by Greg Coleridge
[this is a chapter of an upcoming book to be published by the American Monetary Institute on impact of the Fractional Reserve banking system]
And the banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created –– are still the most powerful lobby on Capitol Hill. And they frankly own the place.
– Dick Durbin, US Senator, Illinois, 2009 1
In a rare public admission of the political influence by the nation’s financial sector, Senator Durbin acknowledged what has been a reality for generations. Banking corporations wield enormous political influence to shape public laws, rules and regulations to promote their private gains. Their singular and collective political influence has increased as the economy has shifted from producing real goods and services to creating, packaging, buying and/or selling ever more diverse, complex, risky and bizarre loans, insurances, currencies and other financial “products.” Money from banks that formerly were loaned to companies that produced needed consumer products are increasingly invested in options, futures, derivatives, hedge funds and other financial instruments (i.e. money invested in money) that yield greater profits.
This “financialization” of our economy increases profits and wealth of the finance, insurance and real estate (FIRE) sector and makes our nation more economically dependent on that sector to drive economic growth. Increased profits, wealth and economic dependency have also increased their political power and influence, which guarantee further profits, wealth and dependency. A vicious cycle increasing both the financial and political power of financial corporations rages on with no end in sight.
The political influence and power of financial corporations was born, however, long ago when banks were issued the power to create money out of nothing through the fractional reserve system. Backed by the Federal Reserve, the nation’s private central bank, commercial banking corporations are legally permitted and protected to create new money literally out of thin air in the form of issuing loans or investments up to 90% of the amount of their existing reserves.
This means that for every $10,000 in assets held in reserve by a banking corporation, $100,000 in new money will over time literally be created by simple keystrokes on a bank computer. One hundred thousand dollars can be parlayed into one million dollars, $1 million into $10 million, $1 billion into $10 billion, and so on indefinitely. None of this includes the additional interest owed to banks due to these leveraged loans. Actions that would land you and I in jail (i.e. creating money) are legally permitted by banking corporations.
It’s another vicious cycle of issuing never-ending mind-boggling unearned wealth for banking corporations. It also creates a virtually bottomless pool of resources that can be invested to influence public policies — both in creating new and defending exiting laws and rules beneficial to their interests.
Since “corporations are persons” and “money is speech” in our current constitutional system, banking corporations (like all corporations) can use their corporate revenue exercising their political “free speech” on behalf of and in opposition to issues, ballot measures and political candidates. The combination of these constitutional “rights” and virtually unlimited corporate resources thanks to fractional reserve banking means the political voices of banking corporations drown out the political voices of people who aren’t corporate CEOs or otherwise personally wealthy. This profoundly threatens what remains of our democracy
Eliminating the fractional reserve system is essential to creating a sustainable economy that meets the needs of our nation. It’s also essential to creating real democratic self-governance.
Early fears of banking influence
There was strong opposition to the formation and continuation of each of the first two privately operated central banks of the United States – the Bank of the United States (1791-1811) and Second Bank of the United States (1816-1836). Both were chartered or licensed for limited durations and purposes. Both charters weren’t renewed due to economic and political fears. Thomas Jefferson said, “I sincerely believe…that banking establishments are more dangerous than standing armies.”2
President Andrew Jackson in his veto to a bill to renew the Second Bank’s charter stated the bank was guilty of fraud, corruption, and controlling the money supply to economically and politically benefit the bank. “[B]eyond question,” he asserted, “[this] powerful institution had been actively engaged in attempting to influence the elections of the public officers by means of its money…”3
Like other businesses at the state level early in our nation’s history, banks were charted by state legislatures. Charters were considered democratic tools by states to ensure banks and other corporations wouldn’t govern. After all, people were sovereign following the Revolution. Corporations, including banks, were subordinate to We the People.
The Ohio Supreme Court ruled, for instance, that,
…[A] banking institution is a public institution, appointed for public purposes – never legitimately created for private purposes… its operations are subject to the control of that public, who may, from time to time, as the public good may require, enlarge, restrain, limit, modify its powers and duties, and, at pleasure, dispense with its benefits.4
Banks and other corporations that tried on their own to go into banking or otherwise usurp their charters were especially targeted by state legislators and courts that routinely revoked their charters for acting ultra virus (beyond their authority). Charter revocations were considered democratic actions by states to control the economic and political powers of corporations – especially banks.
“Locofocos,” members of the radical wing of the Democratic Party, were political firebrands in the first half of the 19th century. They were opposed to state banks, monopolies, paper money, tariffs, and financial policies that were undemocratic and conducive to special privilege.5
The Populists who feared the economic and political power of railroads and banks followed them. The national Populist Party in their Omaha Platform declared: “We demand a national currency, safe, sound, and flexible, issued by the general government only, a full legal tender for all debts, public and private, and that without the use of banking corporations.”6
President Lincoln issued Greenbacks, US debt-free money, to pay for the Civil War. This prevented economic, if not political, servitude of the nation by banks since the US government printed and circulated the money it needed without relying on banking corporations – and the interest and political strings that are attached.
The Federal Reserve System
The personification of economic and political power of banks during the late 19th century was JP Morgan. He controlled at the turn of the century a “Money Trust” of more than 100 banks, railroads, utilities and industrial corporations having total resources of $30 billion – the equivalent of $7.5 trillion dollars today. This represented 40% of all industrial, commercial and financial capital in the nation.7
Morgan’s money was the difference in electing William McKinley as President in 1896 in exchange for McKinley’s support of a money system backed by gold. Morgan’s wealth was also used to fund the Indianapolis Monetary Convention, a phony “grassroots reform” group calling for a new monetary system and private central bank. To heighten the issue, Morgan orchestrated the economic panic of 1907, which intensified the demand for a new central bank.
Bankers drafted a plan for the new central bank – controlled by none other than bankers. Morgan and other bankers drew upon their vast financial fortunes to lobby for the bill. The result was the 1913 Federal Reserve Act. “When the President Woodrow Wilson signs this bill,” Republican Congressman Charles Lindbergh said, “the invisible government by the monetary power will be legalized…”8
What the Act legalized was the monopoly by the new Federal Reserve System to create the nation’s paper money supply. It also granted the Fed the power to create money out of thin air as debt via purchases of government securities. The Fed also became the financial backstop for regional and local banks to create their own money out of nothing and to issue loans 10 times the amount in excess of their actual reserves. The Fed fueled, legitimized and to a certain extent protected banks that engaged in fractional reserve banking.
Lobbying and Campaign Contributions/Investments
The FIRE sector spends huge sums lobbying Congress and federal agencies. The sector spent $4.7 billion on federal lobbying between 1998 and 2011, employing several thousands of lobbyists. This was larger than any other sector except health, which spent just $3 million more during the 13-year period.9 Political campaign “contributions” (a more appropriate term would be “investments”) to federal candidates since 1990 from the FIRE sector total $2.8 billion.10
What did all this lobbying and contributions/investments yield over the last two decades? The money industry’s leveraged buyout of our political system resulted in passage of certain laws and blockage of others – all of which contributed to the 2008 Wall Street crash and global economic recession or slowed economy recovery. These included:
– Passage of the Financial Services Modernization Act in 1999 which repealed the 1933 Glass-Steagall Act prohibiting commercial banks from providing investment banking and insurance services
– Rejection of regulation of financial derivatives advocated by the federal Commodity Futures Trading Commission (CFTC) and its head Brookley Born.
– Blockage of a law forcing banks to disclose money-losing or “toxic” assets to their investors.
– Passage of the Commodities Futures Modernization Act (CFMA) in 2000 which exempted financial derivatives, including credit default swaps, from any regulation.
– Enactment of a rule by the Securities and Exchange Commission permitting investment banks to set their own debt to capital ratio. It had been no more than 12:1. Afterwards, some banks went as high as 40:1.
– Failure to prevent predatory lending
– Federal preemption of state consumer protection laws
– Making it easier for banks to purchase, bundle and sell subprime loans without fear of liability
– Forcing Fannie Mae and Freddie Mac to divert from purchase prime housing loans to risky subprime loans from financial institutions.
– Massive mergers and concentration in the financial sector
– Passage of the Credit Rating Agencies Reform Act of 2006 reducing the ability of the SEC to oversee credit rating agencies that were giving high marks to financial entities engaged in risky investments.11
Banks and other financial institutions, which caused the 2008 financial and housing crisis, were first in line to receive billions in federal bailout assistance. US commercial banking corporations with political ties were more likely to receive federal bailout money under the Troubled Assets Relief Program (TARP). Among the largest recipients were Bank of America ($45 billion), Citigroup ($45 billion), JP Morgan Chase ($25 billion), and Wells Fargo ($25 billion).12
Banks that spent more money on political lobbying were more likely to receive TARP bailout funds. Banks were also more likely to receive TARP money if they had an executive who served on the board of one of the 12 Federal Reserve Banks.13
Wall Street pulled out all stops to neuter the Dodd-Frank Restoring American Financial Stability Act, the so-called financial “reform” bill passed in 2010. What started out as a legitimate effort to “rein in $600 trillion in derivatives, create a giant new federal agency to protect financial consumers, open up the books of the Federal Reserve for the first time in history and perhaps even break up the so-called ‘Too Big to Fail’ giants on Wall Street” achieved little permanent change as the nation’s biggest banks unleashed over 2000 paid lobbyists and showered key Congressmen and Senators will campaign contributions/investments.14 Wall Street spent $251 million on lobbying connected to the bill during the first half of 2010.15
Nineteen of the twenty-two members of the Senate Banking Committee, which dealt with the proposal, receive donations from Wall St in 2009. Each of those up for reelection in 2010 received at least $180,000.16 Senate Banking Committee chair Chris Dodd has received over $12 million in his career in political contributions from the FIRE sector.17 Barney Frank, outgoing Chair of the House Financial Services Committee, raised about $1 out of every $3 over his career from the FIRE sector.18 The FIRE sector invested $42 million in the Obama campaign in 2008. John McCain raised, by comparison, $31 million.19
More than $352 million was spent by the FIRE sector during the first three-quarters of 2011, employing more than 2300 lobbyists.20 Lobbying by the five largest spenders in the banking sector increased 12% from a year earlier, from $42 million to $47 million. The major spenders included the American Bankers Association, Wells Fargo, JP Morgan Chase, and Citigroup. Bank of America was seventh on the list. The biggest increase in lobbying was by Wells Fargo, up 80% over 1 year. The bank alone has 28 paid lobbyists working in Washington, up from five in 2008. If the pace continues, 2011 will be the sixth year in a row commercial bank lobbying has set a record, according to the Center for Responsive Politics.21
The target of the lobbying was once again the Dodd-Frank so-called “financial reform” law. Though passed by Congress in 2010, more than 300 new implementation rules and details were still to be crafted by federal regulators, from a cap on swipe fees merchants pay on debt transactions to terms for implementing the Volker Rule, which bans proprietary trading. Wall Street lobbying sought to ignore, water down or outright undo many of these rules. More that 350 meetings with regulators were held by Wall Street lobbyists on just the Volker Rule compared to 20 by “progressive” groups that favor stricter trading rules.22
Political lobbying is particularly effective for the banking and other sectors during the rule making process following passage of any legislation for several reasons. The public, for one, is usually not actively engaged lobbying for their interests, as most citizens believe nothing more can be done once a bill is passed. For another, lobbyists engage with bureaucrats or congressional staffers instead of elected officials at this stage in closed door meetings – bureaucrats and staffers who are often enticed with employment as a lobbyist, consultant or strategist if they play ball. Bank funds are used to hire former government employees. In addition, many former lobbyists during one year or political administration end up back inside government the next year or administration. This “revolving door” phenomenon is quite common among the FIRE sector. Open Secrets reports that 2500 people have passed through the government-FIRE sector revolving door. This is the third highest of all sectors. It provides an even greater political bang for the bank lobbying buck.23
Not all revolving door members are low lever staffers and bureaucrats. Secretary of the Treasury appointees Robert Rubin and Hank Paulson during the Clinton and Bush administration have come from major banking corporations. Tim Geithner, the current Treasury Secretary, was head of the Federal Reserve Bank of New York, the most powerful of all the private regional central banks.
The money industry’s political investments also bought freedom for those responsible for the financial and housing crisis. Despite evidence of fraud at the major banks, no major bank executive has gone to jail. “If you go back to the savings and loan debacle, we got more than a thousand felony convictions of the elite…” according to William Black who was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.24
The FIRE sector has already contributed $16.8 million to Presidential candidates through December 2011. 25
The Federal Reserve System itself wields enormous political influence. The ability of the Federal Reserve and its member banks to create money out of nothing through fractional reserve banking allows it to be the major supplier of our government’s debt through purchases of trillions of dollars of federal IOU securities – notes, bills and bonds.
The US government has become dependent on the Fed to keep purchasing its debt. The Fed, as a private banking institution, is under no obligation, legal or otherwise, to continue to buy Treasury bills or any other security. This gives the Fed enormous political leverage in our nation in much the same way the International Monetary Fund (IMF) possesses political leverage over foreign countries that request loans to avoid default.
In the case of the IMF the conditions for further loans (called Structural Adjustment Programs, or SAPs) are changes in public policies – eliminating public employees, slashing public benefits, privatizing public assets, increases taxes and fees on all but the rich, debt reduction, deregulation, and reduction of trade barriers. If no austerity measures are enacted by nations, the IMF provides no loans
Ben Bernanke, Chairman of the Federal Reserve, has repeatedly called on policymakers to enact the Fed’s own version of SAPs. Bernanke, and by extension the Fed, wants Congress to reduce the national debt, cut Medicare and Medicaid, tax goods and services (institute a Value Added Tax), and phase in spending cuts and other austerity measures over the next few years. 26 The threat of ending or slowing the purchase of government securities in general or certain securities to pay for programs the Fed disagrees with (i.e. anything that is not moving toward cutting benefits, services and programs to the working class and poor) is real.26
Just to make sure Congress knows the sentiments of the financial community on debt reduction, the FIRE sector was the third largest industry that lobbied the Congressional Supercommmittee.27
The money creation and leveraging ability of the Fed provides it with the wherewithal to pick economic winners and losers. The Fed’s original purpose of purchasing only government-backed securities is long gone. Prior to 2009, the Federal Reserve wasn’t allowed to purchase non-government securities or to hold them as assets. Sine then, they’ve purchased huge amounts of private, mortgage-backed securities.
The Fed offered insurance giant AIG $110 billion as a credit line and provided another $16 trillion in secret loans to bail out US and foreign banks.28 Choosing which banks and other entities receive bailout money and lines or credit not only impacts businesses, but also jobs, income, taxes, communities and political fortunes.
The Fed along the way also acquired new governing powers to regulate banks.29
The Fed’s political power, interconnected with their economic power, is potent. Is it any wonder that Simon Johnson, former IMF chief economist, said, “The finance industry has effectively captured our government.”
The authority of the Federal Reserve and banking corporations to create money out of nothing and provide debt amounts far in excess of reserves is dangerous to our economy and what’s left of our representative democracy. The Money Trust has “captured our government.” They “frankly, own the place.”
Ending the fractional reserve system, as proposed in the NEED Act, HR 2990, and promoted by the American Monetary Institute ( http://www.monetary.org/ ) is essential. Breaking the nexus between economic and political power of the FIRE sector also requires political reform, specifically ending the twin legal fictions that “corporations are people” and “money is speech,” as promoted by the Move to Amend coalition ( http://movetoamend.org/ ). Together, these changes lay the foundation for a real democratic economy and government.
1 Ray Grim, Dick Durbin: Banks “Frankly Own The Place,” Huffington Post, May 30, 2009.
2 Thomas Jefferson, letter to John Taylor, Monticello, 28 May 1816. Ford 11:533. http://www.monticello.org/site/jefferson/private-banks-quotation
3 Andrew Jackson, Fifth Annual Message, December 3, 1833
4 Knoup v the Piqua Bank 1 Ohio S 603 (1853)
5 Coleridge, Greg, Citizens over Corporations: A Brief History of Democracy in Ohio and Challenges to Freedom in the Future, Northeast Ohio American Friends Service Committee, p 30.
6 Omaha Platform, July 4, 1892
7 DeLong, J. Bradford, J.P. Morgan and His Money Trust, Harvard University, 1992.
8 Charles August Lindbergh, http://en.wikipedia.org/wiki/Charles_August_Lindbergh
11 Essential Information and Consumer Education Foundation, Sold Out: How Wall Street and Washington Betrayed America, March 2009, http://www.wallstreetwatch.org
12 Propublica, Bailout Recipients, Last updated, Dec. 12, 2011
13 Steve Eder, Banks with political ties got bailouts, study shows Reuters, Dec. 21, 2009
14 Matt Taibbi, Wall Street’s War, Rolling Stone, May 26, 2010.
15 Jennifer Liberto, Wall Street’s lobbying pricetag: $251 million, CNNMoney, Aug. 2, 2010, http://money.cnn.com/2010/08/02/news/economy/Wall_Street_lobbying/index.htm
16 Foster, John Bellamy and Holleman, Hannah, The Financial Power Elite, Monthly Review, May 2010.
21 Dunn, Andrew, Banks find extra money to hire lobbyists in D.C., The Charlotte Observer, Nov. 20, 2011.
24 William K. Black on Fraud, Bill Moyers Journal, April 23, 2010,
26 Rick Newman, What Bernanke Wants Congress To Do, US News and World Report,
August 29, 2011
28 The Fed Audit, US Senator Bernie Sanders website,
29 Joshua Ritchie, Reshaping the Fed, Feb. 22, 2010 http://www.mint.com/blog/trends/reshaping-the-fed/
Greg Coleridge is Director of the Northeast Ohio American Friends Service Committee (http://www.afsc.net) in Cuyahoga Falls, Ohio. Contact: firstname.lastname@example.org /
http://www.facebook.com/greg.coleridge / http://www.createrealdemocracy.blogspot.com