Tuesday, September 23, 2008

Goldman, Morgan ... and Hitler?

We've let off so many squeaks from the wheel that you'd think they'd hear something by now. Perhaps the Wall Street Journal simply has a very high tolerance for annoying letters ... or perhaps just those that ask uncomfortable questions. In any event, here's the latest.

Dear Sir(s):

Yesterday’s banner headline in the Wall Street Journal ("Goldman, Morgan Scrap Wall Street Model, Become Banks in Bid to Ride Out Crisis," WSJ, 09/22/08, A1) is misleading. It should read, "Socialists and Capitalists Combine to Destroy Last Vestige of Free Market." This collusion between Wall Street and the politicians brings to mind the fact that the backing of the industrialists and financiers in Weimar Germany was critical to Hindenburg's appointment of Adolph Hitler of the National Socialist Party as Chancellor in 1933. This was at a time when the Nazis were losing seats in the Reichstag and were in danger of being displaced as Germany's largest political party — but Hitler was believed to be the man who could save the country and the economy. Hitler made good on his promises . . . on his own terms.

The current situation in the United States has its roots in conditions at the dawn of the 20th century. In 1907, Wall Street controlled the money and credit system of the United States, and one man controlled Wall Street: financier J. P. Morgan. His financial shenanigans, detailed in a February 1913 Congressional report of Morgan's activities, were deemed responsible for causing the "Panic of 1907," and attributed to Morgan's virtual stranglehold on commercial and investment banking, as well as his near-total control on clearing house services.

The Federal Reserve was established in 1913 in part to ensure competition in financial services and break up the monopoly over money and credit in New York City, meaning Wall Street — which was under the thumb of J. P. Morgan. The central bank of the United States ultimately failed in its task of breaking up monopoly control over money and credit. The Federal Reserve effectively turned over control of the Federal Reserve's money creation power to the federal government to finance World War I in lieu of raising taxes. Money creation for qualified industrial, commercial, and agricultural investment dried up, with all new money being funneled to non-productive government spending.

This arrangement was formalized with the establishment of the Open Market Committee under the Banking Act of 1933 to monetize government debt to finance the New Deal. Because the Open Market Committee was located in New York City, this gave the virtual monopoly over money and credit back to Wall Street. The only change was taking it out of the hands of J. P. Morgan, and giving it to the federal government.

The only thing that saved the United States from going completely socialist in the wake of the New Deal was systemic legislation like Glass-Steagall, also from 1933, which separated commercial banking and investment banking. Glass-Steagall and similar legislation carefully separated different types of financial services to avoid a total monopoly, and inserted internal controls to avoid financial institutions from assuming incompatible functions and conflicts of interest.

The Depository Institutions Deregulation and Monetary Control Act of 1980 repealed Glass-Steagall. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999. Virtually all the checks and balances carefully built into the system have now been removed, there is monopoly control over money and credit, and the country is back to where it was in 1907. The only difference is that in 1907 a private elite controlled the economy, where now the State has the monopoly over money and credit, and permitted the establishment of a monopoly over incompatible financial services by Goldman and Morgan.

The solution to the current crisis is the same as it was in 1907, with some improvements. First, break the monopoly over money and credit now held by the federal government by prohibiting monetization of deficits. Second, reinstitute the structural controls separating incompatible financial services. Third, restore the Federal Reserve to its original purpose of providing liquidity and investment capital to industry, commerce, and agriculture, not speculation, government debt, or consumption. Fourth, implement a 100% reserve requirement for commercial banks, with all reserves in the form of cash, government securities, or secured corporate debentures. Fifth, prohibit the Federal Reserve from dealing in government securities of any kind, primary or secondary. Finally, all new money must be created in ways that also create new owners of the capital being financed.

A proposal to accomplish these goals is called Capital Homesteading for Every Citizen. As neither Wall Street nor the politicians offer anything better than programs that have been tried and have failed miserably (when they haven't been the cause of worse problems), Capital Homesteading must be studied seriously and implemented at the earliest possible date.

Donations to CESJ are tax deductible in the United States under IRC § 501(c)(3)






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