Chapter Three ended with the rise of J.P. Morgan and how he used chronic boom and bust cycles to his own great advantage. That brings us to the Panic of 1907.
The Panic of 1907 was a seminal event in the history of banking. It spawned the Federal Reserve System – but not immediately. There would be a long cloak-and-dagger affair before the Federal Reserve Act was signed into law – while Americans were distracted – two days before Christmas, on December 23, 1913.
How Congress was duped by many of its own, and how the public was blindsided into believing their government was creating a safer banking system is a testament to the power of private banks to run and, for their own profit, ruin America.
Here's how it all happened.
In The House of Morgan, Ron Chernow's history of the Morgan banking dynasty, he succinctly explains, "In the early 1900s national and most state-chartered banks couldn't take trust accounts (wills, estates, and so on) but directed customers to trusts. Traditionally, these had been synonymous with safe investment. By 1907, however, they had exploited enough legal loopholes to become highly speculative. To draw money for risky ventures, they paid exorbitant interest rates, and trust executives operated like stock market plungers. They loaned out so much against stocks and bonds that by October 1907 as much as half of the bank loans in New York were backed by securities as collateral."
Up to now, I've given you a removed history of banking. From now on I'll move you forward at times to show how what happened in the past is still happening today. You'll learn to see what's going on from the perspective of history repeating itself – then you'll be able to protect yourself and make money by seeing into the future through the dark past.
What happened during the Savings & Loan Crisis of the late 1980s and early 1990s resulted in almost 800 banks failing. But it was also a slightly distorted mirror image of trust excesses in the 1900s. The S&Ls raised huge deposits garnered by hawking high-yield CDs, only to speculate in the real estate and other "investments" that would eventually blow them up.
The Knickerbocker Trust was attempting to corner copper and speculate in shares. If they succeeded, copper prices would go through the roof, and they would make hundreds of millions. But then, on October 21, 1907, copper prices began to collapse on word that Morgan and Guggenheim were getting into the copper mining business. The collapse dragged down shares across the board. The Knickerbocker Trust, with its huge position in copper, and the shares it owned, was wrecked.
Another run on banks was underway.
Bankers Trust, which was set up by the House of Morgan and its allies to capture trust business that commercial banks in the Morgan sphere couldn't profit from, was not spared in the bank run. Bankers Trust was run by Benjamin Strong, who later became the all-powerful President of the New York Federal Reserve Bank.
J. Pierpont Morgan personally led the rescue of the market and banks. But it had become clear that big banks, including his allied institutions, were not too big to fail.
The New York and and other Eastern banks also wanted to tame Western banks. These were growing so quickly that, by 1913, these non-national banks, outside of the Washington-New York sphere of influence, would grow to represent 71% of all the country's banks and 57% of all deposits.
The Gentleman Banker's Code, which kept Eastern banks from stealing each other's clients, needed to be enforced out West. And a lender of last resort had to be created.
As a result of the Panic of 1907, in 1908 Congress passed the Aldrich-Vreeland Act. The law was, more or less, a two-act play.
Act One authorized banks to issue "scrip" – a currency substitute that is not legal tender – instead of cash to depositors if they were facing a run, and instead of using gold or government bonds as reserves, banks could make loans (issue cash or script) against any bonds and commercial loans. In other words they could use assets, which carried real liabilities, as reserves.
Act Two created the National Monetary Commission to study and recommend legislation to bolster the banking system.
Of all the nine Senators and nine Representatives on the Commission, only one did anything.
Nelson Aldrich, the rich Republican Senator from Rhode Island, was the chairman of the Commission. Aldrich took two years to study central banking around the world. At home, he was counseled continuously by the "Money Trust" – bankers he was in bed with and represented in Congress.
A plan was coming together, but it needed to be mastered and sanctified.
That's where G. Edward Griffin's masterpiece of muckraking, The Creature from Jekyll Island, opens up. In chapter one, Griffin pulls back the cloak on Nelson Aldrich's plush private rail car to reveal the passengers heading, under the cover of darkness, from New Jersey to a hunting lodge on Jekyll Island, Georgia, both owned by J.P. Morgan.
Griffin writes, "This was the roster of the Aldrich car that night:
- Nelson W. Aldrich, Republican Whip [of the] Senate, Chairman of the National Monetary Commission, business associate of J.P. Morgan, father-in-law to John D. Rockefeller, Jr.;
- Abraham Piatt Andrew, Assistant Secretary of the U.S. Treasury;
- Frank P. Vanderlip, president of the National City Bank of New York, the most powerful bank at the time, representing William Rockefeller and the international investment banking house of Kuhn, Loeb & Company;
- Henry P. Davison, senior partner of the J.P. Morgan Company;
- Benjamin Strong, head of J.P. Morgan's Bankers Trust Company;
- Paul M. Warburg, a partner in Kuhn, Loeb & Company, a representative of the Rothschild banking dynasty in England and France, and brother to Max Warburg who was head of the Warburg banking consortium in Germany and the Netherlands."
It was at this meeting on Jekyll Island that the blueprint for the Federal Reserve System was laid out.
But it would take three more years, and the considerable power and money of the conspirators, to buy the Presidency of the United States in order to get his signature. He would sign the legislation that Congress was duped into passing in order to create the greatest money-making machine the world has ever known.
How did they do it? You'll get that in the next installment.
And one last thing: This isn't some conspiracy theory or maybe-it's-true-who-really-knows kind of thing.
This is American history.
No one disputes it. Everyone just forgot how we got here.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.