77 pages • 2 hours read
G. Edward GriffinThe Creature from Jekyll Island: A Second Look at the Federal Reserve
Nonfiction | Book | Adult | Published in 1994A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.
Themes
The Moral Implications of Fractional Reserve and Central Banking
Fractional reserve banking—in which banks keep only a fraction of deposited funds in reserve at any given time, loaning the rest out to generate profit through interest—has been commonplace since at least the early 17th century, and is now the system used by virtually all banks and governmental monetary authorities around the world. Despite its practical benefits as a driver of economic growth, the system has one significant, widely acknowledged drawback: Since fractional reserve banks do not keep all depositors’ funds on hand, they are vulnerable to insolvency if depositors lose faith in the bank’s ability to return deposited money. In such situations, many or all depositors may demand their money back at the same time—a phenomenon known as a bank run—and the demand would then exceed the bank’s existing funds. This crisis occurred on a large scale in the US in 1929 and 1930, helping to precipitate the Great Depression. This risk was recognized in the earliest days of fractional reserve banking, and central banks were established in the 17th century to establish minimum reserve requirements and mitigate the danger of bank runs.
Griffin’s primary argument against fractional reserve banking is that it can encourage what he considers immoral practices. A fractional reserve system uses a promise of future money to generate profit, which can encourage deceptive deposit agreements and risky loans resulting in good-faith depositors losing their savings. Central banks inherently concentrate financial power, and that concentration leads to market and political manipulations that benefit the bank at the expense of the consumer.
Although this system has been in near-universal use for centuries, Griffin argues that it remains poorly understood and that its mechanisms are shrouded in secrecy. He argues that depositors generally aren’t aware that their money is being used for potentially high-risk loans and may not be available on demand or could even be lost entirely if the bank fails. Griffin believes this is fraud even though it is technically legal, as a result, it’s an immoral banking practice. Importantly, fractional reserve banking is not necessarily fraudulent or immoral, though, if depositors have choices. A bank can have two different types of deposit accounts—a time deposit that is loaned, and a guaranteed demand deposit account for which the depositor pays a fee. If depositors can choose whether the bank lends out their deposits for interest—entitling the depositor to a share of that interest—then the practice is not fraud and is not immoral.
Central banks, by definition, are intertwined with government. Some, like the Bank of England, are directly owned and controlled by government, while others, like The Fed, are hybrids which are privately owned but publicly controlled. In either case, the central bank typically provides loans and accounts to the government as its primary purpose. Because of the intrinsic link between government and the bank, the bank’s interests become entangled with the government’s interests and vice versa. Often, that central bank also protects smaller, private banks, bailing them out if necessary. Griffin argues that this system encourages risky lending practices and serves the interests of the largest banks. Those practices lead to economic fluctuations which can and often do negatively affect the public. Griffin argues that central banks are inherently immoral because they wield excessive power and impact legislation to benefit banks over the public.
The Relationship Between War and Finance
There is no question that war affects economics directly. Griffin asserts throughout Jekyll Island that high finance deliberately perpetuates war both for financial gain and to increase its influence. By collecting interest on loans made to warring governments, Griffin claims, large banks drive up their own profits, exploiting the public’s willingness to accept ruinous levels of spending for the cause of national survival. The banks are thus incentivized, in Griffin's view, to perpetuate a state of war for as long as possible, which they do by funding multiple sides of a conflict to maintain a constant threat of war, and by selectively funding the sides most likely to perpetuate national debt.
Taxation is rarely sufficient to fund a successful war effort, so the government either prints fiat money or borrows the money from an outside source. Griffin provides examples of both scenarios: fiat money printing has the potential to cause significant inflation and potential depression following the war, while borrowing indebts the government to outside interests (though economists debate the significance of both these risks). In Griffin’s conspiratorial view, those outside interests are primarily powerful and/or wealthy financiers who will use the war debt to exert political influence. Griffin frames the Napoleonic Wars and the sinking of the Lusitania as examples of government action in service of financier war interests—a reductive view of the enormously complex interplay between states and financial institutions. It is true that central banks had emerged as powerful political actors even before the European wars of the early 19th century. Adam Smith famously wrote in The Wealth of Nations (1776) that the Bank of England “acts, not as an ordinary bank, but as a great engine of state.” Nonetheless, the central banks were one kind of political actor among many. By positioning them as the omnipotent villains of history, Griffin presents a simplified narrative that discounts the agency of the public as well as of political leaders including Napoleon himself.
A government in times of peace seeks stability of power and stability of economics, but a warring government may be willing to sacrifice stability for success if it believes that the alternative would be destruction. Griffin argues that financiers exploit this fear of destruction to exert pressure on those governments. Griffin argues that self-interested, finance-savvy individuals like Nathan Rothschild or J.P. Morgan will inevitably discover the inroads to political influence and financial profit by manipulating a nation at war. He does not present evidence that this actually happens, instead treating the supposed incentive as proof: Because banks theoretically stand to benefit from war, they must be acting behind the scenes to perpetuate war. Wars exist through the interplay of a wide range of competing and complementary interests, including financial interests. President Dwight Eisenhower’s farewell speech famously introduced the phrase “military industrial complex” to describe the pernicious financial interdependence between warring nations and weapons manufacturers. Like many conspiracy theories, Griffin’s claims have a basis in fact—banks do sometimes profit from war. Griffin’s conspiratorial mode of historiography reduces a complex reality to this one fact, presenting it as the single key to understanding the whole of the modern world.
The Effect of Finance on Politics
Governments need money to function, and financial institutions often turn to government for protection or assistance. Banks primarily affect government by loaning it money or borrowing money from it. Additionally, Griffin argues, financiers affect government by funding politicians’ campaigns and manipulating the money supply to affect the economy. Although finance often directly impacts politics and political decisions, government decisions can also affect banks and financiers.
Governments affect banks via legislation. Establishing a central bank is a legislative act. For example, the Federal Reserve Act created The Federal Reserve as a central bank and The Bank of England was created by the monarchy. Government can pass legal tender laws that require a certain currency to be accepted for public and/or private debts. Government can impose regulations on banks, such as a required reserve ratio that must be maintained, or penalties for deceptive lending practices. Finally, the government can pass laws that indirectly affect the world of finance, like contract laws that affect lending contracts.
Government borrowing and lending also directly affects the health and power of financiers. If a government borrows from a bank, they are unlikely to pay off the principal but are generally reliable in paying interest, generating long-term financial gains for the bank. Further, governments are likely to borrow large sums of money, which creates higher profits for banks. If a bank gets into trouble and faces possible failure, it can petition the legislature for help. Governments frequently bail out banks with low-interest loans in the interest of maintaining the health of the economy, as occurred in the 2008 financial crisis. However, if a government like Lincoln’s Union or Napoleon’s monarchy refuses to borrow, financiers lose a large investment potential. Further, if the government refuses to bail out banks when they fail, allowing the market to adjust, banks are encouraged to be more conservative in their loaning practices.
Griffin argues that financiers exert power over governments with interest on loans and threats to the economy. Once a government has borrowed from a bank, that bank has a vested interest in the actions of that government. The bank wants the government to remain in debt and keep paying interest. The bank may adjust interest rates to encourage the government to borrow more or to make the loan difficult to pay back. Griffin speculates that financiers may also act behind the scenes to foment conflict to keep governments under threat of war to encourage more borrowing. Banks have significant influence over the economy, and they can call in loans or adjust interest rates to affect the size and success of businesses. When banks make many risky loans and ask for government assistance, they typically use the threat to the economy as their primary point of argument. Griffin’s description of the Wilson/Taft/Roosevelt election suggests that politicians are often actively indebted to financiers for funding their campaigns. This influence often results in legislative acts that benefit banks and financiers but hurt the public.
Although bailouts are a straightforward example of legislative involvement in the business of banking, a great deal of financial law and financial lobbying is complex and difficult for the public to understand. Griffin uses this opacity as evidence of nefarious purposes. The Jekyll Island meeting that gives the book its title is an example of this rhetorical sleight of hand. Because this meeting of powerful financiers took place in a private location with the sinister-sounding name of Jekyll Island, it functions as a black box into which Griffin can place any number of imagined crimes. Griffin characterizes the Federal Reserve Bank as “the creature from Jekyll Island,” implying that the Fed was born at this secret meeting and that its true purpose remains secret. In reality, the 1913 Federal Reserve Act was created by an entirely different set of policymakers and based on plans that had been under discussion in Washington since well before the Jekyll Island meeting.
