AT THE END OF THEIR ROPE?
and the Coming Depression
Central banks are becoming a force of economic destabilization in the
21st century—contrary to accepted notions of contemporary economic
theory. The basic functions of central banks—whether managing
money supply, supervising private banks, bailing out failing banks,
stabilizing prices, promoting real investment, employment and
growth—have all entered a state of increasing decay, breakdown and
failure. Central banks have:
• globally been losing control, individually and collectively, of the
global money supply;
• progressively destabilized the global economy with decades of
ever-rising liquidity and debt;
• chronically failed to prevent financial asset inflation bubbles or
stop the steady drift toward deflation in goods, money and labor
• been unable to adapt to technology forces that have
fundamentally restructured the global financial system;
• effectively ignored the growth of capital markets, inside credit
and shadow banking;
• failed to regulate and supervise private banks that remain, post-
2008, still addicted to high risk taking;
• proven unable to develop policies and tools to effectively
stimulate investment, jobs, and real GDP; and
• and have failed to construct a stable system to replace the gold
standard or the Bretton Woods international monetary systems.
This book describes the fundamental causes of the breakdown and
emerging crisis of central banks—with primary focus on the US Federal
Reserve, the Banks of England and Japan, the Eurozone’s ECB, and the
People’s Bank of China.
It includes a history of US central banking, and its inability to control
the financial speculation that led to a series of bank runs, financial
crises and crashes in 1873, 1884, 1890, and 1893, and to general
economic depression in 1873, 1893 and the Great Depression in the
The book’s central theme is that central banks, as constituted today,
are still not only failing their basic functions—in the process becoming
more desperate in experimenting with new measures and policies—
but began in furtherance of, and have increasingly been tied to, the
interests of private bankers and investors.
Central banks must therefore be democratized to represent the entire
economy and not just bankers and investors. Proposals for institutional
restructuring of the US Federal Reserve (and other central banks) are
offered as means to ensure central bank independence of both banker-
investor interests as well as politicians’. Public banking is discussed
and argued as necessary, but not sufficient, as a solution. A
Constitutional Amendment to democratize the Fed is proposed.
TABLE OF CONTENTS
Chapter 1: Problems & Contradictions of Central Banking
Chapter 2: A Brief History of Central Banking
Chapter 3: Central Bank Independence—But From Whom?
Chapter 4: Hamilton’s Curse: The 1st Bank of the United States
Chapter 5: The 2nd US Bank & the Depression of 1837-43
Chapter 6: National Banking Goes Bust—Three Crashes
Chapter 7: The US Federal Reserve Bank: Origins & Toxic Legacies
Chapter 8: Greenspan’s Bank: The ‘Kraken’ Monster Released
Chapter 9: Bernanke’s Bank: Greenspan’s ‘Put’ On Steroids
Chapter 10: The Bank of Japan: Harbinger of Things That Came
Chapter 11: The European Central Bank under German Hegemony
Chapter 12: The Bank of England’s Last Hurrah: From QE to Brexit
Chapter 13: The People’s Bank of China Chases Its Shadows
Chapter 14: Yellen’s Bank: From Taper Tantrums to Trump Trade
Concluding Chapter: Central Bankers At the End of Their Rope?
Postscript: Alternatives to Capitalist Central Banking
Dr. Jack Rasmus is the author of several books on the USA and global
economy, including Systemic Fragility in the Global Economy, 2015; Epic
Recession: Prelude to Global Depression, 2010, Obama’s Economy, 2012,
and An Alternative Program for Economic Recovery, 2012. He hosts the
weekly New York radio show, Alternative Visions, on the Progressive Radio
network; is shadow Federal Reserve Bank chair of the ‘Green Shadow
Cabinet’ and economic advisor to the USA Green Party’s presidential
candidate, Jill Stein. He writes bi-weekly for Latin America’s teleSUR TV, for Z
magazine, Znet, and other print & electronic publications. Dr. Rasmus
studied economics at Berkeley, took his doctorate in the University of
Toronto (1977), and worked for many years as a union organizer and labour
contract negotiator. He currently teaches economics and politics at St. Marys
College in California
IS CENTRAL BANKING TANKING?
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FROM REVIEWS OF EARLIER WORK
Systemic Fragility in the Global Economy
CHINESE EDITION FORTHCOMING FROM HUAXIA PUBLISHING
"[Jack Rasmus' book] offers the most pertinent analysis of the stagnation trap I have seen. There
are many steps to the analysis but it boils down to his Theory of Systemic Fragility. ... While Rasmus
aims to provide a theory of system fragility, in the process his analysis gives an incisive
account of the stagnation trap... Rasmus has made a signal contribution to contemporary
economics and provided a vitally important X-ray of the political economy of stagnation."
Jan Nederveen Pieterse, University of California Santa Barbara, in Perspectives Libres, 2016
"Systemic Fragility in the Global Economy (2015) is the fourth in a series that Rasmus has produced
within this broad intellectual and activist project. Each work not only provides a theoretically-informed,
empirically-grounded diagnosis but also offers a wide-ranging set of policy recommendations
aimed at progressive movements... The case studies of the USA, Europe, Japan and China are
excellent, typically contrarian, and highly teachable. Many important and provocative arguments
and points are made in passing in these studies and they are strengthened by the more sustained
theoretical analyses that follow. A major contribution is the analysis of the complexity of shadow
banking, an ill-defined term of art in most of the literature."
Capital & Class, Vol. 40, No. 2, June 2016
EXCERPT FROM CHAPTER SIX
The Banking Crash of 1873
By 1873 the number of National Bank branches had increased from 1,513 at the war’s end to 1,968, mostly in
the west and south. Meanwhile, state banks, private banks, and forms of shadow banks also rose in number.
The volume of loans and money supply for the National Banks alone rose by almost 50%, again mostly in the
west and south, from 1869 to 1873. By 1873 there was $700 million in paper currency money supply in the
US, more than half of which was still national ‘greenbacks’ currency.
Competition between the growing numbers of both national and state banks also caused a dilution in
reserves as the money supply, official and unofficial, continued to surge. States allowed State banks to
reduce their reserves to virtually zero. Reserves were required only for national bank branches. But there
were problems here as well. National bank branches in the west and south were allowed to deposit reserves
in eastern big cities regional branches, so they were concentrated in the New York City branches, and in the
seven largest in New York in particular. Estimates are that more than 60% of all the reserves were
concentrated in New York banks, the big seven especially. This concentration would later prove a source of
Since branches of the National Banks were prohibited from engaging in real estate loans, most of the land
speculation, largely in the west and south where railroad expansion was underway after 1865, was financed
by those State banks that did not join the National Banking system. And their numbers were growing once
again post-war, as were other forms of financial institutions and ways of providing credit. State banks’
speculation in real estate was also made possible by their borrowing from national banks, which linked the
latter to any future speculative bust and contagion. A third tier of private, so-called country banks and
shadow banks also borrowed from the national banks, with similar potential contagion consequences for the
National Banking system.
The primary way in which land speculation for railroad building was financed, however, was not via direct
loans from State banks but through railroad bonds. The civil war had created a robust market for
government bonds. The same brokers and sellers of government bonds during the war simply shifted to
creating and selling railroad corporate bonds. The wartime ‘government bond king’ was Jay Cooke. Once the
war ended, Cooke and others quickly became leaders in the newest emerging private bond markets and in
the new speculative bond opportunity—the railroads. A second great wave of railroad building (that began in
the 1850s but was initially interrupted by the war) was unleashed in the late 1860s. Railroad bond speculation
dovetailed nicely into two other areas of classical speculative investing—land and urban residential and
commercial properties. Thus three major forms of speculative land investing converged in the late 1860s and
The profits in railroad building were not in charging fees for shipping of produce or passenger travel. They
lay in speculation in land in proximity to the tracks and speculative gains from bond sales. The construction of
railroads preceded the development of farming and agriculture in the deep Midwest. Railroads were often
given land for free by governments. They then resold the ‘rights of way’ land surrounding the rail lines to
investors in the east and abroad as well. Railway junctures were especially profitable, since towns and cities
arose at them and the land appreciated even more. Railroad bond speculation even led to an early form of
multi-tiered speculation. Capital raised from initial bond sales was in turn ‘paid’ to the railroads’ own
construction companies. The construction companies made the money, not the railroads. This required the
railroads to continually issue more and more bonds in order to keep the railroad construction going.
Continuing railroad construction was necessary to enable the further issuing of bonds. Debt piled upon debt.
And so the consequent cost of financing that debt also grew over time.
Railroads were intentionally built to nowhere. The more lines laid, the more potential for land speculation and
bond selling to investors, sight unseen. Banks, investors, and local speculators just kept issuing bonds on
top of bonds, the latter to pay the interest due on the former. The bonds weren’t created therefore to build
the railroads; the railroads were being built to keep the bond sales ‘golden goose’ alive and thriving.
It was not unlike what later would be called ‘ponzi’ investing; or, in the 21st century US economy, the over-
building of housing and commercial properties in order to enable expanding ‘securitization’ of mortgages and
other derivatives for sale to investors. That ‘financial side’ was where the real money was to be made.
The stock markets also came of age in the post war period. Borrowing from banks for purposes of stock
speculation also became popular on a wider scale. The New York banks and investors over-invested in
stocks, in particular in the period immediately preceding the banking panic of 1873. Borrowing on stock and
other asset collateral to buy more stocks—i.e. ‘call loans’—was also becoming popular. One third to one half
of total New York banks’ lending occurred in the form of call loans to stock speculators.
The exploding forms of banks and financial institutions, combined with the corresponding increase in money
(and other forms of credit), enabled the railroad bond-land speculation bubble to continue to grow from 1868
to 1873. Bond-financed investment in railroads expanded dramatically, doubling the size of total mileage in
the U.S. and creating a then immense value of $1.5 billion by 1873.
The financial crash finally came in 1873. The precipitating event was when the biggest railroad bond
speculator, Jay Cooke, could no longer sell new bonds for his Northern Pacific Railroad. Cooke also owned
banks. His New York, Philadelphia and Washington, DC banks purchased more than $100 million of the
Northern Pacific Railroad bonds, and then ‘borrowed’ from their depositors’ accounts to cover losses. When
the Northern Pacific went bust, so did Cooke’s banking empire in all three cities. This led to a classic ‘run’ on
other New York. Within a few days more than forty New York banks and brokerages collapsed, followed
quickly by the New York stock market, which was built upon the shaky edifice of call loans. Stock prices
plummeted along with bond asset prices. The stock market closed for ten days—the first time since its
formation in 1819. Remaining banks suspended payments to depositors attempting to withdraw cash. Multiple
bank runs followed, spreading out of New York along the eastern Seaboard, throughout the Southern states,
then the Ohio valley out to Chicago. A fracturing of financial fragility had clearly occurred. A full-fledged
banking panic was underway by October 1873.
Defaults followed in large number. In September 1873 alone more than 100 banks closed, along with 16
national banks and 11 state banks. The remaining closures were other non-chartered private banks and
shadow banks, like Trusts and insurance companies. It is estimated that as many as 50 New York
brokerages also collapsed. However, this still does not count an unknown number of hundreds, perhaps
thousands, of local community banks. It also fails to count the unknown number of banks and other financial
institutions that did not close, but temporarily shut down, i.e. were ‘suspended’, and later returned to
operation merged with others or in some other form. There were countless ‘runs’ on banks by depositors.
Twenty-five railroads defaulted on debt payments between January-September 1873 just preceding the
financial crash; railroad bankruptcies occurred thereafter by the dozens. It has been estimated that 18% of
all railroad mileage defaulted and went into receivership, as well as 18% of all railroad bonds. General
business failures in the wake of 1873 were also impressive. By 1878 at the depression’s end, 10,478
businesses worth $234 million had failed.