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

Griffin discusses contemporary financial issues related to his larger points. He metaphorically connects football to the cycles of the Fed: both have “plays” to suit circumstances; both have definite rules; both have a defined objective; and unless a spectator is familiar with those rules and the objective, the action is impossible to understand.

The objective of the Fed, according to Griffin, is to put the bulk of the risk onto the federal government rather than individual banks. Banks have “checkbook money,” which is money that only exists on bank ledgers rather than in cash or coin. They lend this money to borrowers in exchange for profit from interest on the loan. These loans are both assets, because of the interest income, and liabilities, because the money has left the bank. If the borrower doesn’t repay the loan and has no assets to seize, the bank writes it off as a loss. Though the lost money was only “checkbook” money, it’s still an issue because any money paid to other banks via check must either be taken from the bank’s profit or from the initial capital invested in the bank. The bank’s owners still suffer a loss. If that loss becomes too large, the bank fails. Under the protection provided by the Federal Reserve System, large loans that are defaulted on don’t fall entirely on the owners of the bank.

According to Griffin, the consequence of this governmental protection is that banks are incentivized to give large loans to corporations and foreign nations. Loans to small businesses and individuals are too insignificant to merit government protection which disincentives those loans for the bank. Banks also prefer to have borrowers only pay the interest on the loan. Governments are ideal borrowers, then, because they essentially never pay their debts in whole.

If the government or large corporation cannot or will not pay the interest to the bank there are several responses the bank may have. The first response is to “roll-over” the debt by loaning additional money to the borrower to cover the cost of the interest on the original loan. This is generally done by creating more “check-book money” and creating a new loan that acts as a new asset without losing the original asset. Another option is to threaten the borrower with collection action and then offer a loan that is large enough to allow the borrower to pay the interest plus have more money for the borrower’s own aims. If the borrower still cannot or will not pay the interest on the existing loans, the loan is then “rescheduled,” meaning that it is given a lower interest rate and a longer payment period. The bank still makes the same amount of money, and the interest payments feel more manageable for the borrower.

If the borrower still won’t pay, the bank’s stockholders often have the assets to absorb the loan, but that is not in the best interests of the bank or its owners. For large borrowers, the US Federal Government is the final step in maintaining the debt. The bank asks Congress to help either the corporation or country that cannot make the interest payments. Because the corporation offers jobs and products to citizens, and the country imports American products or exports cheaper products to American stores, Congress is encouraged to protect the status quo. Congress gives money to the borrower, the bank absorbs a small part of the loan, and the borrower agrees to certain conditions imposed by Congress. Alternately, Congress essentially acts as a co-signer on the original loan. Those payments don’t come directly from tax money paid by citizens but instead come from money created by the Federal Reserve.

Given the protections granted to the banks by the government, most banks should be financially sound. However, most banks operate in a state of technical insolvency. Because banks loan out depositor money, if many depositors all want their money back at the same time, then the bank could still fail, even with the protections. The main problem with this is that most depositors are unaware of the risk they’re taking with their money. The Federal Reserve is one backstop to that problem and will lend the bank money to a certain extent.

The Federal Deposit Insurance Corporation (FDIC) is frequently referenced as an insurance fund for depositors. There is a fund that will pay out to depositors if the bank lacks the cash to pay. However, the money in the fund comes from money collected from the banks: each bank must pay a certain percentage of their total deposits into the fund. Regardless of each bank’s record of responsible loans or lack thereof, Griffin claims, all banks pay in the same percentage. Therefore, Griffin argues, banks that make riskier loans turn more profit than conservative banks and can cash in on the FDIC funds if things go wrong. The system encourages banks to loan irresponsibly. Griffin claims that the FDIC doesn’t have enough funds to cover the deposits it has insured. If many depositors at multiple banks needed money from the FDIC fund, the money wouldn’t be there. If the FDIC can’t cover deposits, then the Treasury sells Treasury bonds to make up the difference. Those bonds are primarily bought by the Fed, which prints the money to buy them.

Griffin offers examples of private industries that have received government bailouts. Griffin contends that these scenarios have a few things in common: the company, city, or bank was mismanaged to the point of financial ruin; the banks that loaned the institution money were no longer able to collect their interest payments; the bank representatives turned to the Federal Reserve, the FDIC, and Congress arguing that the failure of the institution poses a serious risk to US citizens and the world at large; and finally, Congress guarantees a large portion of the bad debt of the institution, increasing the financial burden on taxpayers.

Griffin focuses on Continental Illinois, a bank that was bailed out in the early 1980s. Griffin says that Continental’s bailout highlights the inequity in the Federal Reserve system: While the Fed provided over $9 billion in aid to Continental, 43 smaller banks throughout the US were allowed to fail. Because small banks are allowed to fail while large banks are protected, the financial banking power becomes more and more concentrated.

Griffin turns to the financial crisis of 2008. Fannie Mae and Freddie Mac had been enticed by the Federal Reserve’s low interest rates to offer subprime loans—loans that are risky because the borrower has a bad credit rating—to home buyers. This created a real estate boom in which many borrowers bought homes with home loans they couldn’t afford. That bubble burst, as homeowners were progressively less able to cover mortgage payments. Houses sold in the subprime environment went into foreclosure. The Fed and the Federal Housing Authority subsidized the bad loans, which caused inflation to spike and increased the national debt.

The financial crisis wasn’t over. The government also passed funding packages to rescue big banks and major auto manufacturers. The various funding plans resulted in the federal government handing trillions of dollars to major corporations. Many of these corporations used the money to adjust business practices, moving factories and jobs overseas. In addition to unemployment and inflation, many media outlets reported on retention bonuses given to high-ranking executives. Griffin says that the focus was on the greedy executives rather than the large-scale economic problems caused by the bailouts themselves.

Griffin ends the chapter with his second reason for abolishing the Federal Reserve: that it acts directly in opposition to the interests of the American public.

Chapter 4 focuses on savings and loan institutions rather than central banking. A savings and loan institution differs from a standard bank in that its business traditionally focuses on real estate. Presidents Herbert Hoover and Franklin D. Roosevelt both created programs and institutions ostensibly to safeguard the American public’s finances. Hoover created the Federal Home Loan Bank Board, and FDR followed suit by establishing the FDIC and the Federal Savings and Loan Insurance Corporation (FSLIC). These institutions were supposed to increase public faith in financial institutions and provide a safety net in the event of another economic disaster following the 1929 stock market crash.

The Federal Housing Authority (FHA), as part of FDR’s New Deal, subsidized home loans for higher-risk borrowers. This subsidy artificially increased the value of homes and therefore raised prices on houses for the middle classes who weren’t eligible for the subsidies. Griffin argues that the intervention of governmental regulations on savings and loan institutions has made the real estate market a nationalized or politicized market.

Griffin closes the chapter by focusing on the effect of government intervention in the free market. He argues that the desire to make houses affordable for all created a system in which housing becomes artificially expensive and inaccessible over time. Further, the overarching economic consequences of government intervention in the housing market result in higher inflation and tax rates which negatively affect all taxpayers.

Griffin expands his discussion of the economic consequences of the Federal Reserve to the world stage. Chapter 5 focuses on the establishment of the International Monetary Fund (IMF) and the World Bank, how the Fed affects those institutions, and the relationship between the Fed and the gold standard.

The IMF and the World Bank were established in 1944. The proposed function of these sister institutions was to loan money to nations in temporary crises due to war or other disasters and to maintain exchange rates between nations. Before the establishment of the IMF/World Bank, exchange rates were determined by the amount of gold the nation’s currency could buy. After their creation, that gold exchange standard was replaced with a paper money standard. Griffin claims that the primary individuals behind the creation of the IMF/World Bank were sympathetic to socialist ideals and the goal of the IMF was to create an international socialist community.

Initially, currency exchange rates were maintained with the gold exchange standard. Following FDR’s legislation outlawing private gold ownership, the dollar became the currency standard tied to gold value and the IMF used the dollar as de facto currency. When Nixon severed the dollar from the gold standard in 1971, the IMF no longer had to rely on the dollar as the primary currency and effectively ended the gold standard worldwide.

One effect of the abandonment of the gold exchange standard, Griffin argues, was an adjustment in the IMF’s stated goal: “the new goal was to ‘overcome trade deficits’” (99). Borrowing is typically the chief means of resolving trade deficit problems. The IMF facilitates underdeveloped nations borrowing from the World Bank. The loans used by the IMF/World Bank to bail out failing governments are backed by wealthy nation partners. The IMF/World Bank functions similarly to any other bank but with access to larger sums of money and lower interest rates. Griffin asserts that money is funneling from government to government rather than into private enterprise which reduces productivity, innovation, and job creation.

Griffin asserts that the long-term goal of the IMF is to enact worldwide socialism. The two types of loans facilitated by the IMF are used in part for policy change. These changes involve enacting legislation that controls underdeveloped nations’ economic control over industry. Although the required austerity measures appear to encourage free-market economic growth, Griffin argues that the nations often fail to meet the conditions and receive further loans regardless. Griffin provides examples of government failures in Africa and Southeast Asia which were funded by the IMF regardless of human rights violations as evidence of political rather than humanitarian goals.

Griffin expands on his assertion that the IMF/World Bank and the Fed have a shared goal of wealth redistribution to create a socialist New World Order. He describes the Council on Foreign Relations (CFR) and the Trilateral Commission as sources of policy that subtly decrease the power and health of the United States to increase global equality.

A primary tool of this plan for global power concentration is regional governments slowly replacing individual nations. Griffin argues that the North American Free Trade Agreement (NAFTA), the European Union (EU), the Asia-Pacific Economic Cooperation (APEC), and the General Agreement on Tariffs and Trades (GATT) are the first step toward these regional governments.

Griffin outlines various international bailouts in South America facilitated by the IMF/World Bank and the Fed which he claims caused economic problems and inflation in the United States while failing to aid the recipient nation’s citizens. Another element of the national borrowing and lending situation concerns larger nations like China and Russia. Griffin claims that such situations are motivated by a lie: that communism can be defeated with Western influence.

Griffin closes the chapter with thoughts on conspiracy versus accident. He acknowledges that conspiracy theories are treated as foolish and laughable socially. However, he asserts that the world’s history and the history of the United States in particular demonstrate more evidence for conspiracy than accident.