Congressman Wright Patman, of the House Banking and Currency Committee said in 1952: "In fact there has never been an independent audit of either of the 12 banks of the Federal Reserve Board that has been filed with the Congress where a Member would have an opportunity to inspect it. The General Accounting Office does not have jurisdiction over the Federal Reserve."
Question: Why does not the General Accounting of the United States have jurisdiction over the Federal Reserve to demand an accounting? The answer is that accountability of the Federal Reserve is not in the contract, the Federal Reserve Act, just as it was not in the contract of the George Rapp Society or tontine insurance policies. The Federal Reserve Act provides for accountability of "member banks," But, by definition, in the Act itself, the Federal Reserve banks are not "member banks" and, therefore are exempt from accountability -- by contract.
Congressman McFadden and Congressman Patman, both experts in banking and finance, did not understand this. How many senators and representatives that signed the Federal Reserve Act in 1913, do you suppose, understood what they were signing? Not only with respect to this issue, but others that have been raised from time to time?
What about the numerous attempts to audit Fort Knox?? The Federal Reserve Act stipulates that gold owned by the Federal Reserve may be stored in storage facilities of the United States. Now, if Congress cannot compel an accounting for Fort Knox, who, do you suppose owns the gold?
Now, we may ask ourselves another question at this point -- Is the Federal Reserve a maritime lender, or is it an insurance underwriter, to United States? Some additional information from an Essay on Maritime Loans, may help us decide this question: "The contract of maritime loan approaches more nearly to that of Insurance. There is a strong analogy between them. In their effects they are construed on the same principles." "In one contract, the lender bears the sea risks, in the other, the underwriter." "In the one, the maritime interest is the price of the peril; and this term corresponds with the premium which is paid on the other."
So we see that it really is immaterial, under Maritime Law, whether the Federal Reserve is thought of as a maritime lender, or as an insurance underwriter, to the United States. In either case the lender, or underwriter, bears the risks -- and the maritime laws compelling performance in paying the interest, or premium, are one and the same. Also, in either case, assets can be hypothecated as security for the price of the peril.
Speaking of risk, let's see what risk the Federal Reserve is incurring as lender, or underwriter, to the United States in exchange for United States Securities: Mariner Eccles, former chairman of the Federal Reserve Board, held the following exchange with Congressman Patman before the House Banking and Currency Committee on September 30, 1941: Congressman Patman: "Mr. Eccles, how did you get the money to buy those two billions of government securities?" Mr. Eccles: "We created it." Patman: "Out of what?" Mr. Eccles: "Out of the right to issue credit money."
And, from further testimony from the Federal Reserve itself: In a publication from the Federal Reserve Bank of Chicago, entitled "Two Faces of Debt," -- "Currency is so widely accepted as a medium of exchange that most people do not think of it as debt."
In the Chicago bank publication entitled "Modern Money Mechanics," we find: "Neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper. Deposits are merely book entries. Coins do have some intrinsic value as metal, but for less than their face amount." "What, then makes these instruments--checks, paper money, and coins -- acceptable at face value in payment of all debts and for other monetary uses? Mainly, it is the confidence people have that they will be able to exchange such money for real goods and services whenever they choose to do so." "Confidence in these forms of money also seems to be tied in some way to the fact that assets exist on the books of the government and the banks equal to the amount of the money outstanding, even though most of these assets are no more than pieces of paper (such as customer's promissory notes), and it is well understood that money is not redeemablein them."
Modern Money Mechanics publication from Chicago, once again: "Deposits are merely book entries...demand deposits are liabilities of commercial banks. The banks stand ready to convert such deposits into currency or transfer their ownership at the request of depositors."
From the Federal Reserve bank of St. Louis Review: "But what induces the non-banking public to accept liabilities of private, profit-making institutions such as banks?" "The decrease in purchasing power incurred by holders of money due to inflation imparts gains to the insurers of money...." "The gains which accrue to issuers of money are derived from thedifference between the costs of issuing money and the initial purchasing power of new money in circulation. Such gains are called 'seigniorage'. If the goods and services for which the issuer exchanges money have a market value greater than that of resources used to produce the money, then the issurer receives a net gain."
From a book entitles "The Federal Reserve System - Its Purposes and Functions," published by the Federal Reserve Board in 1939: "Federal Reserve Bank Credit resembles bank credit in general, but under the law it has a limited and special use -- as a source of member bank reserve funds. It is itself a form of money authorized for special purposes, convertible into other forms of money, convertible therefrom, and readily controllable as to amount. Federal Reserve Bank credit, therefore, as already stated, does not consist of funds that the Reserve authorities "get" somewhere in order to lend, but constitutes funds that they are empowered to CREATE."(emphasis added)
In his notes entitled "A Primer on Money," Congressman Patman tells that upon hearing that Federal Reserve Banks hold a large amount of cash, he went to two of its regional banks. He asked to see their bonds. He was led into vaults and shown great piles of government bonds upon which the people are taxed for interest Mr. Patman then asked to see their cash. The bank officials seemed confused. When Mr. Patman repeated the request, they showed him some ledgers and bank checks.
Mr. Patman warns us to remember that: "The cash, in truth, does not exist and never has existed. What we call `cash reserves' are simply bookkeeping credits entered upon the ledgers of the Federal Reserve Banks. These credits are created by the Federal Reserve Banks and then passed along through the banking system."
So, by the testimony of the Federal Reserve itself, we see:
1. It creates money out of thin air -- at no cost or risk to the Federal Reserve System -- from its right to issue credit, granted in the Federal Reserve Act.
2. It gains from the inflation it creates.
3. Money is not redeemable in its liabilities.
4.Demand deposits are liabilities of banks.
5. Federal Reserve Notes are liabilities of Federal Reserve.
6. Its gains, as issuers of credit money, are the difference between the cost of creating that credit (essentially nothing) and the initial purchasing power when the new money is put into circulation. [this is called SEIGNIORAGE]