Debunking The Federal Reserve Myths

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By: Edward Flaherty, Ph.D. Department of Economics College of Charleston, S.C. Online Articles:
Facts: Yes, the Federal Reserve banks are privately owned, but they are controlled by the Most Recent Articl
publically-appointed Board of Governors. The Federal Reserve banks merely execute the More Articles
monetary policy choices made by the Board. In addition, nearly all the interest the Federal Features from past
Reserve collects on government bonds is rebated to the Treasury each year, so the The Public Eye Ma
government does not pay any net interest to the Fed. PRA Reports - Onli
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Facts: No foreigners own any part of the Fed. Each Federal Reserve bank is owned
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exclusively by the participating commercial banks and S&Ls operating within the Federal
Reserve bank's district. Individuals and non-bank firms, be they foreign or domestic, are not
permitted by law to own any shares of a Federal Reserve bank. Moreover, monetary policy is Spotlight On
controlled by the publically-appointed Board of Governors, not by the Federal Reserve Civil Liberties & Repress
banks. Economic Justice
LGBTQ Equity
Fact: Independent accounting firms conduct full financial audits of the Federal Reserve
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banks and the Board of Governors every year. The Fed is also subject to certain types of
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audits from the Government Accounting Office.
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Facts: The Federal Reserve rebates its net earnings to the Treasury every year. Understanding the Right
Consequently, the interest the Treasury pays to the Fed is returned, so the money borrowed More Article Topics
from the Fed has no net interest obligation for the Treasury. The government could print its Explore
own currency independent of the Fed, but there would be no effective safeguards against
abuse of this power for political gain.
Facts: The Federal Reserve banks have only a small share of the total national debt (about Browse Topics | Site Guid
7%). Therefore, only a small share of the interest on the debt goes to the Fed. Regardless, the Bookstore | Magazine | Pu
Fed rebates that interest to the Treasury every year, so the debt held by the Fed carries no Activists Resources
net interest obligation for the government. In addition, it is Congress, not the Federal
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Reserve, who is responsible for the federal budget and the national debt.
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Facts: Kennedy wrote E.O. 11,110 to phase out silver certificate currency, not to issue more
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of it. Records show Kennedy and the Federal Reserve were almost always in agreement on
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policy matters. He even signed legislation to give the Fed more authority to issue currency.
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Facts: McFadden was incorrect regarding the Fed costing the government money. However,
1 of 2 1/3/2011 10:15 AM
PublicEye.org - The Website of Political Research Associates http://www.publiceye.org/conspire/flaherty/Federal_Reserve.html
later economic analysis agrees with him that Federal Reserve policy blunders had a PRA is an affiliate of:
substantial role in causing the Depression. However, his implication that this was done
deliberately has no basis in fact. Moreover, for a dozen years prior to his rant, McFadden had Causes in Common
been the chairman of the House subcommittee that oversaw the Federal Reserve. Why didn't Talk to Action
he do anything to reform or abolish the Fed while he had the chance? Open The Governm
Building Human Ri
Facts: The banking system is indeed able to create money with a mere computer keystroke. Stop Spying
However, a bank's ability to create money is tied directly to the amount of reserves Other Allies in Acti
customers have deposited there. A bank must pay a competitive interest rate on those Research
deposits to keep them from leaving to other banks. This interest expense alone is a
substantial portion of a bank's operating costs and is de facto proof a bank cannot costlessly Copyright Information, Te
create money. Conditions
Fact: The term 'lawful money' does not refer to gold or silver coin, but to types of money Please read our Terms and
which the government would permit banks to use when tabulating their reserves. These types copyright information reg
of money included, but were not limited to, gold and silver coin. downloading, copying, pri
linking material on this sit
BY: Edward Flaherty, Ph.D. Department of Economics College of Charleston, S.C. about links present on this
our privacy policy.
Myth #1: The Federal Reserve Act of 1913 was crafted by Wall Street bankers and a
few senators in a secret meeting. Updates and Corrections
Myth #2: The Federal Reserve Act never actually passed Congress. The Senate voted
on the bill without a quorum, so the Act is null and void.
Myth# 3: The Federal Reserve Act and paper money are unconstitutional.
Myth# 4: The Federal Reserve is a privately owned bank.
Myth #5: The Federal Reserve is owned and controlled by foreigners.
Myth #6: The Federal Reserve has never been audited.
Myth #7: The Federal Reserve charges interest on the currency we use.
Myth #8: If it were not for the Federal Reserve charging the government interest, the
budget would be balanced and we would have no national debt.
Myth #9: President Kennedy was assassinated because he tried to usurp the Federal
Reserve's power. Executive Order 11,110 proves it.
Myth #10. The Legendary Tirade of Louis T. McFadden
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Myth #1: The Federal Reserve Act of 1913 was crafted by Wall Street Online Articles:
bankers and a few senators in a secret meeting.
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On the Georgian resort hideaway of Jekyll Island (which has some excellent golf More Articles
courses, by the way), there once met a coalition of Wall Street bankers and U.S. Features from past
senators. This secret 1910 meeting had a sinister purpose, the conspiracy The Public Eye Ma
theorists say. The bankers wanted to establish a new central bank under the PRA Reports - Onli
direct control of New York's financial elite. Such a plan would give the Wall Former Front Page
Street bankers near total control of the financial system and allow them to Announcements
manipulate it for their personal gain.
G. Edward Griffin lays out this conspiratorial version of history in his book The Spotlight On
Creature from Jekyll Island. His amateurish take on history is highly suspect, Civil Liberties & Repress
however. Gerry Rough, in a series of well- researched essays on U.S. banking Economic Justice
history, reveals many historical inaccuracies, inconsistencies, and even LGBTQ Equity
contradictions in Griffin's book and others of its genre. Instead of reproducing Racial Justice
Rough's work here, I offer the reader a substantially more accurate view of the Reproductive Justice
events leading up to the creation of the Federal Reserve System in 1913. To get Christian Right & Theocr
a proper historical perspective, the story of begins just prior to the Civil War... Understanding the Right
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The National Banking Acts of 1863 & 1864 Explore
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
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regulations were virtually nonexistent. The federal government had no
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meaningful controls on banking practices, and state regulations were spotty and
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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.' Political Research Associ
The problems with state banking were numerous, but three were conspicuous. About Us
First, the nation had no unified currency. State banks issued their own bank PRA News
notes as currency, a system which at worst invited severe bouts of counterfeiting Watch short videos
and at best introduced additional uncertainty in the task of determining the Donate!
relative value of each bank note. Second, with no mitigating influence on the
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issuance of bank notes, the money supply and the price level were highly PRA is an affiliate of:
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 Causes in Common
tied to the market value of the bank's bond portfolio which they were required to Talk to Action
have by law. Third, frequent bank runs resulted in substantial depositor losses Open The Governm
and severe crises of confidence in the payments system.5 Building Human Ri
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The National Banking Acts of 1863 and 1864 were attempts to assert some Other Allies in Acti
degree of federal control over the banking system without the formation of Research
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 Copyright Information, Te
active secondary market for Treasury securities to help finance the Civil War Conditions
(for the Union’s side).5 Please read our Terms and
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The first provision of the Acts was to allow for the incorporation of national downloading, copying, pri
banks. These banks were essentially the same as state banks, except national linking material on this sit
banks received their charter from the federal government and not a state about links present on this
government. This arrangement gave the federal government regulatory our privacy policy.
jurisdiction over the national banks it created, whereas it asserted no control
over state-chartered banks. National banks had higher capital requirements and Updates and Corrections
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.5
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.5
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.5
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
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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 reduced 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.5
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
1880’s. Consequently, the improvements to safety that the national banking
system offered were mitigated somewhat by the return of state banking.5
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.5
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
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deposits, in each episode the public stormed any bank rumored, true or not, to be
in financial straights. Anyone unable to withdraw their deposits before the
bank’s 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.5
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
country’s 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 public’s fears.
Morgan’s 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 from starting. 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 party’s 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."3
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
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always been a favorite source of conspiracy theories. However, the movement

toward significant banking and monetary reform was well-known.3 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. 5
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 nation’s credit markets were under the tight control of a handful of
banks – the "money trusts" against which Wilson warned.1 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
Board’s 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.6
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.
References:
1. Davidson, James West, Mark A. Lytle, et al, (1998), Nation of Nations, New
York: McGraw-Hill.
2. Galbraith, John K. (1995), Money: Whence it Came, Where it Went, Boston:

Houghton Mifflin.
3. Greider, William (1987), Secrets of the Temple, New York: Simon &
Schuster.
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4. Griffin, G. Edward (1995), The Creature from Jekyll Island, Appleton:

American Opinion Publishing, Inc.
5. Kidwell, David S. and Richard Peterson (1997), Financial Institutions,

Markets, and Money, 6th edition, Fort Worth: Dryden Press.
6. "Wilson Signs the Currency Bill," New York Times, pages 1-2, December 24,
1913.

6 of 6 1/3/2011 10:16 AM
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Myth #2: The Federal Reserve Act never actually passed Congress. The Online Articles:
Senate voted on the bill without a quorum, so the Act is null and void.
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The silliest of the Federal Reserve conspiracy theories is that the Federal More Articles
Reserve Act of December 23, 1913 passed illegally. The constitution stipulates Features from past
that both the House and the Senate must have at least half their members The Public Eye Ma
present, a quorum, to vote on any bill. According to this myth, the Senate voted PRA Reports - Onli
on the Federal Reserve Act (known as the Currency Bill at the time) deviously Former Front Page
in a late night session when most of its members had gone home or had left town Announcements
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. Spotlight On
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This idea is better described as folklore than a full-blown conspiracy theory Economic Justice
because I've never been able to find it in print, only on occasion on Usenet or in LGBTQ Equity
e-mail from readers. Gary Kah, author of En Route to Global Occupation, came Racial Justice
close when he wrote that the bill's supporters waited until its opponents were out Reproductive Justice
of town and it was passed under "suspicious circumstances" (Kah, p. 13-14). Christian Right & Theocr
Nevertheless, the myth has no basis in fact. The House passed the bill 298-60 on Understanding the Right
the evening of Dec. 22, 1913.3 The Senate began debate the following day at More Article Topics
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10am, and passed it 43-25 at 2:30pm.4
What of the missing Senators? Since there were 48 states in 1913, forty eight
votes plus the tie-breaking vote of vice-President Thomas Marshall would have Browse Topics | Site Guid
been sufficient to approve the bill even if all absent votes had been cast against Bookstore | Magazine | Pu
the bill. However, many of the missing Senators had their positions recorded in Activists Resources
the Congressional Record.1 Of the 27 votes not cast, there were 11 'yeas' (in
favor of the bill) and 12 'nays.'1 Even if the absentee Senators had been there, Political Research Associ
the Currency Bill would have passed easily.
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President Wilson signed the Currency Bill into law in an "enthusiastic" public PRA News
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ceremony on Dec. 23, 1913.4
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References: PRA is an affiliate of:
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1. Congressional Record, 63rd Congress, 2nd Session, Dec. 23, 1913, pp.
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1487-1488.
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2. Kah, Gary (1991), En Route to Global Occupation, Layfayette, La.: Building Human Ri
Huntington Press. Stop Spying
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3. "Money bill goes to Wilson today," New York Times, pp. 1-3, Dec. 23, 1913. Research
4. "Wilson signs currency bill," New York Times, pp. 1-2, Dec. 24, 1913. Copyright Information, Te
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Myth #3: The Federal Reserve Act and paper money are unconstitutional. Gold and silver Online Articles:
coins are the only constitutional forms of money.
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Table of Contents: More Articles
Features from past
The Constitutional basis for central The Public Eye Ma
Gold and silver coin PRA Reports - Onl
banking
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Are gold and silver practical Announcements
The constitutional basis for paper money
metals for coins?
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Recent federal court rulings on the Fed Civil Liberties & Repress
and paper money Economic Justice
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Racial Justice
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
Understanding the Right
those powers which the constitution specifically enumerates. If the power is not
More Article Topics
explicitly granted, then the federal government simply does not have it.
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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. Browse Topics | Site Guid
The Constitutional Basis for Central Banking Activists Resources
First, the constitution grants the Congress the right to coin money and to regulate Political Research Associ
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 About Us
metallic content of the coin. No one challenges this interpretation. On the other PRA News
hand, the only relevant meaning of 'value' in the context of money is its value in Watch short videos
trade, also known as its purchasing power. This a government cannot regulate Donate!
merely by an act of Congress. The government's only tool for regulating this
1 of 9 1/3/2011 10:17 AM
latter value is altering the money supply. PRA is an affiliate of:
Second, Congress has the right to regulate interstate commerce. Banking and Causes in Common
other financial services clearly involves interstate commerce as the courts have Talk to Action
come to define it. Open The Governm
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Finally, and perhaps most importantly, Congress has the right to make any law Stop Spying
that is 'necessary and proper' for the execution of its enumerated powers (Art. I, Other Allies in Acti
Sec. 8, Cl. 18). A law creating a Bureau of the Mint, for example, is necessary Research
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 Copyright Information, Te
of the money supply and it serves as means to regulate the banking industry. Conditions
Is this a reasonable use of the necessary and proper clause? I do not know, but a Please read our Terms an
test of its meaning came early. The history of central banking in the United copyright information reg
States does not begin with the Federal Reserve. The Bank of the United States downloading, copying, pr
received its charter in 1791 from the U.S. Congress and Washington signed it. linking material on this sit
Secretary of State Alexander Hamilton designed the Bank's charter by modeling about links present on thi
it after the Bank of England, the British central bank. Secretary of State Thomas our privacy policy.
Jefferson believed the Bank was unconstitutional because it was an unauthorized
extension of federal power. Congress, Jefferson argued, possessed only Updates and Corrections
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.
Hamilton’s 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.
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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
over-indulgence 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
3 of 9 1/3/2011 10:17 AM
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 Madison’s 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.
Gorham’s 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 government’s ability to
use it. Madison’s 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
4 of 9 1/3/2011 10:17 AM
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

today’s 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
Pinckney’s 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
5 of 9 1/3/2011 10:17 AM
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.
Recent 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.
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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
7 of 9 1/3/2011 10:17 AM
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?
References:
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.
Footnotes:
1. I have no formal legal training and do not consider myself a constitutional

scholar.
2. Then, curiously, in the memorandum in which he articulated his thoughts on

this matter, Jefferson advised that if the President felt that the pros and cons of
8 of 9 1/3/2011 10:17 AM
constitutionality seemed about equal, then out of respect to the Congress which
passed the legislation the President could sign it (Dunne, p. 17-19).

9 of 9 1/3/2011 10:17 AM
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Myth #4: The Federal Reserve is a privately owned bank out to make a Online Articles:
profit at the taxpayers' expense.
Most Recent Articl
This myth claims that the 12 Federal Reserve banks are privately owned and More Articles
therefore want to earn a profit just like any other company. Of course, the Fed Features from past
holds the reigns of monetary policy, so naturally they will use it for the benefit of The Public Eye Ma
their owners and not the economy at large. And finally, since the Fed owns lots PRA Reports - Onl
of government bonds, much of the Fed's profits come at the taxpayers' expense Former Front Page
through the interest paid to the Fed on those bonds. Like many of the other Announcements
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.
Spotlight On
Organization of the Federal Reserve System
Economic Justice
LGBTQ Equity
The Federal Reserve System is sometimes described as a quasi-government
Racial Justice
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.
More Article Topics
Member banks are at the bottom of the organization chart. These are Explore
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
Activists Resources
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 Political Research Associ
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 About Us
by private for-profit commercial banks and S&Ls. PRA News
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Why are member banks -- the owners -- at the bottom of the organization chart? Donate!
They are at the bottom because unlike the shareholders of a typical corporation
1 of 4 1/3/2011 10:17 AM
such as IBM, member banks have very little power over how their regional PRA is an affiliate of:
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 Causes in Common
choose the firm's CEO, so they have a collective say on the company's Talk to Action
operations. Member banks also get to select 6 of the 9 directors of their regional Open The Governm
Federal Reserve Bank, but these directors control only the Bank's daily Building Human Ri
operations, not monetary policy which is the most important function of the Stop Spying
Federal Reserve System (12 USCA §301 and 12 USCA §302). Other Allies in Acti
Research
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: Copyright Information, T
Conditions
Buy and sell government bonds in the secondary markets (open market
operations) Please read our Terms an
Lend reserves to member banks copyright information reg
Offer check-clearing services to member and non-member banks downloading, copying, pr
Issue Federal Reserve Notes and collect worn-out ones for destruction linking material on this sit
Enforce reserve requirements and other regulations of the member banks about links present on thi
Monitor banking and economic activity within their respective district our privacy policy.
In terms of monetary policy, the most important power is the first one -- open Updates and Corrections
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
2 of 4 1/3/2011 10:17 AM
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 $26,262
Distribution of Net Income Dividends paid to member banks

374 Transferred to surplus 479 Payments to U.S.
Treasury 25,409 -------
Total distribution 26,262
Source: 86th Annual Report of the Board of Governors, p.335.
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.
3 of 4 1/3/2011 10:17 AM

4 of 4 1/3/2011 10:17 AM
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Myth #5. The Federal Reserve is owned and controlled by foreigners. Online Articles:
Introduction Most Recent Articl

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The Federal Reserve System is the primary regulatory agency governing the U.S. Features from past
banking industry. It has singular importance in setting monetary policy and The Public Eye Ma
many economists believe it has substantial influence on the course of the PRA Reports - Onl
business cycle. Yet, could it be that the most important economic institution in Former Front Page
the United States is actually owned by foreigners? Gary Kah (1991) and Eustace Announcements
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. Spotlight On
The focus of both books is the Federal Reserve Bank of New York. What we Economic Justice
typically call the ‘Fed’ is actually a two level system: 12 regional Federal LGBTQ Equity
Reserve Banks (the New York Fed is one of them) and the Board of Governors Racial Justice
that runs them (Alan Greenspan is the Board’s chair). Gary Kah claimed Reproductive Justice
foreigners directly own the New York Fed, the largest and most important of the Christian Right & Theocr
dozen regional institutions. Through it the international collaborators control the Understanding the Right
entire Federal Reserve System and reap its gigantic profits. Eustace Mullins More Article Topics
agreed on the importance of the New York Fed, but instead claimed it is owned Explore
indirectly by foreigners – through a European banking club he termed the
“London Connection” which controls the Fed’s policies from abroad.
Are any of allegations true? In this article I focus on whether foreigners own the Browse Topics | Site Guid
Federal Reserve Bank of New York either directly or indirectly, whether it Bookstore | Magazine | Pu
controls the enitre of the Federal Reserve System, and whether foreigners Activists Resources
receive the Fed’s large annual profits.
Political Research Associ
Who Owns the New York Federal Reserve? About Us
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Each of the twelve Federal Reserve Banks is organized as a corporation in much Watch short videos
the same way as many other firms. According to Kah, foreigners own a Donate!
controlling interest in the shares of the New York Fed. He claimed that “Swiss
1 of 7 1/3/2011 10:17 AM
and Saudi Arabian contacts” identified the top eight shareholders as PRA is an affiliate of:
Rothschild Banks of London and Berlin Causes in Common

Lazard Brothers Banks of Paris Talk to Action
Israel Moses Seif Banks of Italy Open The Governm
Warburg Bank of Hamburg and Amsterdam Building Human Ri
Lehman Brothers of New York Stop Spying
Kuhn, Loeb Bank of New York Other Allies in Acti
Chase Manhatten Bank, and Research
Goldman, Sachs of New York (Kah, p. 13).
Copyright Information, Te
He also described these groups as the bank’s “Class A shareholders” (p. 14). Conditions
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 Please read our Terms an
‘Class A’ shares. However, the directors of a Federal Reserve Bank are copyright information reg
separated into classes A, B, and C depending on how they are appointed (12 downloading, copying, pr
USCA §302). This may have been the source of Kah’s confusion. linking material on this sit
Eustace Mullins compiled a very different list. He reported that the top 8 our privacy policy.
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 Fed’s 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. Kah’s source is equally elusive – unnamed Swiss
2 of 7 1/3/2011 10:17 AM
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, let’s 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 bank’s 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 Kah’s 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 Kah’s 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.
Kah’s 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
3 of 7 1/3/2011 10:17 AM
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 money-center 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 firm’s stock. These reports show that
only one of the N.Y. Fed’s 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. Fed’s 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?
4 of 7 1/3/2011 10:17 AM
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 Fed’s 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 bank’s 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. He speculates that this Council of bankers is able to force its will on
the Board of Governors:
The claim that the “advice” of the council members is not binding
on the Governors or that it carries no weight is to claim that four
times a year, twelve of the most influential bankers in the United
States take time from their work to travel to Washington to meet
with the Federal Reserve Board merely to drink coffee and
exchange pleasantries (Mullins, p. 45).
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
5 of 7 1/3/2011 10:17 AM
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 Fed’s 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
Board’s 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 Kah’s 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.
Footnotes:
1. State chartered banks have the option of becoming member banks of the
Federal Reserve System. Interestingly, only 10% of have done so.
2. Compact Disclosure CD-ROM, v3.0
References:
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.
6 of 7 1/3/2011 10:17 AM
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.
United States Code Annotated, 1994. U.S. Government Printing Office.

7 of 7 1/3/2011 10:17 AM
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Myth #6: The Federal Reserve has never been audited. Online Articles:
An often repeated Federal Reserve conspiracy theory is that the Fed has never Most Recent Articl
been audited. "Every year Congress introduces legislation to audit the FED," More Articles
wrote Thomas Schauf, "and every year it is defeated."7 Why? Conspiracy Features from past
theorists such as Schauf, Gary Kah (1991), and Pat Robertson (1994) say the The Public Eye Ma
reason is that the Fed is involved in an international plot to subvert U.S. PRA Reports - Onl
sovereignty and create a one-world government. Naturally, the Fed will not Former Front Page
permit Congress to audit its activities, lest it discover this treasonous plan and Announcements
shut it down.
How much truth is there to this claim? Has the Fed ever been audited by Spotlight On
Congress or anyone else? The Fed controls U.S. monetary policy and can act Civil Liberties & Repress
with a great deal of independence from Congress and the executive branch. Economic Justice
Clearly, such awesome power requires some sort of regular public oversight at LGBTQ Equity
the very least to insure that the Fed is doing its job efficiently and effectively, Racial Justice
and to detect any abuses of power or fraud. This essay explores the claim that Reproductive Justice
the Fed has never been audited and finds that it is completely false. Christian Right & Theocr
A Brief History of Federal Reserve Audits More Article Topics
Explore
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 Browse Topics | Site Guid
from time to time. From 1913 to 1921 the Board of Governors, then known as Bookstore | Magazine | Pu
the Federal Reserve Board which sets monetary policy and regulates the Activists Resources
activities of the Federal Reserve Banks, was audited annually by the U.S.
Treasury Department. In 1921 Congress created the Government Accounting Political Research Associ
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 About Us
jurisdiction. From 1933 to 1952 audit teams from the twelve Federal Reserve PRA News
Banks performed the annual examination of the BOG's books. From 1952 to Watch short videos
1978, the Board, under authorization from Congress, decided to employ Donate!
nationally recognize accounting firms to conduct the audits of itself to insure
1 of 5 1/3/2011 10:18 AM
independent oversight. This provided an external evaluation of the adequacy PRA is an affiliate of:
and effectiveness of the examination procedures.1
Causes in Common
In 1978 Congress passed the Federal Banking Agency Audit Act (31 USCA Talk to Action
§714). It placed the Federal Reserve System back under the auditing authority Open The Governm
of the GAO. The Act significantly increased the access of the GAO to the Building Human Ri
Federal Reserve Banks, the Board, and the Federal Open Market Committee Stop Spying
(the FOMC). Since then, the GAO has conducted over 100 financial audits and Other Allies in Acti
Research
performance audits of the three Federal Reserve bodies.3
Copyright Information, T
Scope of GAO Audits Conditions
Some of the more important GAO performance audits of the Fed have been in Please read our Terms an
the areas of bank supervision, payment systems activities, and government copyright information reg
securities activities. In the first area, the GAO examined how well the Fed was downloading, copying, pr
enforcing its regulatory powers over its member banks. In 1992 it drew attention linking material on this sit
to the Fed's sluggish compliance with regulatory reforms mandated by the about links present on thi
Foreign Bank Supervision Act of 1991. In examining the Fed's payment system our privacy policy.
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, Updates and Corrections
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
2 of 5 1/3/2011 10:18 AM
statements. An audit also includes assessing the accounting

principles used and significant estmates 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.4
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,
3 of 5 1/3/2011 10:18 AM
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: Innaccurate 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
4 of 5 1/3/2011 10:18 AM
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.
References
1. "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.
2. 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.
3. Public Law 95-320, "Federal Banking Agency Audit Act," July 21, 1978.
4. Annual Report, 1996, Board of Governors of the Federal Reserve System.
5. Kah, Gary (1991), En Route to Global Occupation. Layfayette, La.:

Huntington House.
6. Robertson, Pat (1994). The Turning Tide. Dallas: Word Publishing.
7. Schauf, Thomas (1992). The Federal Reserve. Streamwood, IL: FED-UP, Inc.
8. United States Code Annotated, U.S. Government Printing Office.

5 of 5 1/3/2011 10:18 AM
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by Edward Flaherty (last updated September 5, 2000) Online Articles:
Myth #7: The Federal Reserve charges interest on the currency we use. Most Recent Articl
More Articles
In my experience this particular myth has alarmed more people than any other. Features from past
The Federal Reserve is a bank, no? Banks do not lend money for free, right? The Public Eye Ma
Our currency comes into circulation only when the government borrows PRA Reports - Onl
currency from the Fed -- at interest -- and then spends it into the economy, Former Front Page
right?. This means we, as citizens, pay interest on the very currency that we Announcements
use. Conspiracy theorists believe this is part of the alleged "New World Order"
plot to bankrupt the United States.
Spotlight On
What is the truth here? Does the government really pay interest on our paper Civil Liberties & Repress
money, Federal Reserve Notes? Thomas Schauf of FED-UP, Inc. circulates an Economic Justice
information letter in which he writes: LGBTQ Equity
Racial Justice
Why pay interest on our currency? A typical incorrect answer is - Reproductive Justice
the FED profits are returned to the U.S. Treasury. The truth is, the Christian Right & Theocr
FED is a private bank in business for profit. We pay roughly $300 Understanding the Right
billion in interest on our artificial debt and by special agreement, the More Article Topics
U.S. Treasury receives $20 billion in return. Taxpayers lose $280 Explore
billion to the FED banking system per year ... Your local library has
these dollar figures. The numbers don't lie.5
Schauf also argues that the Federal Reserve system is part of an international Browse Topics | Site Guid
banking conspiracy, and that President Kennedy might have been assassinated Bookstore | Magazine | Pu
because he allegedly attempted to curb the power of the Federal Reserve (See Activists Resources
Myth #9). This currency interest issue is also raised by other conspiracy
theorists. Television evangelist Pat Robertson in his book The New World Order Political Research Associ
and Jacques Jaikaran in Debt Virus make identical claims.
About Us
How accurate are these claims? Some of Schauf's statement is correct. The PRA News
Treasury Department prints Federal Reserve Notes and then sells them to the Watch short videos
Federal Reserve system for an average cost of about 4 cents per bill (see Donate!
FedPoint #1). However, the Fed must present as collateral for the currency an
1 of 3 1/3/2011 10:19 AM
amount of Treasury securities that is equivalent in value to the currency PRA is an affiliate of:
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 Causes in Common
Schauf's statement can take his reader. Talk to Action
Open The Governm
What Schauf doesn't say is that nearly all the Federal Reserve's net earnings are Building Human Ri
repaid to the Treasury. This is done per an agreement between the Board of Stop Spying
Governors and the Treasury. Schauf even says this "typical" answer is Other Allies in Acti
incorrect. The table below indicates otherwise. Research
1999 Combined Statements of Income of the Federal Reserve Banks (in millions) Copyright Information, T
Conditions
Interest income Interest on U.S. government securities $28,216
Interest on foreign securities 225 Interest on loans to Please read our Terms an
depository institutions 11 Other income copyright information reg
688 ------- Total operating downloading, copying, pr
income 29,140 linking material on this sit
about links present on thi
Operating expenses Salaries and benefits 1,446 our privacy policy.
Occupancy expense 189 Assessments by Board of
Governors 699 Equipment expense Updates and Corrections
242 Other 302
------- Total operating
expenses 2,878
Net Income Prior to Distribution $26,262
Distribution of Net Income Dividends paid to member

banks 374 Transferred to surplus 479
Payments to U.S. Treasury 25,409
------- Total
distribution 26,262
Source: 86th Annual Report of the Board of Governors, p.335.
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.
2 of 3 1/3/2011 10:19 AM
<<SNIP>>
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.
References:
2. Board of Governors of the Federal Reserve System, Annual Report, 1999.
3. Jaikaran, Jacques (1995), Debt Virus: A Compelling Solution to the World's

Debt Problems, Lakewood, Co.: Glenbridge Publishing.
4. Robertson, Pat (1994), The New World Order, Dallas: Word Publishing.
5. Schauf, Thomas (1992), The Federal Reserve. Streamwood, IL: FED-UP, Inc.
6. Office of the Public Debt, U.S. Treasury.
7. Ownership of Federal Securities, Treasury Bulletin, June 2000.

3 of 3 1/3/2011 10:19 AM
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Myth #8: If it were not for the Federal Reserve charging the government More Articles
interest, the budget would be balanced and we would have no national Features from past
debt. The Public Eye Ma
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A popular misconception about the Federal Reserve is that it has something to Former Front Page
do with the national debt. The argument is that because the government must Announcements
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. Spotlight On
Several things make this argument wrong. First, the Federal Reserve holds very Economic Justice
little of the national debt. Of the $5.7 trillion in government bonds currently LGBTQ Equity
Racial Justice
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 Understanding the Right
Treasury. This means that the bonds held by the Fed carry no net interest More Article Topics
obligation for the Treasury. For example, in 1999 the Fed collected $28.2 billion Explore
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
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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 Political Research Associ
could also blame Congress for not raising enough taxes to cover their spending
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Finally, placing blame for the national debt at the door of the Federal Reserve Watch short videos
demonstrates an ignorance of how our government works. The national debt has Donate!
but one cause: Congress. The debt is the sum of all the budget deficits and
1 of 2 1/3/2011 10:19 AM
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Federal Reserve, that determines federal spending and tax rates. Therefore, it is
Congress, not the Federal Reserve, who is responsible for it. Causes in Common
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Myth #9: President Kennedy was assassinated because he tried to usurp the Federal Online Articles:
Reserve's power. Executive Order 11,110 proves it. (Last updated 9/4/2000)
Most Recent Articl
Presidential Executive Order 11,110 is quite infamous among conspiracy buffs. More Articles
Jim Marrs, author of Crossfire: The Plot that Killed Kennedy, writes that the Features from past
order instructs the Treasury secretary to issue about $4.2 billion in silver The Public Eye Ma
certificates as a form of currency in place of Federal Reserve Notes.1 Written PRA Reports - Onl
by John F. Kennedy, Marrs also speculates this order was part of a larger plan by Former Front Page
Kennedy to reduce the influence of the Federal Reserve by giving the Treasury Announcements
more power to issue currency. The order wassigned June 4, 1963. A few
months later, of course, Kennedy was killed, and conspiracy theorists
hypothesize a link between the murder and E.O. 11,110. They argue that the Spotlight On
Federal Reserve was somehow involved in the assassination to protect its power Civil Liberties & Repress
over monetary policy. Economic Justice
LGBTQ Equity
The executive order modifies a pre-existing order issued by Harry Truman in Racial Justice
1951. E.O. 10,289 states "The Secretary of the Treasury is hereby designated Reproductive Justice
and empowered to perform the following-described functions of the President Christian Right & Theocr
without the approval, ratification, or other action of the President..." The order Understanding the Right
then lists tasks (a) through (h) which the Treasurer can now do without bothering More Article Topics
the President. None of the powers assigned to the Treasury in E.O. 10,289 relate Explore
to money or to monetary policy. Kennedy's E.O. 11,110 then instructs that
SECTION 1. Executive Order No. 10289 of September 9, 1951, as

amended, is hereby further amended (a) By adding at the end of Browse Topics | Site Guid
paragraph 1 thereof the following subparagraph (j): Bookstore | Magazine | Pu
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'(j) The authority vested in the President by paragraph (b) of section
43 of the Act of May 12, 1933, as amended (31 U.S.C. 821(b)), to Political Research Associ
issue silver certificates against any silver bullion, silver, or standard
silver dollars in the Treasury not then held for redemption of an About Us
outstanding silver certificates, to prescribe the denominations of PRA News
such silver certificates, and to coin standard silver dollars and Watch short videos
subsidiary silver currency for their redemption,' and (b) By revoking Donate!
subparagraphs (b) and (c) of paragraph 2 thereof.
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any act done, or any right accruing or accrued or any suit or
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be enforced as if said amendments had not been made. Open The Governm
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John F. Kennedy, THE WHITE HOUSE, June 4, 1963. Stop Spying
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To understand exactly what Kennedy's order was trying to do, we must Research
understand the purpose of the legislation which gave the order its underlying
authority. The Agricultural Adjustment Act of 1933 (ch. 25, 48 Stat 51) to Copyright Information, Te
which Kennedy refers permits the President to issue silver certificates in various Conditions
denominations (mostly $1, $2, $5, and $10) and in any total volume so long as
the Treasury has enough silver on hand to redeem the certificates for a specific Please read our Terms an
quantity and fineness of silver and that the total volume of such currency does copyright information reg
not exceed $3 billion. The Silver Purchase Act of 1934 (ch. 674,48 Stat 1178) downloading, copying, pr
also grants this power to the Treasury Secretary subject to similar limitations. linking material on this sit
Nowhere in the text of the order is a quantity of money mentioned, so it is about links present on thi
unclear how Marrs arrived at his $4.2 billion figure. Moreover, the President our privacy policy.
could not have authorized such a large issue because it would have exceeded the
statutory limit.2
As economic activity grew in the fifties and sixties, the public demand for low
denomination currency grew, increasing the Treasury's need for silver to back
additional certificate issues and to mint new coins (dimes, quarters, half-dollars).
However, during the late fifties the price of silver began to rise and reached the
point that the market value of the silver contained in the coins and backing the
certificates was greater than the face value of the money itself.2
To conserve the Treasury's silver needs, the Silver Purchase Act and related
measures were repealed by Congress in 1963 with Public Law 88-36. Following
the repeal, only the President could authorize new silver certificate issues, and
no longer the Treasury Secretary. The law, signed by Kennedy himself, also
permits the Federal Reserve to issue small denomination bills to replace the
outgoing silver certificates (prior to the act, the Fed could only issue Federal
Reserve Notes in larger denominations). The Treasury's shrinking silver stock
could then be used to mint coins only and not have to back currency. The repeal
left only the President with the authority to issue silver certificates, however it
did permit him to delegate this authority. E.O. 11,110 does this by transferring
the authority from the President to the Treasury Secretary.2
E.O. 11,110 did not create authority to issue new silver certificates, it only
affected who could give the order. The purpose of the order was to facilitate the
reduction of certificates in circulation, not to increase them. In October 1964 the
Treasury ceased issuing them entirely. The Coinage Act of 1965 (PL 89-81)
ended the practice of using silver in most U.S. coins, and in 1968 Congress ended
the redeemability of silver certificates (PL 90-29). E.O. 11,110 was never
reversed by President Johnson and remained on the books until 1987 when there
was a general cleaning-up of executive orders (E.O. 12,608, 9/9/87). However,
by this time the remaining legislative authority behind E.O. 11,110 had been
repealed by Congress with PL 97-258 in 1982.2
In summary, E.O. 11,110 did not create new authority to issue additional silver
certificates. In fact, its intention was to ease the process for their removal so that
small denomination Federal Reserve Notes could replace them in accordance
with a law Kennedy himself signed. If Kennedy had really sought to reduce
2 of 3 1/3/2011 10:19 AM
Federal Reserve power, then why did he sign a bill that gave the Fed still more
power?
Marrs also makes some other factual errors in his conspiracy tale that suggest he
is not very familiar with the Federal Reserve or the financial system. He writes
that a source of tension between the Federal Reserve and the Kennedy
Administration was the Treasury's desire to allow banks to underwrite state and
local government bonds, thereby weakening the "dominant" Federal Reserve
banks. However, such a move, which was later permitted by Congress, would
not have affected the Federal Reserve system because it had never been
involved in underwriting bond issues. Marrs also claims that Kennedy signed a
bill that changed the backing of small denomination currency from silver to gold
to "add strength to the weakened U.S. currency." This is completely false. U.S.
currency has not been on the gold standard since 1934, and silver certificates, as
their name suggests, had never been redeemable in anything but silver. In
addition, U.S. currency was not "weak" during Kennedy's time: There had not
been any significant inflation since the late forties, and the exchange rate value
of the dollar was fixed according to the Bretton Woods agreement.
In the introduction to his book, Marrs advises the reader not to trust his book.
This appears to be good advice.
References:
1. Marrs, Jim (1989), Crossfire: The Plot that Killed Kennedy, New York:
Carroll & Graf Publishers.
2. Woodward, G. Thomas (1996), "Money and the Federal Reserve System:

Myth and Reality," Congressional Research Service.

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Myth #10. The Legendary Tirade of Louis T. McFadden More Articles
Features from past
Louis T. McFadden was a member of the House of Representatives in the The Public Eye Ma
twenties and thirties and is one of the heroes of the Federal Reserve conspiracy PRA Reports - Onl
theorists. A Republican from Canton, Pennsylvania, he was the chair of the Former Front Page
House Banking and Currency Committee during the twenties, but was merely a Announcements
Committee member by 1932. He used his position in Congress occasionally to
crusade against the Federal Reserve, a stance Gary Kah implies may have cost
McFadden his life. Spotlight On
On June 10, 1932 the House was debating a bill which would would expand the Economic Justice
types of securities the Federal Reserve could trade when conducting monetary LGBTQ Equity
policy. McFadden used this opportunity to launch a twenty-five minute tirade Racial Justice
against the Federal Reserve, and in so doing became a legendary champion Reproductive Justice
amongst conspiracy theorists. However, just because a claim appears in the Christian Right & Theocr
Congressional Record does not necessarily mean it is true. McFadden began... Understanding the Right
More Article Topics
Mr. Chairman, we have in this country one of the most corrupt Explore
institutions the world has ever known. I refer to the Federal
Reserve Board and the Federal reserve banks. The Federal Reserve
Board, a Government board, has cheated the Government of the
United States out of enough money to pay the national debt. The Browse Topics | Site Guid
depredations and the iniquities of the Federal Reserve Board and Bookstore | Magazine | Pu
the Federal reserve banks acting together have cost this country Activists Resources
enough money to pay the national debt several times over. This evil
institution has impoverished and ruined the people of the United Political Research Associ
States; has bankrupted itself, and has practically bankrupted our
Government. It has done this through defects of the law under About Us
which it operates, through the maladministration of that law by the PRA News
Federal Reserve Board and through the corrupt practices of the Watch short videos
moneyed vultures who control it.1 Donate!
1 of 4 1/3/2011 10:20 AM
Once the hyperbole and histrionics are deducted, there is little remaining of PRA is an affiliate of:
substance in the above quotation. McFadden makes the claim that the Federal
Reserve had cost the federal government enough money to "pay the national Causes in Common
debt several times over." Is he correct? Talk to Action
Open The Governm
Disbursements of Federal Reserve Net Income, 1914-1931 (in millions) Building Human Ri
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Total Revenues $970.7 Net Other Allies in Acti
Expenses 363.3 ------- Research
Net Income 607.4
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Distribution of Net Income: Paid as Conditions
dividends 102.0 Payments to Treasury 147.1
Retained by Fed 358.3 Please read our Terms an
Source: Annual Report, 1995, Board of Governors, p. 358. downloading, copying, pr
In this table we see that from 1914 to 1931 the Federal Reserve system about links present on thi
collectively earned profits totaling $607 million. About $102 million was our privacy policy.
distributed to member banks as dividends, and about $147 million was paid to
the Treasury as a "franchise tax." The Federal Reserve banks kept the remaining Updates and Corrections
$359 million. The national debt in 1932 was $19.5 billion, so even if the Federal
Reserve had been paying all its profits to the government during this time, it
would have been enough to pay only 3 percent of the national debt -- a far cry
from McFadden's "several times over."4 Moreover, the Federal Reserve's total
revenues for the period were $971 million, so if the entirety of the System's
revenues had gone straight to the Treasury, it still would not have been sufficient
to make McFadden's claim even remotely accurate.
McFadden then covered a wide variety of topics related to the Federal Reserve
Board. He accused it of assisting Trotsky's efforts during the Russian
Revolution, of being controlled by international bankers, of debasing the
currency, and of many other fascinating transgressions. He also invoked the
testimony of Father Charles E. Coughlin, the Catholic priest who would later
become famous for his radio broadcasts in support of Hitler's National Socialist
agenda.
We can study the accuracy of these claims, as well. The first one is new to me,
and I have not the slightest idea whether it is true, although given that McFadden
had trouble with a claim which could be easily verified, it seems wise to invoke
skepticism on his more fantastic accusations. Generally, this accusation is
consistent with the "Protocols of the Learned Elders of Zion," originally
published in 1903 in czarist Russia. It is supposed to be an "internal" document
proving the alleged international Jewish conspiracy, but it is now known to have
been a hoax.2 Henry Ford popularized translations of it into English in the 1920s
and this may have been McFadden's source. The second claim is false, as I show
in my article, Do Foreigners Own the Fed? The claim that the Fed debased the
currency is also false. To "debase" a currency means to reduce its purchasing
power, which happens when the general level of prices rises over time. This is
usually caused by excessive growth of the money supply, yet in 1932 the price
level was lower than it was in 1914, indicating that the opposite of a debasement
had occurred.
McFadden also made some important and accurate arguments. During his
speech on the House floor, he stated,
From the Atlantic to the Pacific our country has been ravaged and
2 of 4 1/3/2011 10:20 AM
laid waste by the evil practices of the Federal Reserve Board and
the Federal reserve banks and the interests which control them ...
This is an era of economic misery and for the conditions that caused
that misery, the Federal Reserve Board and the Federal Reserve
banks are fully liable.1
What did McFadden mean by "economic misery?" They year he spoke, 1932,
was the very worst time of the Great Depression. The unemployment rate was
approaching 25 percent of the labor force, which to this day stands as record for
the U.S. economy. Homelessness, deprivation, and starvation, usually reserved
for the ultra-poor in this country, were now stalking millions of former members
of the middle class. "Economic misery" was an understatement.
Most economic historians would agree with McFadden that the policies of the
Fed during this period were the primary cause of the Depression. A mild
recession in the summer of 1929 turned into a banking panic after the stock
market crash in October of that year. Banks, which owned stocks and made
loans to customers for the purpose of acquiring stocks, suddenly found a large
portion of their assets nearly worthless as a result of the crash. Many of them
began to fail, taking with them the deposits of millions of families (at the time
there was no deposit insurance).
This sort of thing had happened many times before, but the Federal Reserve was
created in 1913 in part to mitigate its effects as the banking system's "lender of
last resort." In the midst of the first severe wave of bank failures in 1930, the
Fed was deadlocked on what to do, eventually deciding to do nothing. Several
more waves of bank failures followed and the Depression was well underway.
Thus, the crisis can reasonably be blamed on the erroneous policies of the
Federal Reserve Board (The classic book, A Monetary History of the United
States by Milton Friedman and Anna Schwartz, provides a detailed accounting of
the Fed's internal policy debates during this critical time).
In my view, however, McFadden goes too far in terming the Fed's policies as
"evil" or its consequences deliberate. As Friedman and Schwartz showed, the
Fed essentially made an honest error in judgment. There is absolutely no
evidence that the Federal Reserve intended to create the Great Depression.
Such a motive would have made no sense from the Fed's point of view. The
Depression created a highly unstable economic and political environment. Why
would it have intentionally created the sort of conditions that would have
seriously endangered its own existence?
Finally, after McFadden's twenty-five minutes of ranting had expired, Senator

Benjamin Strong of Kansas commented on the oratory he had just heard:
There is a disease that afflicts mankind which is very vicious. It

warps the judgment, it narrows the vision, it even causes men to see
red, to make mountains out of mole hills. This disease has
sometimes been referred to as B.A. Ladies may refer to it as
"tummy" ache, but out in the wide-open spaces men call it the
"belly" ache, and I know of no man of my acquaintance that has this
disease in so violent a form as the gentleman from Pennsylvania,
Mr. McFadden.
I have not the time to refer to the many charges he makes against
the Federal Reserve system, but I call attention to the fact that for
12 years he has been the chairman of the Banking and Currency
Committee of this House and did not see fit during that time to
3 of 4 1/3/2011 10:20 AM
remedy any of the evils of which he now complains. It seems to me

entirely out of place to wait until he is retired as chairman of that
great committee and then assault all of the institutions of which it
has control.1
Strong's statement suggested that McFadden's rant was little more than political
bluster. If McFadden had really been the anti-Fed crusader some people today
make him out to have been, then why did he not do anything about the Fed when
he had the chance? More likely, he was making political points with his
constituents by placing blame for the Great Depression at the door of the Federal
Reserve. While this may have been justifiable, he went too far by implying the
Fed intended to wreck the economy.
References:
1. Congressional Record, June 1, 1932 to June 11, 1932, U.S. Government

Printing Office.
2. Johnson, George (1983). Architects of Fear. Boston: Houghton Mifflin.
3. Kah, Gary (1991). EnRoute to Global Occupation. Layfayette, La.:

Huntington House Publishers.
4. Office of the Public Debt, U.S. Treasury Department.
[Read more from McFadden on a conspiracist website]

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The 1907 Banking Panic

Morgan’s emergency injection of liquidity into the banking system undoubtedly

The Federal Reserve Act of 1913

always been a favorite source of conspiracy theories. However, the movement

2. Galbraith, John K. (1995), Money: Whence it Came, Where it Went, Boston:

4. Griffin, G. Edward (1995), The Creature from Jekyll Island, Appleton:

5. Kidwell, David S. and Richard Peterson (1997), Financial Institutions,

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References: PRA is an affiliate of:

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Political Research Associates • 1310 Broadway, Suite 201 • Somerville, MA 02144

latter value is altering the money supply. PRA is an affiliate of:

Hamilton conceded that the constitution was silent on banking. He asserted,

The Constitutional Basis for Paper Money

Even if the Federal Reserve is a constitutionally proper institution, what of paper

Prior to the constitutional convention in the summer of 1787, the States

Charles Pinckney of South Carolina produced a draft of a constitution that had

MR. GOUVERNEUR MORRIS [PA.] moved to strike out “and emit

MR. BUTLER [S.C.] seconds the motion.

MR. MADISON [Va.] Will it not be sufficient to prohibit making

MR. GOUVERNEUR MORRIS: Striking out the words will still

MR. GORHAM [Mass.] had doubts on the subject. Congress, he

MR. MERCER [Md.] was a friend to paper money, though in the

approve of such a measure. He was consequently opposed to a

MR. ELLSWORTH [Conn.] thought this a favorable moment to

MR. RANDOLPH [Va.], notwithstanding his antipathy to paper

Here in a microcosm is the debate on whether to deny the federal government

These clauses have several implications relevant to the question of whether

Against this motion we urged that it would be improper to deprive

U.S. v. Rickman, 638 F.2d 182, C.A.Kan. 1980:

Federal Reserve Notes in which the defendant, charged with failure

U.S. v. Wangrund, 533 F.2d 495; C.A.Cal. 1976

Federal Reserve notes are legal tender.

Tax protestor's claims concerning the constitutionality of the Federal

Federal Reserve Notes constitute legal tender and are taxable

Milam v. U.S., 524 F.2d 629. C.A.Cal. 1974.

The statute which delegates to the Federal Reserve System the

Gold and Silver Coin

The United States Constitution prohibits states from declaring legal

The provision of the Constitution [USCA Const Art. 1, §8, cl. 5]

no state shall make anything but gold or silver coin tender in

Are Gold and Silver Practical Metals for Coins?

Breckenridge, S.P., Legal Tender, N.Y.: Greenwood Press, 1903, 1969.

1. I have no formal legal training and do not consider myself a constitutional

2. Then, curiously, in the memorandum in which he articulated his thoughts on

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Determine open market policies

The Fed and Taxpayers

Interest income Interest on U.S. government securities $28,216

Operating expenses Salaries and benefits 1,446

Net Income Prior to Distribution $26,262

Distribution of Net Income Dividends paid to member banks

Source: 86th Annual Report of the Board of Governors, p.335.

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Introduction Most Recent Articl