The bankers could create money and they could also create booms and busts, which were very profitable. Debt inevitably leads to booms and busts. The economy expands when money is borrowed and put into circulation. The economy contracts when the debt must be repaid. Bankers could finance wars, which were also profitable. Wars destroy things, which have to be replaced; the purchase price is financed by debt. Central banking failed to bring economic stability. The thirty years that followed the creation of the Fed marked some of the most challenging times in America’s history: World War I, the Panic of 1920, the Great Depression, and World War II.

Immediately after World War I, the Federal Reserve debased the dollar to help rebuild the British economy. In order to lower the value of the dollar and raise the value of the pound, the Fed embarked on purposeful monetary expansion. Money supply expanded from $12 billion in 1914 to $26 billion in 1929. The result of monetary expansion was the Roaring Twenties, a huge stock market boom, and equities that kept being bid higher as cheap money poured into the economy. The challenge for the bankers was to keep the stock market flying high.

The banks could lend based upon fractional reserves but they still faced pesky state usury laws which limited the amount of interest they could charge. Investment banking added a new dimension to usury – leverage. And the perfect vehicle for investment banking was the Investment Trust. An Investment Trust could raise cash by selling its own paper. For example, the Investment Trust G could raise $150 million worth of cash, by issuing $150 million of its own paper: $50 million of its own bonds, $50 million of its own preferred stock, and $50 million of its own common stock. After the sale of its own instruments, Investment Trust G uses the $150 million in cash to buy the common stock of other companies, such as AT&T, Ford, GM, and US Steel. These stocks became Investment Trust G's assets.

In the 1920’s, the fractional reserve banking system had inflated the money supply and much of the inflated money went to the stock market. Assume all common stocks rise, on average, by 50% in value. Then, the assets that Investment Trust G owns, which were worth $150 million, would now be worth $225 million. If the value of Investment Trust G's assets are worth $225 million, then the value of the paper that Investment Trust has issued---its bonds, preferred stock, and common stock--should reflect this increase, by also being worth $225 million; bonds worth $75 million, preferred stock worth $75 million, and common stock worth $75 million.

But the bonds and preferreds only paid interest and dividends, and the only paper issued by Investment Trust that could rise in value is the common stock. Since the total value of Investment Trust G was now worth $225 million, then the value of common stock issued by Investment Trust G increased in value from $50 million before, to $125 million now.

The value of the assets--the common stock of other companies--that Investment Trust G owned, increased in value by 50%; but the value of Investment Trust G's own common stock increased in value by 150% (from $50 million to $125 million), that is, at a rate three times greater than the common stock of other companies that Investment Trust G owns. That’s leverage. In this example, the ratio of leverage is 3:1, between the increase in the value of common stock, and its production of a threefold increase in the value of Investment Trust common stock.

But why stop there: You could theoretically set up another Investment Trust, let’s call it Investment Trust S, which would buy up and hold the common stock of Investment Trust G. Investment Trust S would issue bonds, preferred stock, and common stock; and Investment Trust S would buy the common stock of Investment Trust G. If the leverage of Investment Trust G to the common stocks it held was 3, and the leverage of Investment Trust S to Investment Trust G was 3, then the leverage of Investment Trust S to the common stock in the portfolio of Investment Trust G was 9:1.

This is a hypothetical example, but it is based upon the very real formula of the Goldman Sachs Trading Company, and its subsidiaries Shenandoah Inc. and BlueRidge Inc. Of course, the Goldman Sachs Trading Company did not produce anything, they did not manufacture any product, and they did not provide any particular service beyond moving paper around. And Goldman Sachs was not unique; many banks were speculating in the market, pushing depositors to become investors in their schemes. Everyday investors borrowed money, on margin, to invest in the stock market, which became artificially inflated. Leverage resulted in the Roaring Twenties, a bubble economy.

Eventually the Ponzi Scheme collapsed. There were certainly other causes of the Great Depression, but the new turbocharged leverage was definitely a big contributor. This was merely another form of usury; taking money from depositors to gamble in stocks and increasing the bet through leverage. The gamble failed in 1929.

Unemployment climbed to 25% and millions of Americans lost their homes to foreclosure. Shantytowns called Hoovervilles, named after President Hoover, sprang up across the country, the most notable in New York’s Central Park. In 1932, the Bonus Army demanded immediate payment of their Service Certificates. Throughout American history, soldiers had received bonuses for their service, typically cash plus acreage; World War I vets only received a $60 cash bonus. The American Legion fought for veterans’ bonuses, and in 1924 the government issued Service Certificates with a 20 year maturity. Faced with the hardships of the Depression, more than 40,000 World War I veterans marched on the Capitol, built a Hooverville along the Anacostia River, and demanded immediate payment of their Service Certificates.

Military troops led by General Douglas MacArthur and General George Patton, along with local police, attacked the veterans with fixed bayonets and gas; the US Army attacked its own veterans. Hundreds of veterans were injured and several were killed. The veterans marched again the next year, but it was not until 1936 that the bonuses were finally paid. The determination of the Bonus Army surely affected the 1944 decision to create the GI Bill of Rights.

The nation's banking system had collapsed by the time Franklin Roosevelt was inaugurated. Over 11,000 banks had failed. President Roosevelt’s first words were to calm a nervous country, “The only thing we have to fear is fear itself”; that is the memorable line, but it was followed by strong condemnation of the true culprits:

“Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. Primarily this is because rulers of the exchange of mankind's goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.

“True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.

“The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths.”

The next day FDR declared a banking holiday, closing the doors of the banks. Eight days later he allowed “the most sound” banks to reopen.

Congressional hearings showed that the presumed leaders of American enterprise, the bankers and brokers, were guilty of disreputable and dishonest dealings and gross misuses of the public's trust, literally buying control of politicians. The hearings started in 1932 and they uncovered plenty of abuses. JP Morgan maintained a “preferred list” of clients that would get special deals, huge discounts on stock purchases that could then be flipped for a quick profit. Among the clients on the “preferred list”: former President Calvin Coolidge, Supreme Court Justice Owen J. Roberts, former head of the Democratic Party John Raskob, and diplomat Norman Davis. The bankers had truly bribed their way into government.

J.P. Morgan, Jr., the son of the founder of the banking empire, testified that he had not paid any income taxes in 1930, 1931, and 1932; and dozens of multi-millionaire partners in JP Morgan had also not paid taxes. The revelation that the wealthiest Americans were not paying income tax must be juxtaposed against the desperate demands of the Bonus Army. 

The hearings of 1932 ultimately led to reforms: “The Glass-Steagall Act was enacted to remedy the speculative abuses that infected commercial banking prior to the collapse of the stock market and the financial panic of 1929-1933. Many banks, especially national banks, not only invested heavily in speculative securities but entered the business of investment banking in the traditional sense of the term by buying original issues for public resale. Apart from the special problems confined to affiliation three well-defined evils were found to flow from the combination of investment and commercial banking.” – Investment Company Institute v. Camp.

The three evils of the combined investment/commercial banks were: 1) banks were investing their own assets in securities with consequent risk to commercial and savings deposits; 2) loans were made in order to shore up the price of securities or the financial position of companies in which a bank had invested its own assets; 3) and commercial banks' financial interest in the ownership, price, or distribution of securities inevitably tempted bank officials to press their banking customers into investing in securities which the bank itself was under pressure to sell because of its own stake in the transaction.

The Glass-Steagall Act was one of the pillars of banking law since its passage in 1933. Glass-Steagall built a wall between commercial banking and investment banking. The law kept commercial banks that accept deposits from doing business on Wall Street as investment banks that issue and trade securities, and vice versa. There are actually two Glass Steagall measures. The first was the Glass-Steagall Act of 1932, a bookkeeping provision that allowed the Treasury to balance its account. And what is commonly known today as the Glass-Steagall law is actually the Bank Act of 1933, containing the provision erecting a wall between the banking and securities businesses. The Glass-Steagall Act also permitted Reserve Banks to make loans to member banks on any security the Reserve Banks consider satisfactory, and in unusual circumstances even to make loans to nonbank borrowers. It also established the Federal Deposit Insurance Corporation, or FDIC, to insure bank clients’ deposits. The bankers had so thoroughly abused depositors’ confidence that insured accounts were the only way to lure depositors back to banks, and to avert a run on the banks; even then millions of Americans would never trust the banks again.

The Bank Act of 1933 also included: the Truth in Securities Act and the Securities Exchange Act. The Truth in Securities Act required full disclosure in the issue of new securities to the public. Heavy penalties would be levied for failure to give full and accurate information about securities to the government. The Securities Exchange Act created the Securities and Exchange Commission, SEC, to regulate and oversee the securities markets. Certain manipulative practices, such as washed sales (selling stock, claiming a loss for tax purposes, and then buying it back in less than 30 days – or the mere pretence of a sale) and matched orders (creating pools to buy shares outside the exchanges, limiting supply and pushing prices higher), were prohibited. Insider trading was eliminated, or at least criminalized.

In April of 1933, President Roosevelt signed an order requiring citizens to turn in their gold for $20.67 per ounce. A few people surrendered their gold. The idea was to stop a “run” on the government by people demanding gold for their paper dollars; because of fractional reserve banking there never was enough gold to match the paper dollars that had been printed. The price of gold from the treasury was then raised to $35 per ounce, effectively increasing the money supply by 59%, and posting a nice profit for the Treasury.

The Bank Act of 1933 would remain largely intact until the Depository Institutions Act of 1980, and it was obliterated in 1999 by the Gramm-Leach-Bliley Act. Not surprisingly, many of the abuses of the 1920’s would be revisited after these regulations were taken away.

FDR would continue to attack the bankers throughout most of his administration: “The real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson — and I am not wholly excepting the Administration of W. W. The country is going through a repetition of Jackson's fight with the Bank of the United States — only on a far bigger and broader basis.”

The banking reforms continued. The Banking Act of 1935 restructured the Federal Reserve System, and introduced the basic structure that exists today. The Treasury Secretary and Comptroller of the Currency no longer serve on the Board. The Commodities Exchange Act of 1936 set regulations for trading futures options and commodities on registered and regulated exchanges. The Act provided federal regulation of all commodities and futures trading activities and required all futures and commodity options to be traded on organized exchanges.

FDR remained vigilant against the abuses of the bankers through his first two terms: “We have begun to bring private autocratic powers into their proper subordination to the public's government. The legend that they were invincible--above and beyond the processes of a democracy--has been shattered. They have been challenged and beaten.” Also: “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.”

Many people now believe that all government is bad. Perhaps it has taken a turn for the worse, but how can a democratically elected government be bad when it serves the will of the People?  Bankers and Corporatist use this demonization to combat the “one person – one vote” rule.  If you ask citizens about the quality of our military, police, or NASA everyone says they are the best in the world.  Our state run university system attracts the brightest minds from all over the world.  Senior citizens, by an overwhelming majority think that Medicare works great for them.  All are government programs.  Control is in the hands of the bankers and Corporatists who want the People to fight government so they keep power. 

The Depression-era bankers may have taken a beating, but they rose like vampires to suck profits in World War II. The national debt increased six fold. The national debt in 1946, the year after the war ended, was 128 per cent of gross national product. While soldiers paid the ultimate price, the financiers were collecting hefty premiums on the debt. The most despicable act of treason is war profiteering. Blood, severed limbs, and life itself must never be sacrificed for profit. The fight for freedom does not include the perverse freedom to profit from patriots’ blood.

Since the end of World War II, the US dollar enjoyed a unique and dominant position in international trade. In the summer of 1944, before the war ended, 44 nations sent delegates to a conference in Bretton Woods, New Hampshire, and they created a system for exchanging one currency against another. It also led to the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, now known as the World Bank. The IMF was designed to monitor exchange rates and lend reserve currencies to nations with trade deficits. The IBRD/World Bank was designed to provide underdeveloped nations with needed capital — although each institution's role has changed over time. The member states agreed to fix their exchange rates by tying their currencies to the US dollar, and the dollar was fixed to gold at $35 per ounce. Central banks were given the job of maintaining fixed exchange rates between their currencies and the dollar. They did this by intervening in foreign exchange markets. If a country's currency was too high relative to the dollar, its central bank would sell its currency in exchange for dollars, driving down the value of its currency. Conversely, if the value of a country's money was too low, the country would buy its own currency, pushing the price up. The United States became the money manager for the world. The theory was that the Bretton Woods system would promote stability; the reality was quite different.

The dollar was king, but US foreign policy sometimes imposed onerous restrictions on the use of the dollar as a global reserve currency. After 1965, US behavior became increasingly destabilizing, mostly as a result of increased government spending on social programs at home and an escalating war in Vietnam. America's economy began to overheat and inflation began to gain momentum, causing deficits to widen. Foreign governments realized the US was printing money, which was theoretically, backed by gold. The flood of dollars caused demand for gold to surge. Foreign governments (especially France) began cashing in the paper dollars for gold.  Of course, the US didn’t have enough gold to back its dollars.

In 1971, President Richard Nixon signed the Smithsonian Agreement, which devalued the dollar in its relation to gold. It would now take $38 dollars to buy an ounce of gold, up from $35; Nixon then cut the connection between the dollar and gold. Inflation increased. In 1973, Nixon again devalued the dollar to $42.22 per ounce of gold, nearly 20% devaluation in two years. Confidence in the dollar was dashed. President Ford would later lift restrictions on gold ownership and gold prices jumped dramatically. Inflation skyrocketed.

By 1978, inflation had made lending unprofitable. The prime rate was 11.75%, higher than most states’ usury limits; by 1980, the prime rate topped out at 20%, essentially matching the devaluation of the dollar in 1971.  And those pesky state laws that limit usury? They are still on the books in several states. The basic idea behind the usury laws was to avoid excessive interest rates. Low interest rates limit inflation, but the usury laws could not stop inflation when the dollar had been devalued.

Slowly but surely, the banks chipped away at the state usury laws. Each state had its own limits, a balancing act between attracting lenders and protecting its citizens. Generally, state usury laws placed maximum caps between 6% to about 18% on loans, but the laws became riddled with holes; exemptions for business loans, car loans, and mail-order loans – but no exemptions for an individual making a loan to another individual. To charge more than the legal limit was a crime. The criminals were known as loan sharks.

Before we get to the monumental changes in usury laws, we need to go back to 1950, when Frank X. McNamara, head of the Hamilton Credit Corp. went to dinner with Albert Bloomingdale, heir to the department stores. Charge cards came into use around 1914, when Western Union and various department stores, hotels, and oil companies began using them. These early cards could be used to purchase the issuer's goods and services only, and balances had to be paid in full each month.  McNamara and Bloomingdale discussed a client of Hamilton Credit who had allowed neighbors to borrow his store charge cards to make purchases at local stores. The man charged his neighbors interest on the purchases but when the neighbors became delinquent on their payments, the man was forced to ask Hamilton Credit for a loan. Meanwhile, McNamara forgot his wallet and he had to call his wife to bring him cash to pay for the meal. The idea for the Diners’ Club was hatched.

Diners’ Club, the first credit card, was initially accepted by 14 restaurants in the New York area. The Diners Club was going to be a middleman. Instead of individual companies offering credit to their own customers, the Diners Club offered credit to individuals from many companies and then billed the customers and paid the companies, relieving the companies from collection duties. The restaurants were charged 7 percent and the card holder paid an annual fee of $3. By the end of the first year, 20,000 customers were using the Diners’ Club card.

In 1958, American Express and BankAmeriCard (which later became Visa) got into the act.  Bank of America issued the first BankAmeriCard by mass mailing 60,000 cards to the residents of Fresno, California. BankAmeriCard was the first credit card based on a revolving line of credit. The bank was swamped by massive defaults on the cards. In 1966, a group of Midwestern banks attempted another mass mailing of five million cards. The cards were mailed indiscriminately and this was probably the first time, but not the last, that a dog was issued a credit card. Cards were stolen from the mail and fraud was rampant. Congressional hearings on the “Chicago Debacle” included calls to outlaw credit cards, but the cards were a successful way for banks to lure new customers even if the credit card unit didn’t pull in big profits, and for the consumer the lure was irresistible. The credit card companies linked a nationwide network of merchants and banks under the brands of Visa and MasterCard. The debt habit was diligently cultivated and encouraged. By 1978, over 100 million cards had been issued.

The banks had plenty of credit card customers but they couldn’t make profits in an inflationary 

economy that capped usury. For the credit card companies, it was no longer a matter of chipping 

away at usury limits; they began pounding the legal limits with a sledgehammer.

Sinclair Noe

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