In the last chapter, we saw how the expansion and contractionof the money supply following the Civil War led to a series ofbooms and busts. We saw how the firm of J.P. Morgan & Company,with help from financiers in London, was able to reap great profitsfrom both sides of those cycles but particularly from the recessions.
At that point, we jumped ahead in time to examine how J.P.
Morgan and other leading American financiers were closelyaligned with British interests. We also saw how, in the 1920s, theAmerican dollar was deliberately weakened by Morgan agentswithin the Federal Reserve System in order to prop up the saggingBritish economy. Let us return now to the point of departure andallow our cast to resume playing out that most important priorscene: the actual creation of the Federal Reserve System itself.
HALF-WAY HOUSE TO CENTRAL BANKING
Historians seeking to justify governmental control of the monetary system have claimed that the booms and busts that occurredduring this period were the result of free and competitive banking.
As we have seen, however, these destructive cycles were the directresult of the creation and then extinguishing of fiat money througha system of federally chartered national banks—dominated by ahandful of firms on Wall Street—which constituted a half-wayhouse to central banking. None of these banks were truly free ofstate control nor were they competitive in the traditional sense of 432
THE CREATURE FROM JEKYLL ISLAND
the word. They were in fact subsidized by the government and hadmany monopolistic privileges. From the perspective of bankers onWall Street, however, there was a great deal more to be desired. Forone thing, America still did not have a "lender of last resort." Thatis banker language for a full-blown central bank with the power tocreate unlimited amounts of fiat money which can be rushed to theaid of any individual bank that is under siege by its depositorswanting their money back. Having a lender of last resort is the onlyway a bank can create money out of nothing and still be protectedfrom a potential "run" by its customers. In other words, it is themeans by which the public is forced to pay a hidden tax of inflationto cover the shortfall of fractional-reserve banking. That is why theso-called virtue of a lender of last resort is taught with greatreverence today in virtually all academic institutions offeringdegrees in banking and finance. It is one of the means by which thesystem perpetuates itself.
