Saturday, January 31, 2009


The most knowledgeable among us would say, “The Federal Reserve System is an unlawful delegation of the power of Congress.” They would be correct!

In 1907, New York Times Financial Review published Paul Warburg's (a partner of Kuhn, Loeb and Co..) first official reform plan, entitled "A Plan for a Modified Central Bank," in which he outlined remedies that he thought might avert Panics. Jacob Schiff, (C.E.O.of Kuhn, Loeb and Co.), warned, "Unless we have a Central Bank with adequate control of credit resources, this country is going to undergo the most severe and far reaching money Panic in its history." The Panic of 1907 hit full stride in October.

The history behind the creation of the Bank Act of 1909 and the Federal Reserve System of 1913 lay with the Bank Panic of 1907. F. Augustus Heinze (a banker) and his failed attempt to corner the stock of United Copper Company caused the Panic. The collapse of Heinze's scheme exposed an intricate network of interlocking directorates across Banks, Brokerage Houses, and Trust Companies in New York City. The discovery of the close associations between bankers and stockbrokers seriously raised the anxiety of already nervous depositors.

CONSIDER: The reader should note that this Bank/Stockbroker association caused the Depressions of 1907, 1933, and 2008, with the two latter being the worst in our history. In other words, we have had the most severe Depressions under the watch of the Federal Reserve System.

Heinze’s involvement in New York Banking was subsequently linked to one of his close and suspicious associates, C.F. Morse. Morse controlled three national banks directly and was a director of four other banks. After the failure of his attempt to corner United Copper stock, Heinze was forced to resign from the presidency of Mercantile National Bank, and worried depositors began a run on the bank. Depositors began runs on several of the banks controlled by Morse as well.


October 18, Charles Barney (President Knickerbocker Trust) was reported to have been involved in Heinze’s Copper Scheme. National Bank of Commerce refuses to continue acting as a clearing agent as a vote of no confidence seriously alarmed Knickerbocker depositors. The run on Knickerbocker Trust begins.

October 21, the National Bank of Commerce announces it would stop clearing checks for the Knickerbocker Trust Company, the third largest trust in New York City.

J.P. Morgan organized a meeting of Trust Company Executives to discuss ways to halt the Panic. Morgan, along with James Stillman (National City Bank) and George Baker (First National Bank) had earlier organized an informal team to oversee relief efforts during the Panic at the National Banks. Assisting them were several young financial experts responsible for evaluating the assets of troubled institutions and indicating which ones were worthy of aid. Chief among these investigators was Benjamin Strong of Banker's Trust Company, who would later become president of the Federal Reserve Bank of New York.

October 22, Knickerbocker underwent a run for three hours before suspending operations having paid out $8 Million in cash.

October 23, next to the front-page article describing the run on the Knickerbocker Trust the New York Times has a headline describing the Trust Company of America, (second largest trust company in New York City) as the current "sore point" in the Panic. By attracting attention to the Trust Company of America, the article greatly exacerbated the serious run on it. Charles Barney was also a member of the Board of Directors of Trust Company of America.

Withdrawals from Trust Company of America were approximately $1.5 Million the previous day and on the day the ill-timed article was published depositors claimed another $13 Million of nearly $60 Million in total deposits.

October 24, withdrawals from Trust Company of America were an additional $8 Million to $9 Million.

Call Money on the New York Stock Exchange was nearly unobtainable. Call Money was money lent for the purchase of stock equity, with the stock itself serving as collateral for the loans. Call Loans could be called in at any time. The opening rate for Call Money was 6%, but Exchange President Ransom H. Thomas noticed a serious scarcity of money. At one point, a bid of 60% went out for Call Money. Yet, even at that exorbitant rate, no money was offered. The last recorded transaction of October 24 was at the opening rate of 6%. Fearing a total collapse of the Stock Market, Thomas called Stillman (National City Bank) for aid. Stillman referred Thomas to J.P. Morgan, who controlled most of the available funds. While Thomas traveled to Morgan's office, the Call Money rate on the Exchange reached 100%.

The most severe runs on deposits in New York City were limited to the Trust Companies, not the State or National Banks. During the two-week span of the run, Trust Company of America reportedly paid out $47.5 Million in deposits. Deposits contracted at all the Trusts in New York, not just the prominent ones like Knickerbocker.

If only the Trust Companies were being run by depositors, why would the banks want to help their competitors? The stock market provides a key link. Runs on deposits forced Trusts to liquidate their liquid assets, Call Loans on the Stock Market. This depressed the value of stocks because the stock serving as collateral for the Call Loan had to be sold quickly to pay off the Loan. The sudden increase in the supply of stock would depress stock prices. Given the predominance of National Banks in the Call Loan market, extensive liquidation of Call Loans by Trusts threatened the assets of National Banks.

National Banks were well aware that runs on the Trusts could spread to the National Banks through the Call Loan market, giving the Banks a strong financial incentive to help the Trusts stop the Panic, even if they had no legal interest.

Because of the 1907 Panic, the main bankers of the day “required” Congress to pass an Act creating a bank of last resort. J.P. Morgan approached his friend in Congress Sen. Nelson Aldrich, who authored the National Bank Act of 1909.

In early November 1910, a small party of men from New York quietly boarded Sen. Nelson Aldrich's private railway car, allegedly for a trip south to an exclusive hunting club.

In addition to Warburg (Kuhn, Loeb Co.) and Sen. Aldrich, the others were: Frank Vanderlip,( National City Bank) Harry P. Davison, (a J.P. Morgan partner), Benjamin Strong,(Banker's Trust Co.) and A. Piatt Andrew, former secretary of the National Monetary Commission and now assistant secretary of the Treasury. The real purpose of this historic "duck hunt" was to formulate a plan for US Banking and Currency Reform that Aldrich could present to Congress.

The group created the blue print for the Federal Reserve System. Since its creation in 1913, the Fed has been responsible for more bank failures then in the entire history of the United States prior.

CONSIDER: Congress is responsible for the creation of our money. As bankers have taken control of Congress, they have been responsible for every Panic and Depression this Nation has endured. Perhaps it is time for banking to be run by the Government and not private citizens subject to greed and corruption. Perhaps then, we could have an honest system of finance and an honest Congress.