It is a great satisfaction to report that during the year under review it was
possible for the
American Acceptance Council to further develop and strengthen its relations
with the Federal
Reserve Board."
During the 1920s Paul Warburg, who had resigned from the Federal Reserve
Board after holding a position as Governor for a year in wartime, continued
to exercise direct personal influence on the Federal Reserve Board by
meeting with the Board as President of the Federal Advisory Council and as
President of the American Acceptance Council. He was, from its organization
in 1920 until his death in 1932, Chairman of the Board of the International
Acceptance Bank of New York, the largest acceptance bank in the world. His
brother, Felix M. Warburg, also a partner in Kuhn, Loeb Co., was director
of the International Acceptance Bank and Paul's son, James Paul Warburg,
was Vice-President. Paul Warburg was also a director on other important
acceptance banks in this country, such as Westinghouse Acceptance Bank,
which were organized in the United States immediately after the World War,
when the headquarters of the international acceptance market was moved
from London to New York, and Paul Warburg became the most powerful
acceptance banker in the world.
Paul Warburg became an even more legendary figure by his memorialization
as "Daddy Warbucks" in the comic strip, "Little Orphan Annie". The strip
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celebrated a homeless waif and her dog who are adopted by "the richest man in
the world", Daddy Warbucks, a takeoff on "Warburg", who has almost
magical powers and can accomplish anything by the power of his limitless
wealth. Those in the know snickered when "Annie", the musical comedy
version of this story, had a highly successful run of several years on
Broadway, because the vast majority of the audience had no idea that this
was merely another Warburg operation.
It was the transference of the acceptance market from England to this
country which gave rise to Thomas Lamont's ecstatic speech before the
Academy of Political Science in 1917 that:
"The dollar, not the pound, is now the basis for international exchange."
Americans were proud to hear that, but they did not realize at what a price.
Visible proof of the undue influence of the American Acceptance Council on
the Federal Reserve Board, about which Congressman McFadden
complained, is the chart showing the rate-pattern of the
Federal Reserve Bank of New York during the 1920s. The Bank's official
discount rate follows exactly for nine years the ninety-day bankers'
acceptance rate, and the Federal Reserve Bank of New York sets the discount
rate for the rest of the Reserve Banks.
Throughout the 1920s the Board of Governors retained two of its first
members, C.S. Hamlin and Adolph C. Miller. These men found themselves
careers as arbiters of the nation's monetary policy. Hamlin was on the Board
from 1914 until 1936, when he was appointed Special Counsel to the Board,
while Miller served from 1914 until 1931. These two men were allowed to
stay on the Board so many years because they were both eminently
respectable men who gave the Board a certain prestige in the eyes of the
public. During these years one important banker after another came on the
Board, served for awhile, and went on to better things. Neither Miller nor
Hamlin ever objected to anything that the New York bankers wanted. They
changed the discount rate and they performed open market operation with
Government securities whenever Wall Street wanted them to. Behind them
was the figure of Paul Warburg, who exercised a continuous and dominant
influence as President of the Federal Advisory Council, on which he had such
men of common interests with himself as Winthrop Aldrich and J.P. Morgan.
Warburg was never too occupied with his duties of organizing the big
international trusts to supervise the nation's financial structures. His
influence from 1902, when he arrived in this country as immigrant from
Germany, until 1932, the year of his death, was dependent on his European
alliance with the banking cartel. Warburg's son, James Paul Warburg,
continued to exercise such influence, being appointed Franklin D. Roosevelt's
Director of the Budget when that great man assumed office in 1933, and
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setting up the Office of War Information, our official propaganda agency during
the Second World War.
In The Fight for Financial Supremacy, Paul Einzig, editorial writer for the
London Economist, wrote that:
"Almost immediately after World War I a close cooperation was established
between the Bank of
England and the Federal Reserve authorities, and more especially with the
Federal Reserve Bank
of New York.* This cooperation was largely due to the cordial relations
existing between Mr.
Montagu Norman of the Bank of England and Mr. Benjamin Strong,
Governor of the Federal
Reserve Bank of New York until 1928. On several occasions the discount rate
policy of the
Federal Reserve Bank of New York was guided by a desire to help the Bank
of England.
* William Boyce Thompson (Wall Street operator) commented to Clarence
Barron, Nov. 27, 1920, "Why should the Federal Reserve Bank have private
wires all over the country and talk daily by cable with the Bank of
England?" p. 327 "They Told Barron".
There has been close cooperation in the fixing of discount rates between
London and New
York."86
86 Paul Einzig, The Fight For Financial Supremacy, Macmillan, 1931
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CHAPTER ELEVEN
Lord Montagu Norman
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