Introduction
1913 was an historic year for the United States of America. In July the Civil War Veterans met to celebrate the 50th Anniversary of Gettysburg which can be read in further detail at another SSPublishing website by using the link provided.. But the main event of 1913 would have to be the passing of the Federal Reserve Act in December of that year. The country we became after this Bill was passed in Congress and signed into law by President Woodrow Wilson so transformed the nation, it was completely different than the one before it.
The Federal Reserve (the Fed) is the Central bank of the United States. Although we had National banks at various times in our history, our countries Founders never wanted a central bank when they envisioned our form of government. They had lived under the Bank of England and understood the dangers of a central bank. They had witnessed what central banks did to Europe and England: (a) How they debased their currency at will, (b) How they funded and made war too easy of a proposition for any country to get itself entangled in quagmires, (c) How they created the endless boom and bust cycles of economies, and (d) the endless taxation through inflation.
I should state at this point that I am not anti-Fed. Without the Federal Reserve the twentieth century would have been very different. The outcome of the twentieth century and how the world looks today though is without doubt a direct result of the Federal Reserve. When central banking is studied, its a catch-22 with many factors. I doubt we could have won two World Wars without the Fed financing them. I also doubt we would have even had the two World Wars if the Fed had never been created and financed them. As Churchill said about the Enigma machine when the Allies finally deciphered one they had in possession, "it's a riddle wrapped in a mystery inside an enigma". This phrase has since been used to describe any very complex subject. It was even a line in Oliver Stone's movie "JFK" about the Kennedy assassination. Central banks are complex and dangerous beasts. They are also probably a necessary evil. The secret is how do you control the beast? An answer to which we are still trying to figure out.
My chief complaint with the Fed is that it cannot react quick enough to changing market signs. By the time they even recognize financial distress, the damage is done. Wall Street and Main Street do not connect and are not one in the same as we are constantly told.
On the History of the Federal Reserve website (a), they posted "Nationwide panics occurred on average every fifteen years. These panics forced financial institutions to suspend operations, triggering long and deep recessions. American banks held large required reserves of cash, but these reserves were scattered throughout the nation, held in the vaults of thousands of banks or as deposits in financial institutions in designated reserve and central reserve cities. During crises, they became frozen in place, preventing them from being used to alleviate the situation. During booms, banks’ excess reserves tended to flow toward big cities, especially New York, where bankers invested them in call loans, which were loans repayable on demand to brokers. The brokers in turn loaned the funds to investors speculating in equity markets, whose stock purchases served as collateral for the transactions. This American system made bank reserves immobile and equity markets volatile, a recipe for financial instability."
I almost choked the first time I read that. The very reason for the Fed was to prevent the financial disasters that happed every fifteen years. Really? Seriously? Since the Fed has been created we have had two Great Depressions (Yes, the 2008 housing collapse was the 2nd Great Depression regardless what they call it) as well recessions every 15 years or less. I guess some things never change, but this is exactly what I mean. The Fed cannot react quick enough to prevent financial disasters because their very policies create them. So what is the solution? Ironically, a central bank. But a central bank that actually works. We need massive bank reform that is truly an elastic money supply as the Fed was intended to be.
What exactly is a Bank?
Before we can start exploring what the Federal Reserve is and how it operates, we need a brief history lesson in banking itself. We take banks for granted. They seem to be on every corner. But there was a time when banks did not exist. Although one could barter for their goods and services, this system creates problems when I need something from you, but I have nothing to trade for it that you want of mine. This is why physical gold and silver was used for "money" for thousands of years before the first bank was ever built. Everybody saw the value in it and accepted it as payment. Because they knew in the end, they could trade the same money they received for goods and services they desired. Thus gold and silver exchange became an ideal way to do trade with anyone and anywhere. But, it also was heavy and cumbersome and had to be kept in peoples homes. Always at the risk of it being stolen. What the people needed was a safe place to keep their gold and silver, but where? The one tradesman that used gold and silver were the people that made objects out of it everyday in their work. This trade was the Goldsmiths and Silversmiths. But for simplicity, lets just use the term goldsmith, even though silver was also traded. The goldsmith already had a good supply of gold for his daily work. Which he kept safely in a vault or heavy lockbox. No one is sure when it happened, but it is believed to have started in the 16th century when the common folk started asking their town goldsmith to keep their private precious metals safe and secure in the goldsmiths vault.
Where did bank vaults come from?
Lock boxes and vaults have evolved over the years to todays form. In the ancient Roman city of Pompei which was destroyed by a volcano in 79 AD, one object that was found intact was a lockable iron safe. It's purpose was to both store clothing as well as valuable jewelry and money. It was found in the central hall of a house decorated with images of gods. This iron safe was very advanced for its day. In the early years, wooden boxes with locks served as "lock boxes". Later metal boxes became in use with better locks. Vaults most likely came after entire rooms were being used for storage. Security kept improving to a point to what would be a thick metal walled room with a heavy door. The doors lock kept improving using thicker dead-bolts and more of them too.
In 1694, a few decades after banking got started, the Bank of England had nine underground vaults. In these vaults was stored roughly 400,000 bars of gold, with a value of 200 billion pounds. The banks present building was erected in 1734 but has gone through numerous upgrades. The vault storage system was continually improved, with the biggest advancements coming in the 1930's. The vaults are now three levels deep and have walls 2.4 meters (8 ft.) thick. They are equipped with highly advanced lock technology. An interesting bit is that the vaults of the Bank of England have never been robbed. There is an unsubstantiated story that a sewage worker accidentally entered the vaults in the Victorian Age through a drain. He disclosed his finding to the Bank and was awarded 800 pounds. Changes were made to strengthen the security even further.
Lock boxes and vaults have evolved over the years to todays form. In the ancient Roman city of Pompei which was destroyed by a volcano in 79 AD, one object that was found intact was a lockable iron safe. It's purpose was to both store clothing as well as valuable jewelry and money. It was found in the central hall of a house decorated with images of gods. This iron safe was very advanced for its day. In the early years, wooden boxes with locks served as "lock boxes". Later metal boxes became in use with better locks. Vaults most likely came after entire rooms were being used for storage. Security kept improving to a point to what would be a thick metal walled room with a heavy door. The doors lock kept improving using thicker dead-bolts and more of them too.
In 1694, a few decades after banking got started, the Bank of England had nine underground vaults. In these vaults was stored roughly 400,000 bars of gold, with a value of 200 billion pounds. The banks present building was erected in 1734 but has gone through numerous upgrades. The vault storage system was continually improved, with the biggest advancements coming in the 1930's. The vaults are now three levels deep and have walls 2.4 meters (8 ft.) thick. They are equipped with highly advanced lock technology. An interesting bit is that the vaults of the Bank of England have never been robbed. There is an unsubstantiated story that a sewage worker accidentally entered the vaults in the Victorian Age through a drain. He disclosed his finding to the Bank and was awarded 800 pounds. Changes were made to strengthen the security even further.
The people would take their coins to the goldsmith to be safely locked away. The goldsmith would then in return hand write a receipt, called a script. The script would clearly show the amount the person had left on deposit. They would then pay a small fee for the safe keeping of their money with the understanding that they could come back at any point to retrieve it. A rudimentary form of banking had begun. When the people did retrieve their money, the goldsmith would destroy the script and write a new one with the new amount the depositor had in his lockbox.
Although no loans had started yet, the safe keeping of people's money in a secure location is by definition a bank. The term "bank" comes from an old Italian word "banca". Which meant a money dealers counter or shop. Some say it comes from the French word "banque", which meant tables. So both versions refer to some sort of counter or table where business or money exchanging took place. Interestingly, our term "bankrupt" comes from an Italian word also, "banca rotta". Which means breaking benches or more appropriately, breaking the benches of the "banca". In John 2:15, Jesus turns over the tables of the money changers in the Temple. Was there a hidden message in that verse of the Lord warning us of future money changers too? I'll let you be the judge.
Please visit again as we will soon get into everything Fed: from its creation to todays Federal Reserve System
Although no loans had started yet, the safe keeping of people's money in a secure location is by definition a bank. The term "bank" comes from an old Italian word "banca". Which meant a money dealers counter or shop. Some say it comes from the French word "banque", which meant tables. So both versions refer to some sort of counter or table where business or money exchanging took place. Interestingly, our term "bankrupt" comes from an Italian word also, "banca rotta". Which means breaking benches or more appropriately, breaking the benches of the "banca". In John 2:15, Jesus turns over the tables of the money changers in the Temple. Was there a hidden message in that verse of the Lord warning us of future money changers too? I'll let you be the judge.
Please visit again as we will soon get into everything Fed: from its creation to todays Federal Reserve System
