Louis T. McFadden was a member of the House of Representatives
in the twenties and thirties and is one of the heroes of the Federal
Reserve conspiracy theorists.  A Republican from Canton, Pennsylvania,
he was the chair of the House Banking and Currency Committee during the
twenties, but was merely a Committee member by 1932.  He used his
position in Congress occasionally to crusade against the Federal Reserve,
a stance Gary Kah implies may have cost McFadden his

On June 10, 1932 the House was debating a bill which would
would expand the types of securities the Federal Reserve could trade
when conducting monetary policy.  McFadden used this opportunity
to launch a twenty-five minute tirade against the Federal Reserve, and
in so doing became a legendary champion amongst conspiracy theorists.  However,
just because a claim appears in the Congressional Record does not necessarily
mean it is true.  McFadden began…

Mr. Chairman, we have in this country one of the most corrupt institutions
the world has ever known.  I refer to the Federal Reserve Board and
the Federal reserve banks.  The Federal Reserve Board, a Government
board, has cheated the Government of the United States out of enough money
to pay the national debt. The depredations and the iniquities of the Federal
Reserve Board and the Federal reserve banks acting together have cost this
country enough money to pay the national debt several times over. This evil
institution has impoverished and ruined the people of the United States;
has bankrupted itself, and has practically bankrupted our Government.  It
has done this through defects of the law under which it operates, through
the maladministration of that law by the Federal Reserve Board and through
the corrupt practices of the moneyed vultures who control it.1

Once the hyperbole and histrionics are deducted, there is little remaining
of substance in the above quotation.  McFadden makes the claim that the
Federal Reserve had cost the federal government enough money to “pay the national
debt several times over.”  Is he correct?

Disbursements of Federal Reserve Net Income, 1914-1931 (in millions)

Revenues              $970.7                         Net
Expenses                 363.3                                                    ——-                         Net
Income                   607.4

of Net Income:                            Paid
as dividends         102.0                            Payments
to Treasury      147.1                            Retained
by Fed           358.3

Source: Annual
Report, 1995,
Board of Governors, p. 358.

In this table we see that from 1914 to 1931 the Federal Reserve system collectively
earned profits totaling $607 million.  About $102 million was distributed
to member banks as dividends, and about $147 million was paid to the Treasury
as a “franchise tax.” The Federal Reserve banks kept the remaining $359 million.  The
national debt in 1932 was $19.5 billion, so even if the Federal Reserve had
been paying all its profits to the government during this time, it would
have been enough to pay only 3 percent of the national debt — a far cry
from McFadden’s “several times over.”4  Moreover,
the Federal Reserve’s total revenues for the period were $971 million, so
if the entirety of the System’s revenues had gone straight to the Treasury,
it still would not have been sufficient to make McFadden’s claim even remotely

McFadden then covered a wide variety of topics related to the Federal Reserve
Board.  He accused it of assisting Trotsky’s efforts during the Russian
Revolution, of being controlled by international bankers, of debasing the
currency, and of many other fascinating transgressions.  He also invoked
the testimony of Father Charles E. Coughlin, the Catholic priest who would
later become famous for his radio broadcasts in support of Hitler’s National
Socialist agenda.

We can study the accuracy of these claims, as well.  The first one
is new to me, and I have not the slightest idea whether it is true, although
given that McFadden had trouble with a claim which could be easily verified,
it seems wise to invoke skepticism on his more fantastic accusations.  Generally,
this accusation is consistent with the “Protocols of the Learned Elders of
Zion,” originally published in 1903 in czarist Russia.  It is supposed
to be an “internal” document proving the alleged international Jewish conspiracy,
but it is now known to have been a hoax.2  Henry
Ford popularized translations of it into English in the 1920s and this may
have been McFadden’s source.  The second claim is false, as I show in
my article, Do Foreigners Own the Fed?  The
claim that the Fed debased the currency is also false.  To “debase” a
currency means to reduce its purchasing power, which happens when the general
level of prices rises over time.  This is usually caused by excessive
growth of the money supply, yet in 1932 the price level was lower than it
was in 1914, indicating that the opposite of a debasement had occurred.

McFadden also made some important and accurate arguments.  During his
speech on the House floor, he stated,

From the Atlantic to the Pacific our country has been ravaged and
laid waste by the evil practices of the Federal Reserve Board and the Federal
reserve banks and the interests which control them … This is an era of
economic misery and for the conditions that caused that misery, the Federal
Reserve Board and the Federal Reserve banks are fully liable.1

What did McFadden mean by “economic misery?”  They year he spoke, 1932,
was the very worst time of the Great Depression.  The unemployment rate
was approaching 25 percent of the labor force, which to this day stands as
record for the U.S. economy.  Homelessness, deprivation, and starvation,
usually reserved for the ultra-poor in this country, were now stalking millions
of former members of the middle class.  “Economic misery” was an understatement.

Most economic historians would agree with McFadden that the policies of
the Fed during this period were the primary cause of the Depression.  A
mild recession in the summer of 1929 turned into a banking panic after the
stock market crash in October of that year.  Banks, which owned stocks
and made loans to customers for the purpose of acquiring stocks, suddenly
found a large  portion of their assets nearly worthless as a result
of the crash.  Many of them began to fail, taking with them the deposits
of millions of families (at the time there was no deposit insurance).

This sort of thing had happened many times before, but the Federal Reserve
was created in 1913 in part to mitigate its effects as the banking system’s “lender
of last resort.”  In the midst of the first severe wave of bank failures
in 1930, the Fed was deadlocked on what to do, eventually deciding to do
nothing. Several more waves of bank failures followed and the Depression
was well underway.  Thus, the crisis can reasonably be blamed on the
erroneous policies of the Federal  Reserve Board (The classic book,
A Monetary History of the United States by Milton Friedman and Anna Schwartz,
provides a detailed accounting of the Fed’s internal policy debates during
this critical time).

In my view, however, McFadden goes too far in terming the Fed’s policies
as “evil” or its consequences deliberate.  As Friedman and Schwartz
showed, the Fed essentially made an honest error in judgment.  There
is absolutely no evidence that the Federal Reserve intended to create the
Great Depression.  Such a motive would have made no sense from the Fed’s
point of view.  The Depression created a highly unstable economic and
political environment.   Why would it have intentionally created
the sort of conditions that would have seriously endangered its own existence?

Finally, after McFadden’s twenty-five minutes of ranting had expired, Senator
Benjamin Strong of Kansas commented on the oratory he had just heard:

There is a disease that afflicts mankind which is very vicious.
It warps the judgment, it narrows the vision, it even causes men to see red,
to make mountains out of mole hills.  This disease has sometimes been
referred to as B.A.  Ladies may refer to it as “tummy” ache, but out
in the wide-open spaces men call it the “belly” ache, and I know of no man
of my acquaintance that has this disease in so violent a form as the gentleman
from Pennsylvania, Mr. McFadden.

I have not the time to refer to the many charges he makes against the
Federal Reserve system, but I call attention to the fact that for 12 years
he has been the chairman of the Banking and Currency Committee of this
House and did not see fit during that time to remedy any of the evils of
which he now complains. It seems to me entirely out of place to wait until
he is retired as chairman of that great committee and then assault all
of the institutions of which it has control.1

Strong’s statement suggested that McFadden’s rant was little more than political
bluster.  If McFadden had really been the anti-Fed crusader some people
today make him out to have been, then why did he not do anything about the
Fed when he had the chance?  More likely, he was making political points
with his constituents by placing blame for the Great Depression at the door
of the Federal Reserve.  While this may have been justifiable, he went
too far by implying the Fed intended to wreck the economy.    


1. Congressional Record, June 1, 1932 to June 11, 1932,
U.S. Government Printing Office.

2. Johnson, George (1983). Architects of Fear. Boston: Houghton

3. Kah, Gary (1991). EnRoute to Global Occupation.  Layfayette,
La.: Huntington House Publishers.

4. Office
of the Public Debt
, U.S. Treasury Department.  

[Read more from McFadden
on a conspiracist website]

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