Debunking the Federal Reserve
Conspiracy Theories (and other financial myths)

by Edward Flaherty
(last updated September 5, 2000)


Table of Contents

Prologue:

i. Why bother addressing conspiracy theories?
ii. A glimpse at the American conspiracy culture
Conspiracy Theories:

1. The Federal Reserve Act was the product of a secret, conspiratorial meeting
2. The Federal Reserve Act passed Congress illegally
3. The Fed and paper money are unconstitutional
4. The Federal Reserve is a privately owned bank out to make a profit at the taxpayers' expense
5. The Federal Reserve is owned and controlled by foreigners
6. The Federal Reserve has never been audited
7. The Federal Reserve charges interest on the currency we use
8. But for the Federal Reserve, the budget would be balanced and we would have no national debt
9. President Kennedy was assassinated because he tried to usurp the Federal Reserve's power
10. Louis T. McFadden exposed the Federal Reserve scam in the Congressional Record

Other Financial Myths:

11. The Antidote to the Debt Virus
12. Exposing the Debt Virus fallacies
13. Banks charge interest on money they costlessly create out of thin air
14. "Lawful money" is only gold or silver coin as prescribed by the constitution.
 



i. Why bother addressing conspiracy theories?
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Most people probably view conspiracy theorizing as an activity limited to fringe political groups and their followers.  Consequently, efforts to debunk those beliefs are wasted either because no true believer can ever be told otherwise or because no 'reasonable' person would ever buy into that stuff.  While there may be some truth to this perception, the internet has provided a cheap and ready outlet for many fringe beliefs.  By letting erroneous beliefs stand unchallenged, we run the risk that those who are undecided may interpret silence from skeptics as agreement with the conspiracy theorists.  This web site hopes to provide the curious and undecided person with a source for educated and skeptical responses to many Federal Reserve-related conspiracy theories.

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ii. A glimpse at the American conspiracy culture

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It would be a mistake to examine these conspiracy theories outside the context in which they were written.  All the conspiracy authors whose work I study here profess a belief in the alleged 'New World Order' conspiracy, or some variant thereof.  George Johnson, author of Architects of Fear, sums up their beliefs succinctly.

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Myth #1: The Federal Reserve Act of 1913 was crafted by Wall Street bankers and a few senators in a secret meeting.
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Hypothesis: Bankers and senators met in secret on Jekyll Island, Georgia in 1910 to design a central bank that would give New York City banks control over the nation's money supply.

Facts: The meeting did take place, but plans for a return to central banking were already widely known. Regardless, the proposal that came out of the Jeckyll Island meeting never passed Congress.  The one that did, the Federal Reserve Act, placed control over monetary policy with a public body, the Federal Reserve Board, not with commercial banks.

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Myth #2: The Federal Reserve Act never actually passed Congress.  The Senate voted on the bill without a quorum, therefore the Act is null and void.

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Hypothesis: Supporters of the Federal Reserve Act knew they did not have the votes to win, so they waited to vote until its opponents left for Christmas vacation.  Since a majority of senators were not present to vote on the bill, its passage is not constitutionally valid.

Facts: The voting record clearly shows that a majority of the senate did vote on the bill.  Although some senators had left Washington for the holiday, the Congressional Record shows their respective positions on the legislation.  Even if all opponents had all been present to vote, the Federal Reserve Act still would have passed easily.

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Myth #3: The Federal Reserve Act and paper money are unconstitutional.
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Hypothesis: The constitution does not specifically grant Congress the power to create a central bank, therefore it cannot legally do so.  The constitution also forbids paper money and requires all money to be either gold or silver coin.  Therefore, both the Federal Reserve and its paper money currency are unconstitutional.

Opinion: A central bank is a reasonable use of the constitution's 'necessary and proper' clause, according to many federal court and Supreme Court rulings.  Although the constitution forbids States from making anything but gold or silver a legal tender, it places no such restriction on Congress.

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Myth #4: The Federal Reserve is a privately owned bank out to make a profit at the taxpayers' expense.
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Hypothesis: Each of the 12 Federal Reserve banks is a privately owned corporation.  Like any firm, their main objective is to maximize profits.  They do so by lending the government money and charging interest.  They manipulate monetary policy for their own gain, not for the public good.

Facts: Yes, the Federal Reserve banks are privately owned, but they are controlled by the publically-appointed Board of Governors.  The Federal Reserve banks merely execute the monetary policy choices made by the Board.  In addition, nearly all the interest the Federal Reserve collects on government bonds is rebated to the Treasury each year, so the government does not pay any net interest to the Fed.

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Myth #5: The Federal Reserve is owned and controlled by foreigners.

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Hypothesis: Major European banks and investment houses own the Federal Reserve.  From across the Atlantic they dictate monetary policy for their own benefit.

Facts: No foreigners own any part of the Fed.  Each Federal Reserve bank is owned 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 controlled by the publically-appointed Board of Governors, not by the Federal Reserve banks.

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Myth #6: The Federal Reserve has never been audited.
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Hypothesis: The Federal Reserve consistently resists attempts to audit its books.  This is because any independent inspection would reveal the Fed's treachery.

Fact:  Independent accounting firms conduct full financial audits of the Federal Reserve banks and the Board of Governors every year.  The Fed is also subject to certain types of audits from the Government Accounting Office.

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Myth #7: The Federal Reserve charges interest on the currency we use.
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Hypothesis:  Federal Reserve Notes, the currency we use in the United States, are evidence of the debt of the U.S. government to the Federal Reserve.  The central bank charges the government interest for this currency, thereby diverting billions of dollars from the Treasury that could be used for other things.  The government could print its own money and avoid the Fed's interest.

Facts:  The Federal Reserve rebates its net earnings to the Treasury every year.  Consequently, the interest the Treasury pays to the Fed is returned, so the money borrowed from the Fed has no net interest obligation for the Treasury.  The government could print its own currency independent of the Fed, but there would be no effective safeguards against abuse of this power for political gain.

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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.
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Hypothesis:  When the government runs a budget deficit, it borrows the money from the Fed at interest.  If the Fed did not charge interest or if the government simply printed its own interest-free currency, then we would have a balanced budget and no national debt.

Facts: The Federal Reserve banks have only a small share of the total national debt (about 7%).  Therefore, only a small share of the interest on the debt goes to the Fed.  Regardless, the Fed rebates that interest to the Treasury every year, so the debt held by the Fed carries no net interest obligation for the government.  In addition, it is Congress, not the Federal Reserve, who is responsible for the federal budget and the national debt.

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Myth #9: President Kennedy was assassinated because he tried to usurp the Federal Reserve's power.  Executive Order 11,110 proves it.

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Hypothesis: In the months before Dallas, President Kennedy signed E.O. 11,110 which instructed the Treasury to issue about $4 billion of interest-free 'silver certificate' currency, thereby circumventing the Federal Reserve and the interest it charges.  The Federal Reserve, fearful of further encroachments on its powers, had Kennedy killed.

Facts: Kennedy wrote E.O. 11,110 to phase out silver certificate currency, not to issue more of it.  Records show Kennedy and the Federal Reserve were almost always in agreement on policy matters.  He even signed legislation to give the Fed more authority to issue currency.

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Myth #10: Congressman Louis T. McFadden exposed the Federal Reserve scam in the Congressional Record.

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Hypothesis:  On the floor of the House in 1932, McFadden accused the Federal Reserve of costing the government enough money to repay the national debt several times over, of causing the Great Depression, and of many other terrible things.

Facts:  McFadden was incorrect regarding the Fed costing the government money.  However, later economic analysis agrees with him that Federal Reserve policy blunders had a 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 been the chairman of the House subcommittee that oversaw the Federal Reserve.  Why didn't he do anything to reform or abolish the Fed while he had the chance?

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Other Financial Myths:

Myth #11: The Antidote to the Debt Virus

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Hypothesis: All money is created only when someone takes out a loan.  Therefore, there can never be enough of this debt-money in circulation to repay all principal and interest.  This imbalance causes inflation, financial crises, social maladies, and will eventually destroy the economy unless there is a massive injection of "debt-free" money.  This idea is from Dr. Jacques Jaikaran's book, The Debt Virus.

Facts: The hypothesis shows an incomplete view of how the banking system interacts with the economy.  The system necessarily creates an amount of "debt-free" money equal to the interest on its loans.  It does this whenever it pays operating expenses, dividends, or purchases assets.  As a result, there is more than enough money in circulation to retire all bank-related debt.

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Myth #12: Exposing the Debt Virus fallacies
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This article is a much more detailed critique of The Debt Virus than the previous article.  The file is in PDF, so you will need to download your free copy of Adobe Acrobat Reader to view it.

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Myth #13: Banks charge interest on money they costlessly create out of thin air.
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Hypothesis:  Through fractional reserve banking and double-entry accounting, banks are able to create new money with the stroke of a pen (or a computer keystroke).  The money they lend costs them nothing to produce, yet they charge interest on it.

Facts:  The banking system is indeed able to create money with a mere computer keystroke.  However, a bank's ability to create money is tied directly to the amount of reserves customers have deposited there.  A bank must pay a competitive interest rate on those 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 create money.

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Myth #14: "Lawful money" is only gold or silver coin as prescribed by the constitution.
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Hypothesis:  The constitution specifies that only gold or silver coin may be used as money, also known as 'lawful money.'  All other forms of money, particularly paper money, are illegal.

Fact: The term 'lawful money' does not refer to gold or silver coin, but to types of money which the government would permit banks to use when tabulating their reserves.  These types of money included, but were not limited to, gold and silver coin.

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since August 31, 2000.
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