The Creature from Jekyll Island: A Second Look at the Federal Reserve

A currency drain occurs when a lack of parity in claims between two banks results in one bank's cash reserves being depleted in favor of the other. This happens when a depositor at one bank issues a check, and the recipient deposits it in a different bank. The recipient's bank then withdraws the funds from the depositor's bank. If too many banks call in these checks simultaneously, and the original bank lacks the liquid funds to cover them, it results in a currency drain. Along with bank runs, currency drains can pose a serious threat to banks that overextend their lending.

According to Investopedia, “discount window” refers to “a central bank lending facility meant to help commercial banks manage short-term liquidity needs. Banks that are unable to borrow from other banks in the federal funds market may borrow directly from the central bank's discount window paying the federal discount rate” (Kenton, Will. “What Is a Discount Window, Why & How Do Banks Use It?” Investopedia, 10 Jun 2024). The term originated with the practice of a bank representative going to the physical window of the Federal Reserve Bank’s branch to request a loan at discounted interest. Banks use the Discount Window to shore up their assets if too many depositors are withdrawing money at once to avoid failing.

The Federal Reserve System, often shortened to The Fed, is the central bank of the US. The system consists of 12 individual banks, each assigned to a specific region of the US, which are overseen by a Board of Governors. Though the individual banks are set up like private institutions, the Board of Governors is a governmental body nominated by the President and approved by the US Senate.

The Fed was founded in 1913 after a series of economic and banking crises led policymakers to believe that more centralized regulation of monetary and banking policy was necessary to protect consumers and institutions. Today, the Fed

conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy; promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad; [and] promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole. (“About the Fed.” The Federal Reserve Board, 10 Jun 2024).

It also helps facilitate safe US dollar transactions, among other economic functions.

The Fed is a controversial institution, the target of numerous conspiracy theories and criticism from legitimate economists alike. The Creature from Jekyll Island portrays it as the product of an elaborate conspiracy whose mission is to protect the interests of a small number of wealthy and powerful banks and their primary shareholders. Though Griffin’s theories about the Fed have been debunked by historians and economists, scholars such as Peter Conti-Brown agree that the Fed is fatally flawed and should be abolished, though for very different reasons (Conti-Brown, Peter. “The Twelve Federal Reserve Banks: Governance and Accountability in the 21st Century.” Rock Center for Corporate Governance, 5 Mar 2015).

Fractional reserve banking occurs when banks are only required to keep a fraction of their deposits on hand for withdrawals and can loan the rest to borrowers to collect the interest as profit. Most banks in the world operate this way, which is why checking accounts are largely free and savings accounts pay a small portion of interest to the depositor. The advantage of fractional reserve banking is that it helps expand the economy by freeing up capital. Griffin, however, argues that fractional reserve banking is fraudulent, immoral, and fundamentally bad for depositors.

When a currency, like dollars, is representative of a certain weight of the precious metal gold, that is known as the “gold standard.” The Gold-Exchange Standard is when the exchange ratio of different currencies is determined by how much gold the currency could buy on the open market. Griffin advocates returning to currency backed by precious metal because in a gold standard economy, inflation is essentially non-existent. However, most economists and economic historians believe that the historically greater volatility and greater adverse impacts for ordinary people observed under the gold standard outweigh the benefits it offers in low inflation (Whaples, Robert. “Where Is There Consensus Among American Economic Historians? The Results of a Survey on Forty Propositions.” The Journal of Economic History, 3 Mar 2009).

Bonds are government debt sold at auction or on the open market. United States Treasury bonds are a common example. These bonds can pay out a small amount of interest or can be held until they mature and can be cashed in. They are generally considered to be safe investments because they are backed by the issuing government. The primary way that the Fed creates money is by buying and selling Treasury bonds.

A Reserve Ratio is the percentage of deposits that a bank is required to hold in reserve and not loan out. The Fed sets the reserve ratio for all banks in the United States. Griffin argues that the reserve ratio is nonsensical in a fiat money system because the so-called reserves have no inherent value.

During the bank and corporation bailouts in 2008, many institutions that received bailout money granted their executives retention bonuses. The argument was that the money was to keep executives from abandoning companies in trouble. There was massive public outrage, however, because the same executives who had caused the company to need public money were being rewarded with taxpayer dollars.

In fractional reserve banking, most of the deposits are loaned out to borrowers. If many depositors attempt to withdraw their funds at the same time, there is often not enough money on hand to pay them. This is known as a run on the bank or a bank run. Bank runs were relatively common in the early days of banking, and following the stock market crash of 1929, there were massive bank runs nationwide. One of the functions of the Fed and the FDIC is to provide funds to depositors in the event of a bank run. Griffin argues that these bank runs would not happen in a system that was not inherently fraudulent. However, his argument is based on a misrepresentation of the way the FDIC works. When a bank fails FDIC deposit insurance goes directly to the depositors, not to the banks, and the bank’s remaining assets are liquidated by the FDIC to be returned to depositors and shareholders. Banks do not profit from the existence of the FDIC.