How a Natural Disaster Created a Man-Made Disaster

Over 115 years ago, a devastating natural disaster put into motion events that would cause the most devastating financial disaster in history.

In April 1906, San Francisco was struck by an earthquake that killed more than 3,000 people and destroyed over 80% of the city.

Insurance companies in Britain were hit by massive claims.

Settlement of these claims required large amounts of gold to be moved from London to the US.

In an effort to stem the outflow, the Bank of England raised its discount rate to make it more attractive to keep the gold in England.

It worked. Gold flowed back from the US to England.

The US’s tighter monetary conditions resulted in one of the worst bear markets in American history.

In 1906/07, Wall Street fell 48%.

We’ll let Wikipedia tell the rest of the story:

Panic occurred, as this was during a time of economic recession, and there were numerous runs on banks and trust companies. The 1907 panic eventually spread throughout the nation when many state and local banks and businesses entered bankruptcy. Primary causes of the run included a retraction of market liquidity by a number of New York City banks and a loss of confidence among depositors, exacerbated by unregulated side bets at bucket shops.

Without a central bank to restore calm, it was up to the most powerful banker of the day, John Pierpont Morgan (yes, the original JPMorgan) to save the day and stabilise the system.

An angry mob is the ideal pretence for powerbrokers to implement their agenda.

US Federal Reserve Reserve

Source: US Federal Reserve

[Click to open in a new window]

The Panic of 1907 was the crisis needed by the bankers to force the US Congress to establish the US Federal Reserve Bank.

As noted in the US Federal Reserve’s history archives:

The Panic of 1907 was the first worldwide financial crisis of the twentieth century. It transformed a recession into a contraction surpassed in severity only by the Great Depression. The panic’s impact is still felt today because it spurred the monetary reform movement that led to the establishment of the Federal Reserve System.

Under the guise of ‘we need a stable financial system to protect the people’, the bankers and politicians went to work on drafting up a central bank model.

More than five years after the Panic, the US Federal Reserve Bank was legislated into existence in December 1913.

During this five-year period, there was another panic in 1910–11 (emphasis added):

The Panic of 1910-1911 was a slight economic depression that followed the enforcement of the Sherman Anti-Trust Act. It mostly affected the stock market and business traders who were smarting from the activities of trust busters


My reason for mentioning this is that the Panic of 1910–11 did NOT create a bank run.

So without another threat to the banking system after the Panic of 1907, why did the bankers and politicians persist with plan? Why not let the system work itself out?

That’s where the motherhood statements tell the story.

The big-picture plan — according to the Fed’s own site — was and still is:

The Federal Reserve works to promote a strong U.S. economy. Specifically, the Congress has assigned the Fed to conduct the nation’s monetary policy to support the goals of maximum employment, stable prices, and moderate long-term interest rates.

Who doesn’t want maximum employment, stable prices, and moderate interest rates? Sign me up.

As always, the real objective can be found in the fine print.

The US Federal Reserve Bank is made up of 12 regional banks…St Louis Federal Reserve, New York Federal Reserve, San Francisco Federal Reserve, etc.

To quote from the Fed’s own site (emphasis added):

…each of the 12 Reserve Banks operates within its own particular geographic area, or District, of the United States, and each is separately incorporated and has its own board of directors. Commercial banks that are members of the Federal Reserve System hold stock in their District’s Reserve Bank. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. In fact, the Reserve Banks are required by law to transfer net earnings to the U.S. Treasury, after providing for all necessary expenses of the Reserve Banks, legally required dividend payments, and maintaining a limited balance in a surplus fund.

What this all means in layperson terms is that every commercial bank (by law) is required to keep 6% of its capital in its regional reserve bank.

In exchange for these reserves, the commercial bank is issued with an equivalent amount of shares. Naturally, the bigger banks — JPMorgan, Citibank, et al. — are allocated a greater number of shares.

The price of these shares is fixed at US$100.

The shares carry voting rights to about two-thirds of the board of directors for that regional reserve bank.

But here’s the good bit…

…the Reserve Banks are required by law to transfer net earnings to the U.S. Treasury, after providing for all necessary expenses of the Reserve Banks, legally required dividend payments…

One of the expenses of the regional banks is ‘legally required dividend payments’.

The shares held by the commercial banks are entitled to a dividend of 6%.

The Panic of 1907 was the Trojan horse for the bankers to establish a system that’s been very beneficial to the banking sector…voting rights on the regional Fed banks and a guaranteed 6% dividend.

Has the Fed delivered on its charter?

Stable prices:

US Inflation

Source: Visualizing Economics

[Click to open in a new window]

History indicates the period prior to the Fed’s creation — when market forces corrected any excesses — was far more stable over the longer term.

Moderate long-term interest rates…I won’t even bother with that chart. Zero-bound for over a decade…that’s NOT moderate…it’s punitive.

The Federal Reserve system (designed by bankers to be run by bankers for the benefit of bankers) has — under the pretence of offering greater stability — created an immeasurable level of instability.

Rampant speculation. Derivative contracts priced in the trillions of dollars. Record debt. Historically-low rates. Unfunded welfare and pension promises. Unfettered money creation.

Our economic growth is a fraud built upon one giant (central bank-cultivated) lie. We can have our cake and eat it too.

We have generations who now believe share markets will rise forever. House prices can never fall. Generous retirement income promises will be kept.

Why save for tomorrow, when you can borrow today?

The Fed’s charade of prudent stewardship was briefly revealed to all in 2008.

The cracks in the central bank’s veneer of responsible management were quickly papered over with QE and ultra-low rates.

Curing a debt crisis with more debt must surely rank as one of the stupidest policy settings in modern history. Yet, as a society, we bought it.

Why? Because the so-called pillars of our society — the banks — sold it to us. These are the very same banks that are in on the Fed’s scam.

Applying even greater stress to a system that was already showing signs of strain has only served to further weaken the foundations upon which our financial structures are built.

Yes, there has been one hell of an asset price party. Which, when you think about it, is only fitting. All great dramas have a final, spine-tingling crescendo before the tragic ending.

The widespread instability now embedded within the system guarantees a man-made seismic shock in financial markets — far worse than 2008 — is in our future.

When that ‘who-could’ve-predicted-that’ crisis next occurs, watch the bankers once again lobby to implement a system — under the guise of needing to restore stability — that favours their interests…not ours.

We know they’ll try to sell it to an unsuspecting and gullible public as being in our best interests. Different era, same game plan.

Will the public be so naïve this time around? Probably.

But don’t discount the possibility of angry people taking to the streets to protest against the graft, corruption, and insider trading that’s become endemic within the banker’s bank — the Fed.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

PS: Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion