Skip to main content

< Back to Main List

The Federal Reserve and Banking Cartel Theory

Overview​

The theory that the Federal Reserve System operates as a private banking cartel rather than a genuine public institution has been a persistent thread in American political discourse since the Fed's creation in 1913. Critics argue that the Fed was designed by and for the benefit of major banking interests, operates with insufficient democratic accountability, and serves to concentrate wealth and financial power in the hands of a small elite.

The most well-known articulation of this thesis comes from G. Edward Griffin's book "The Creature from Jekyll Island" (1994), though the critique has roots going back to the Fed's founding and draws on the Austrian school of economics through scholars like Murray Rothbard.

Historical Background​

The Jekyll Island Meeting (1910)​

In November 1910, a group of the most powerful financiers in America met in secret at the Jekyll Island Club, an exclusive resort off the coast of Georgia. The meeting's purpose was to draft what would become the Federal Reserve Act. The participants represented approximately one-quarter of the world's wealth at the time:

Confirmed Attendees:

  1. Senator Nelson Aldrich - Chairman of the Senate Finance Committee, father-in-law of John D. Rockefeller Jr.
  2. A. Piatt Andrew - Assistant Secretary of the Treasury
  3. Henry P. Davison - Senior partner at J.P. Morgan & Co.
  4. Arthur Shelton - Secretary to Aldrich
  5. Frank Vanderlip - President of National City Bank of New York (Rockefeller interests)
  6. Benjamin Strong - Representative of J.P. Morgan, later first president of the Federal Reserve Bank of New York
  7. Paul Warburg - Partner at Kuhn, Loeb & Co. (German banking family connected to the Rothschild network)

The meeting was conducted under extreme secrecy:

  • Participants used first names only to prevent staff from identifying them
  • They traveled in a private railcar
  • The meeting's existence was denied for years
  • Frank Vanderlip confirmed the meeting in a 1935 Saturday Evening Post article

The Federal Reserve Act (1913)​

The plan drafted at Jekyll Island was refined and passed as the Federal Reserve Act, signed by President Woodrow Wilson on December 23, 1913. The Act created:

  • A system of 12 regional Federal Reserve Banks
  • A Federal Reserve Board (later the Board of Governors) appointed by the President
  • A hybrid structure with both public and private elements
  • The power to issue currency, set interest rates, and regulate the banking system

Early Critics​

Opposition to the Federal Reserve was immediate and fierce:

Congressman Louis McFadden (R-PA), Chairman of the House Banking Committee, made extraordinary statements on the House floor in the 1930s:

He accused the Federal Reserve of deliberately engineering the Great Depression and enriching foreign banking interests. McFadden introduced articles of impeachment against the Federal Reserve Board in 1933.

Charles Lindbergh Sr. (R-MN), father of the aviator, opposed the Federal Reserve Act in 1913:

He warned that the Act would establish "the most gigantic trust on earth" and that "the worst legislative crime of the ages" was being committed. He argued the bill transferred control of the money supply to private banking interests.

The Cartel Thesis​

G. Edward Griffin's Analysis​

G. Edward Griffin published "The Creature from Jekyll Island: A Second Look at the Federal Reserve" in 1994. The book became the most widely read critique of the Federal Reserve and has sold millions of copies. Griffin's central arguments:

  1. The Fed was created by bankers, for bankers - The Jekyll Island meeting proves the Fed was designed by the very interests it was supposed to regulate

  2. The Fed is not truly federal - Despite its name, the Federal Reserve is not a government agency. The regional Federal Reserve Banks are owned by their member banks, and the system operates with significant independence from elected government

  3. The Fed creates money from nothing - Through fractional reserve banking and open market operations, the Fed enables the creation of money that represents no real wealth, benefiting those closest to the money creation process (the Cantillon Effect)

  4. The Fed enables unlimited government debt - By purchasing government bonds, the Fed enables deficit spending that would otherwise be constrained by market forces

  5. The Fed socializes losses - When banks take excessive risks, the Fed acts as lender of last resort, effectively transferring losses to the public through inflation or taxpayer-funded bailouts

  6. Inflation is a hidden tax - The Fed's money creation devalues existing currency, functioning as a tax that disproportionately harms those on fixed incomes and benefits those with access to new money and assets

Murray Rothbard's Austrian Critique​

Murray Rothbard, the Austrian school economist, provided a more academically rigorous critique in works including:

  • "The Case Against the Fed" (1994)
  • "A History of Money and Banking in the United States" (2002)
  • "The Mystery of Banking" (1983)

Rothbard's arguments centered on:

  1. Central banking enables credit expansion that creates artificial booms followed by inevitable busts (Austrian Business Cycle Theory)
  2. The gold standard constrained government and its abandonment (completed in 1971 under Nixon) removed the last check on money creation
  3. The banking system operates as a legal cartel protected from the competitive forces that would normally prevent fractional reserve banking
  4. Inflation benefits the banking class at the expense of savers and workers

Structure of the Federal Reserve​

Public-Private Hybrid​

The Fed's unusual structure is central to the debate:

Public Elements:

  • The Board of Governors (7 members) is appointed by the President and confirmed by the Senate
  • The Fed remits most of its profits to the U.S. Treasury
  • Congress can alter the Fed's mandate through legislation

Private Elements:

  • The 12 regional Federal Reserve Banks are technically owned by their member banks
  • Member banks hold stock in and elect directors of their regional Fed bank
  • The Federal Open Market Committee (FOMC), which sets monetary policy, includes regional bank presidents chosen through a process involving private bank directors
  • The Fed is not subject to normal government budget processes or direct congressional appropriation

Independence​

The Fed operates with extraordinary independence for a government-adjacent institution:

  • Fed decisions do not require presidential or congressional approval
  • The Fed chairman serves a 4-year term that does not align with presidential terms
  • Fed deliberations are conducted in secret, with transcripts released only after a 5-year delay
  • The Fed has historically resisted comprehensive audits (the "Audit the Fed" movement)

The 2008 Financial Crisis​

The 2008 crisis reignited scrutiny of the Fed:

  • The Fed conducted $16.1 trillion in emergency lending to domestic and foreign banks, revealed only through a partial audit mandated by the Dodd-Frank Act
  • Major recipients included Goldman Sachs, J.P. Morgan, Citigroup, Morgan Stanley, and foreign banks including Deutsche Bank, UBS, and Barclays
  • The Fed purchased toxic mortgage-backed securities from banks, effectively transferring losses to its balance sheet
  • Quantitative easing (QE) programs inflated asset prices, disproportionately benefiting wealthy asset holders
  • No major bank executives were criminally prosecuted for the fraudulent practices that precipitated the crisis

Critics argued this confirmed the cartel thesis: the Fed existed primarily to protect the banking system from the consequences of its own excesses, at public expense.

Evidence and Documentation​

Evidence Strength: MODERATE EVIDENCE​

The factual basis for the critique is well-documented, though interpretation varies significantly.

Well-Established Facts:

  • The Jekyll Island meeting happened and its participants are confirmed
  • The Fed has a hybrid public-private structure
  • The Fed creates money and enables fractional reserve banking
  • The Fed's emergency lending in 2008 was vast and initially secret
  • The dollar has lost over 96% of its purchasing power since 1913

Debated Interpretations:

  • Whether the Fed's structure constitutes a "cartel" in the economic sense
  • Whether the Fed primarily serves banking interests or the broader public interest
  • Whether alternative monetary systems would produce better outcomes
  • The degree to which the Fed caused (vs. responded to) financial crises

Counter-Arguments​

Edward Flaherty​

Economist Edward Flaherty has written detailed rebuttals to many claims in "The Creature from Jekyll Island," arguing:

  • The Fed is functionally a government agency despite its unusual structure
  • Member bank "ownership" is nominal and does not convey control
  • The Fed's profits are largely remitted to the Treasury
  • The Jekyll Island meeting, while secret, produced a system that has been modified many times by democratic processes
  • Many of Griffin's historical claims contain errors or exaggerations

Peter Conti-Brown​

Legal scholar Peter Conti-Brown (University of Pennsylvania) authored "The Power and Independence of the Federal Reserve" (2016), arguing:

  • The Fed's structure is more complex than either defenders or critics acknowledge
  • The Fed's independence has varied significantly over time
  • Governance reforms could address legitimate accountability concerns without abolishing the institution
  • The Fed serves important macroeconomic stabilization functions

Mainstream Economics​

Most mainstream economists argue:

  • Central banking is necessary for macroeconomic stability
  • The Fed's response to 2008 prevented a second Great Depression
  • The gold standard was abandoned for good reasons (deflation, rigidity)
  • While reforms may be needed, the fundamental concept of central banking is sound

Key Figures​

Critics​

  • G. Edward Griffin - Author of "The Creature from Jekyll Island"
  • Murray Rothbard - Austrian economist and Federal Reserve critic
  • Congressman Louis McFadden - 1930s House Banking Committee Chairman
  • Charles Lindbergh Sr. - Early opponent of the Federal Reserve Act
  • Congressman Ron Paul - Longtime advocate of "Audit the Fed" and return to gold standard
  • Senator Rand Paul - Continued his father's advocacy for Fed accountability

Jekyll Island Attendees​

  • Nelson Aldrich - Senate Finance Committee Chairman
  • Paul Warburg - Kuhn, Loeb & Co. partner, primary architect of the Fed's design
  • Henry P. Davison - J.P. Morgan senior partner
  • Frank Vanderlip - National City Bank president
  • Benjamin Strong - First president of the NY Fed

Institutions​

  • Federal Reserve System - The institution itself
  • J.P. Morgan / JPMorgan Chase - Major bank, historically central to Fed's creation
  • Goldman Sachs - Major bank with extensive Fed connections (revolving door)
  • Citigroup (successor to National City Bank) - Represented at Jekyll Island

The "Audit the Fed" Movement​

Beginning with Congressman Ron Paul and continuing through Senator Rand Paul, the movement to subject the Federal Reserve to comprehensive congressional audits has gained significant support:

  • Ron Paul's 2009 bill (H.R. 1207) gained 320 co-sponsors in the House
  • A partial audit was achieved through the Dodd-Frank Act (2010)
  • The partial audit revealed the $16.1 trillion in emergency lending
  • Full audit legislation has repeatedly passed the House but stalled in the Senate
  • Opponents argue full audits would compromise Fed independence and monetary policy effectiveness

Cross-References​

Other Coverage Worth Reading​

  • Patrick Byrne: Former Overstock.com CEO and self-described CIA intelligence asset who defines the deep state as a two-winged oligarchy —...
  • Dan Bongino: Former Secret Service agent and FBI Deputy Director who describes the deep state as a "vast, well-funded cabal...
  • Matt Taibbi: Investigative journalist who documented the "censorship-industrial complex" through the Twitter Files and congressional testimony, exposing the network of...
  • Kash Patel: Former federal prosecutor and current FBI Director who defines the deep state as a "sinister cabal" of corrupt...

Sources​

  1. Griffin, G. Edward. "The Creature from Jekyll Island: A Second Look at the Federal Reserve." American Media, 1994.
  2. Rothbard, Murray. "The Case Against the Fed." Ludwig von Mises Institute, 1994.
  3. Rothbard, Murray. "A History of Money and Banking in the United States." Ludwig von Mises Institute, 2002.
  4. Conti-Brown, Peter. "The Power and Independence of the Federal Reserve." Princeton University Press, 2016.
  5. Vanderlip, Frank. "From Farm Boy to Financier." Saturday Evening Post, February 9, 1935.
  6. Government Accountability Office. Audit of Federal Reserve Emergency Lending Facilities, 2011.
  7. Flaherty, Edward. "Debunking the Federal Reserve Conspiracy Theories." PublicEye.org.
  8. Paul, Ron. "End the Fed." Grand Central Publishing, 2009.

This information was compiled by Claude AI research.