232: The Fed

I'm one of the classical stuff that you know. What is that? It took me a second to get going. Change it up.

Start the engine. Change it up. We're a pot. Sometimes Thomas laughs like a puppet.

Like that. Pub-a-left. We're a podcast about the real world. What is happening?

We talk about old books, philosophy and things and stuff. And we're happier here. My name is Ajay Hindenburg. I'm joined by Thomas Magby.

Hello. And Graham Donaldson. And before I did that, I asked Graham what the topic of today's podcast was and what float forth was perhaps the most boring combination of words that I could ever imagine was we are going to talk about banks in the 1920s and my eyes glazed over. And then you hit record and started talking.

This promises to be a monologue of an episode because I'll be somewhere else. No, trust me. I think it's going to be interesting. I'm interested about how we became a reserve bank.

So this all starts at Ingle Stod. I'm a Germany. So people liked the last time with money about the different monetary eras. Where are these people?

They're not like two e-mails. My dad does. My dad does. My mom.

My dad definitely picks and chooses. I'm so interested. But anyway, so I thought I'd do one more sort of money episode. But since we're classical stuff, it needs to be at least 100 years old.

You can't just do a recent one. So you have to go back to the time. You can't be talking about what FDX was. That's right.

You can't be talking about crypto. That's for the in-betweens. That's for the in-betweens. So you need to go at least 100 years.

So what we're going to be talking about is we're going to be talking about the Panic of 1907 or as it's also known with a very early 20th century American word that knickerbocker crisis. I don't know why knickerbocker sounds like something. Is it similar to the panic right now when we're going and taking their money out of the bunch? Yes, very similar.

You just can't talk about the one. I just can't talk about it right now. I don't know if it's similar because we'll know 100 years of it. Fair enough.

Okay. So let's talk about this crisis and how it ultimately led into having a central bank in the United States. This is kind of an interesting and important thing. Our overseers and overlords that own our currency.

That's right. So let's talk about banks. So the first thing you need to know about banks is you need to know about blood magic. No, I'm just kidding.

No. So when America was founded, there was always a big question. Should we have a central bank that is like the first bank of the United States, a bank for the government, or should we not? And there's big divide over this in the founding fathers and in the first presidents.

And on one side it was, yes, we need a central bank. And I'm pretty sure Hamilton was on that side. Hamilton wanted the bank. And Jackson did not.

And so sort of running in early America was a decision as to whether or not we should have a bank that is America's bank. Or we should let each individual state or city or district have their own little banks and have everything be real decentralized or should we have it be centralized into one big bank. When Jackson, I believe it was when Jackson was president, we had a central bank and he allowed its charter to basically expire. And it didn't get renewed and that was in like the 1830s.

So from the 1830s up until the 1910s, it was America was free for all for banking. So let's talk a little bit about what that means. So the central business of a bank, now Thomas, I know you're sitting here rolling your eyes because these are easy, slam dunk layup questions for you as a former banker. But what is the central business of a bank?

How do banks make money? You're in the little guy. Yeah. They take the deposits and then they make the make loans.

That's right. So a bank has the old business was you borrow it 3%, you lend it 6%, you go golfing by noon. Like that was the old that was the old bank. Super boring business, real easy.

People deposit their money into your bank and the way that you attract depositors is you pay them an interest. So give us all of your money will make will give you 1% a year on your deposits. People will be like, okay. And then they take all those deposits and then they use that as money to lend out for other ventures and they can charge a higher interest than what they're paying out to their depositors.

They keep the spread. That is the business of a bank. Pretty straightforward. It's actually pretty great little business.

Yes. And it means that so the bank needs to be the one that makes decisions of who is credit worthy and it is within the bank's interest to give out more loans as opposed to fewer loans. Because if you give out, I guess there's less loans. Fewer loans are a comfortable answer.

Yes, right. So if you give out fewer loans, if one goes bad, you take a major hit on your losses. But if you have a thousand loans and one goes bad, that's less of a hit for you. So banks have an incentive to loan out money.

If banks are going to loan, they need to loan out a lot for them to be safer. And this is actually good for a society that wants to finance things. If you want to get a loan to go do something productive and banks have this sort of built-in incentive to want to have more loans for the safety of their book, this is a good thing. And you sort of shake hands and you agree on a rate and you pay that back and you get the money to go and start your business.

H.A. can start his, you know, if he realizes that he can sell his pottery in Alabama. But he needs some startup capital to do, but he knows there's a market for it. Well, if I lend him money and then he can buy a truck and then he can sell his pottery and make a ton.

And then paying me back, that is basically, A.J. is being able to do something now as opposed to having to do something later in the future when he could pay for the truck out of his pocket. So credit and financing things is basically like taking future productivity and letting it happen now. But there's also that payoff.

So, A.J., you've got to make back, you've got to pay off that loan. So anyway, so this was the original business of banks. They needed depositors, they needed to attract depositors, and then they would lend out money. And that was how banks worked.

And before we had any sort of central bank, the way that the banks in America would work is that they were generally independent from each other. You could have really different kinds of interest rates based on wherever you were in the country. If you were in a more agricultural place of the country, you could have interest rates that really would sort of follow the flow of the planting season. If you were in a more industrial place, you could have interest rates that really followed like business cycles.

So based on where these banks were located and who they were lending to, you could have a very sort of different interest rates around the world. So you could very easily be in a riskier part of America and have higher interest rates than a safer part of America, for example. And if you were a bank on the frontier, you were taking on greater risk with a potential greater reward than if you were a bank back in Massachusetts or something. So because banks were sort of independent from each other, this also meant that when banks failed, if they took on bad risks or if there was a bad harvest, those bank failures could kind of be independent from each other.

So if you were living in small town, Tennessee, and your bank, you went to your bank and you said, I want to take out all of my money, and the bank says, we don't have it. We lent it all and those loans went bust and we don't have your money. Can we give you 20% of your money instead and you come back later and you go, oh dear, and you go home and you tell your friends that the bank doesn't have your money and they freak out. And the next morning, everyone lines up, tries to get their money.

And the bank says, sorry, we don't have it. And the bank goes bankrupt and you lose your deposits. That could happen in your small town, Tennessee. And over in Missouri, it could be happy days, no one cares.

Like their bank could be totally funded, everything's fine. These things were kind of independent from each other. But it also meant that that scenario that I just outlined where banks could go bust or banks could have a run on them was a pretty frequent in, sort of later 19th century, early 20th century America. These banks could go bust and people would not really have trust in them or as soon as word spread that this bank didn't have your money, it's sort of like a self-fulfilling prophecy everybody shows up and asking for their money.

Now that bank can't do any loans and so that bank is scummed. Yeah, because there's also this side of there were banks during this time that would open knowing that they essentially fraudulently. Sure. And there would be a wildcat banking where you're kind of presenting the best case scenario where they're opening these frontier towns and they're doing as many transactions as they can.

And then oops, they accidentally run out of money. During this time, banks are opening and issuing their own currencies and don't have anything to back up said currency. And so they will move into a town, take into deposits, give out useless paper currency. And then when people try and withdraw everything, they skip town.

That's wildcat banking. Yes, and you also had massive frauds as well. And so which didn't do much to help with the whole trust issue in the system. So you had sort of structural problems that could happen in a bank where they made out bad loans and everything else about them were well intentioned but these loans didn't pay out.

And then you also had fraudulent banks where they were just ripping off. And there was no way of really discerning between the two except through trust. Okay. Now we're going to come up to this.

There was a hair brain scheme that two guys, actually three guys, two brothers and a dude came up with and they had a scheme to make some money. It's to make some money boys. We're going to make some money. So these brothers were named Augustus Hines and his brother Otto.

So Augustus and Otto Hines and their buddy Charles W. Morse. So Hines and Morse. The Hines brothers, they owned a big copper company.

They owned a company that dug copper out of the ground. So they owned a lot of this copper company and they had a buddy named Charles Morse who was, they were in sort of a banking business with. So Hines and Otto, they had made a lot of money from their copper company and they had kind of turned their copper money into bigger financial products. So they owned, it wasn't technically a bank, it was called a trust.

But they owned all these financial companies and their copper company. They were taking on deposits and lending money. They had sort of, were with Charles Morse, they had, they were sort of the banking world in New York City. And what they wanted to do, so Otto, one of the brothers had a plan and he's like, listen, people with it, the nation was kind of going in a little bit of an economic downturn.

There was a really big earthquake in California a couple of years before and so a lot of money had actually left New York City to go to San Francisco to rebuild San Francisco after the giant earthquake. And things were kind of a little bit like an economic cycle was turning and things were kind of in recession. So times were tough economically. And everybody kind of realized that this was also going to hit the commodity world.

When times were tough, no one's going out and starting, no one's going to, the demand for copper was pretty low and people were pretty sure that, you know, the Hines copper company was going to have some rough couple of quarters and they were going to be posting some losses. And they catch up. Yeah, no, they do not, they do not pay it to catch up. It's spelled differently.

I looked it up to you. I was thinking the exact same thing. I was hoping. I did not pay it to catch up.

You know, it's just some tomatoes. Yeah. But, and so when this happened, the Hines brothers realized that they, that there was a lot of people who were speculating short their company. Now, Mr.

Maggie, as the former banker, do you want to explain how shorting of a company works? It's like normally with the stock when you buy it, you want the price to go up and then you sell it. So just reverse that and that's shorting. So you sell a thing that you don't own and then you buy it back in the future and you hope that the price has gone down.

That's right. So you go and you borrow a share of a company. So let's say you borrow a share from AJ and you take that share and you sell it at the market price. Let's say you sell it for $15 and you have $15 cash.

Well, I mean, he's going to have to pay me a little bit to borrow my share. He is. And then that company goes down to $10 a share. And then Thomas goes back and takes that $15 buys a share for $10, gives the share back to AJ and has made $5.

That's shorting. But to do what you need to borrow a bunch of shares. I'm not the wiser because I still got my share. You still got my share.

Plus a small fee, whatever it's like $0.50 you gave me borrow on the share. You got your share and you could demand your share back at times depending on how the short structure could demand for your share to come back. Thanks. Especially if the company went, when gangbusters went from $15 to $30, you may be like, I want my share back to sell, buddy.

And so you could demand your share back. So shorting is a little bit dangerous. But the Heinz brothers, they were like, listen, I'm pretty sure the auto came and he said, I've crunched the numbers. And everybody is short of our copper company.

And so what we're going to do is we're going to squeeze them. And so they went to Charles Morse because Charles Morse had made some money squeezing and cornering the ice market back in the day. Which is a strange thing. So Charles Morse had done this exact, I would say it's a scheme, but had done this exact tactic and made some bank cornering the ice market.

So they go to Charles and then they're like, we're pretty sure everybody's short and we're the majority shareholders of our copper company. And so here was their scheme. We are going to go on to the market. We are going to go on to the market.

And we are going to buy as many shares of the copper company as we can find. Every single share that exists, we are going to buy. It doesn't matter what price it is, we're going to buy it. And that is going to drive the price up.

And when that drives the price up, the people who are betting on the company going down are going to get real nurse and they're going to, you know, clench their butts. And they're going to need to buy those shares back to get out of their short. And the only people that will have shares that they can buy from will be us because we've bought the rest of the shares that exist and we can then name our price. This is the scheme.

This is called the short squeeze. It's what happened with GameStop. It's what happened with GameStop. GameStop was a little bit different because they were doing it by weaponizing the options market, which is kind of different.

But it's the same kind of mechanism. It's still kind of idea. Yeah. So, and so Charles and Agassus were like, are you sure this is going to work?

And I was like, yeah, there's not enough shares out there for all the shorts to buy to cover to get themselves as. You guys tracking? Yes. So, they did this.

They went out and they bought every single share that they could get of the copper company. And the copper company obviously went up. It went from like, you know, I think... Wait, is there company anyway?

The market shares is not a terrible idea anyway. Sure. Unless the share price goes up. Yeah.

So much that... But I mean, if everyone's kind of short the company anyway, you're probably getting into discount, which means that you have your own shares to sell when it goes back up. So, it's not a terrible thing. It's not a terrible thing.

So, anyway, so the company predictably goes up. It goes up in prices and the shorts start freaking out. But it turns out auto made a mistake. There was actually plenty of shares out there for the shorts to buy back and cover.

And they did. Hard whoops. Yes. Hard whoops indeed.

So, I think the company went from like $40 to $60 on the initial squeeze. But then when all the shorts covered, I think in a couple of days it went to $10. Ooh. Yeah.

Now the Heinz brothers and Charles Morse had all bought at $40, $42, $47, $51, $56, $60, and then it went all the way bet down to $10. They were busted. Absolutely busted. And the Heinz brothers, you know, with their copper company, they sort of look their wounds and off they go.

And I think Augustus Heinz ends up dying in disgrace somewhere. But Charles Morse needs to pay these debts. And he runs... He has a bank.

Wait, so did he finance this whole affair? He was in on the scheme as well. Okay. He's got to pay his debts.

But he also is somebody whose poor business is in taking on deposits and letting them go. He's in taking on deposits and letting money like a bank. Although he technically has a trust. Oh, no.

So does he use everybody's bank money? So he does. So he goes and he needs to pay this off. And so he is taking...

He's trying to get money to pay off these bad bets that he's made and he's taking depositors money. And he's, you know, he's trying to... That's not money that's coming back. That's not money that's coming back.

So he's trying to... If he can basically like pay this off and if no one comes to the bank and is like, I want my money back, he can kind of wait for interest payments to start coming in from his good loans and maybe he can kind of weather the store. If he just has some money in the system that he can pay off these debts but he's going to get interest payments. Like the important thing to remember is like his banking business wasn't busted.

But he personally was busted and he's going to use his banking business to bail himself out. So then it is busted. At the point that you're using the deposit money. It's not busted.

It's just fraud. So then he... The business is totally different. Yeah.

So Word gets out that Morse has just lost a kitten kaboodle with this whole copper thing. And people show up the next day to their bank accounts and they say, I would like my deposits please and the bank would be like, please hold. Please hold. Oh, it turns out like we've been moving money from point A to point B so we don't have the full deposits to meet your needs.

We take X percentage and be like, okay, take percentage and go home and you tell your brother, I want to the bank. I can only take out 40% of my deposit. And your brother would be like, I have all of my money in that bank. Next morning your brother goes and he doesn't.

You get to the point where there is an absolute panic almost overnight that that company is underwater. His trust is done. And it was called Knickerbocker. So his knickerbocker trust is done.

They have no cash. They're not mean depositors. There's no juice left in the system to flow through it. But then an interesting thing started to happen.

It was a banking contagion. And it happened. Because his bank was under, they thought all the banks were under. Well, and in some cases other banks legitimately were because they had financial interest in the Knickerbocker trust.

So when they go under, you're now taking a loss. And so when you're taking a loss, so let's say I was Knickerbocker and I'm under and AJ you had invested and you have financial investments with me and some interest in me. But you run a trust and you know Thomas is your deposit or he comes up and he's like, hey man, where's my money? And let's say you have the money and you give Thomas all his money.

Thank you very much. But now you're down that deposit. And if everybody comes as down that deposit, you get this contagion. So you get it to the point where there were banks that weren't even involved in any way, shape or form, in the ecosystem of Knickerbocker, who had people who were just so freaked out that they would come and demand their deposits.

And the bank would be like, listen, we have your money, we can give it to you, but we in no way are involved or implicated or exposed to Knickerbocker. If you'll be like, that's what a bank would say that is exposed. You know, like there was just no trust. And you had this basically this mania of withdrawals happening.

Even in banks can't function. With me banks can function. So you would have a perfectly viable bank that has made wonderful loans that is making, people are paying back those loans and they're willing to make other wonderful loans that are going to do productive things. But when the depositors come and take out all their money, you've basically stopped the flow of capital through the bank and the bank seizes up and dies.

Well, that and they can't necessarily pay back all of the money because that's loaned out. That's right. And because there was no regulation saying how much of the depositors money you needed to keep, like, liquid at the bank versus how much you could lend out. We have that now.

Yes. So you would demand like 20% or whatever it is. I don't think it's that high. Yeah.

Yeah. So banks nowadays have to have a percentage of their depositors money deposited at the Federal Reserve. So it's a bank that has bank accounts of other banks. We'll get to that.

Cool. Anyway, so this whole thing starts to seize up. People are taking money out of the system because they're like, oh, dying boys. It's another bank run.

And so people are getting their money out. Healthy banks are going under, obviously sick banks are going under. And the smart plane is shorting the banks. And the smart, you know, some people are, yeah, speculation on this.

And really what, especially for those healthy banks that really don't really have any business going under, except that people have lost their money. And so they're getting under, except that people have lost confidence in them. Basically what you need is you need some kind of level of confidence. And the level of confidence would be your money is here if you need it.

But we don't have anybody who can do that. Now, the way that the knickerbocker crisis fixed itself was Thomas Boyer, Jamie Morgan himself. This is the one where he calls everyone into a room and like, cut this out. Yeah.

Okay. You want to tell this story? Well, is it the one? I don't know if this is the same crisis because he does this a few times.

But so there's this beautiful Morgan mansion in New York City. And so if this is the one that takes place there, he essentially invites all of the heads of these. I don't know if it's the same. Maybe it is, but tell us, I think it is.

The way this one goes, again, it could be a different crisis. He invites all the heads of these different trusts and banks into a room and he's like, we need to figure this out. Like we've got to stop. Like all these problems going on.

And they talk about it. They say, oh, we didn't come to a conclusion. And they're like, well, let's take a break. We'll come back tomorrow.

And he goes, no, you're figuring this out right now. Locks the door. It doesn't let anyone out of the room until they come up with the solution to this problem. I don't think it's the 19-0.

I'm not sure if it is, but that definitely illustrates the kind of person J.B. Morgan was. Yes. He would find solutions to the problems.

Yes. So J.B. Morgan does is he takes his... This sounds like our life, plugging a life chicken story with stall in there.

Or are we going to get the J.B. Morgan fanboys flaming our YouTube channel? I would love that. Um, actually.

He's like, no. Am I going to install his do? Sorry, what happened? So J.B.

Morgan basically puts up his own fortune as the backstop for the crisis, and he puts his money into the good banks and basically puts out the press release saying, like, if you have your money in these banks, you're going to get your money back because I'm putting my money in there. And of course, he himself is now taking financial positions in these banks. If these banks are successful, he's going to be successful and he's going to get a return. Turns out very well for JP Morgan.

But like, Morgan does this, Rockefeller does this. Who are the British? The Rothschilds are involved. Nathan Roth, no, Nathan's the dad.

Who's the New York Rothschild? I can't remember. But anyway, they are involved in putting their money into the banks to basically like calm everybody. And it works.

And the crisis is averted and people are like, oh, I guess I can. If JP Morgan's going to back my $40 I have in my bank account, like, then I'm not going to have to go and take my money out. And these banks can now go. And I'm like, yeah, I'm going to lend that money.

Yeah. We don't need to sell the farm, ma. Okay. But what this highlighted for people at the time, and the president at the time was Tae Roosevelt, who was no friend to big banking.

I just want to say this was, I kind of read this from what you can see. I'll just give you this. Morgan then met with the nation's leading financiers in his New York mansion where he forced them to devise a plan to meet the crisis. And then it goes on.

So it was the president? There you go. That's right. He's the president at the time.

And Roosevelt is very famous for hating the trust. He sort of had antitrust laws. And so now there is a desire. Now there was a great example of what happens when the banking, when an unregulated decentralized system goes wrong, you need, like, financier heroes to step in.

And let's be honest, Morgan's not doing this because his heart bleeds red, white, and blue. It does. But he's doing this also because he's going to profit it from saving the banks. He's going to have to be green.

He's going to have to basically negotiate sweetheart deals because he's buying real estate when houses on fire, right? Like this is what he's doing. And so they use this as exhibit A of we need maybe a not a government organization, but we could use a central bank. That will be the bank of last resort that if this kind of thing happens instead of going to and begging JP Morgan to put his money into it, we can go and have a bank that is basically the bank of the United States that can put money into these failing banks and restore trust to the system.

And so then lo and behold, a charter for the Federal Reserve gets proposed and then I think it's 1913 or 1911 or something like that pretty soon thereafter. The first bank of the United States, the Federal Reserve Bank gets put into existence. And they are not a private bank, but they're also not a government agency. They are kind of this weird hybrid between the two where they function like a bank, but AJ, you and I can't go and take a, we can't go open an account at the Federal Reserve.

You know what else, you can't do it. Really? Yeah. You need a charter.

But it's also not a government organization where the leaders of it are not voted in. They are appointed by administrations and they themselves are not, like they are bankers. Like that's their job is to, well, they actually have a. Is it not by a certain family?

No, it's not by a family. It is something that is, whose existence is allowed by the Federal Government with a special charter. And so they have powers that no other bank can do. They control the supply of money is one of their powers.

And so there's no single family that's like reaping all of money. No, no, no. In fact, the family is the United States government basically. Yeah.

I was thought it was owned by a private family and they were sort of pulling all the strings. No, if the Federal Reserve makes any money on their loans, it's money that goes to the Federal Government. Well, hot dog. I feel a lot more comfortable about it.

No, so what the Federal Reserve, now, and how it works now is if you are a bank in the United States and you want to be a bank and loan money out, you need to follow some regulations. So some of the regulations, and Thomas, definitely feel free, correct because I think I'm wrong on that. So, Thomas, is banks need to have their own accounts set up at the Federal Reserve. So like Citibank and Bank of America and Goldman Sachs and JP Morgan, they all have their own bank account at the Federal Reserve.

And they need to have money in that account that is a percentage of their deposits. So they basically need to take your money, AJ, from where do you bank? Bank of America. So Bank of America needs to take a percentage of your AJ deposit and put it in the Federal Reserve Bank.

And then they can loan out the rest. And whatever that ratio changes all the time and regulations happen. But there's a ratio of how much reserves you need to have in the Federal Reserve. So banks need to do this.

You can't be a bank otherwise. Now I don't think credit unions have to do this. I was going to say it depends on your charter in their state charters versus national charters. That's what I was trying to look up right now.

But this would be a national charter, right? If you're working with the Federal Reserve. Yeah. And then the Federal Reserve, they don't really go and make loans to like me and you for getting a car.

Like we can do that with the bank. But they do make loans. But the Federal Reserve has famously called, they have sort of what's called the dual mandate. So they have one or two things that the Federal Reserve government wants the bank to be able to do.

The dual mandate is this. We want you to create, we want you to have a maximum employment in the United States. So one of your mandates is as many people in the United States can have a job or can get a job. And the other side of the dual mandate is we don't want prices of goods to go crazy up or crazy down in short periods of time.

So price stability and maximum employment. This is the famous dual mandate of the Fed. Is that correct? On the maximum employment, it's not 100%.

Yes, it is. Because there's some amount of, there's a name for it I'm not remembering. But there's some amount of unemployment that's always expected to be happening. You're going to have your losers and lasers.

Yeah. So there is potential for there to be too low of unemployment. Yes. Am I saying that the right way?

You can have too much employment and too much unemployment. So both of those are problems. So there's some sort of way I'm just kidding. You can probably not actually be a loser.

I'm just kidding. I understand that poverty is a thing you can fall into without being lazy. Okay. Okay.

So the Federal Reserve has basically, they need, they have to be able to keep the nation in balance in terms of employment and in terms of price stability. And they only really have like one tool to do this. And that tool is that they can change interest rates. But they can't change like.

They can change one. So it's a very specific kind of interest rate, which is very weird. We're going to talk about it. But let's talk a little bit about, I want to find this without being too complicated.

All right. I don't know what you're going with all this. I'm going to explain why the Federal Reserve, what they do is they can change an interest rate. But the interest rate they change is very weird and esoteric.

And what it is, is they can change the overnight rate that banks have to pay on their deposits to each other. The federal funds rate. Yes. The federal funds rate.

Why does that make my car more expensive? Yeah. So basically how that makes your car more expensive is. So what rate are they raising?

Two banks need to have a set amount of money in their bank account at the end of any business day. That's a ratio to their deposits and loans and all that. Okay. So I've got a bank and you've got a bank.

So AJ Bank, let's say today was just a great day for loaning out money. And you made a ton of loans and you closed the deal and you sing and you've loaned out all this cash. But all that cash is out. But at the end of the day, you need to, so that you don't run afoul of the Fed, you need to have a set amount of cash that is representative of your depositors.

So I can borrow that from you. You can borrow that from me. I'm going to pay for it. You're going to pay me for it.

And that is called the overnight Fed Fund rate. That's the rate that they change. That's the rate that's going to raise their interest rate. That's the interest rate.

So the overnight rate is what they can change. What if I don't make any loans and I've got the money and they're already out of the bar for you? You don't have to borrow from anybody. You can borrow from people from you and you're going to make money on that.

Yeah. So now all the Federal Reserve can do is their interest rate is changing that number. So when you hear the Fed rose, raised interest rates from 5% to 5.25%, they have raised that overnight bank lending rate. And the question is, could I be going to the table and I'm like, hey, when you cannot.

We are now and J. You don't do that. Well, I mean, I'm like, but if they don't find out. If they don't find out, then we can run for governor.

I don't know. But you really love that because you're making less money on me borrowing. Exactly. So you're like, no, I want the.

That's right. Now, how does this influence anything else? Well, if you're a bank and you're now having to, let's say you're a bank that's going to need to borrow a lot of money from other banks and you're going to have to pay out the 5% overnight rate. No, it's not 5% every night.

It's 5% annual. But just that's the annual rate overnight. All of a sudden, your expenses as a bank have gone up. The rate that you're going to have to pay to borrow money has gone from like a tenth of a percent to what it is now, 5.25%.

So you as a banker now having to, the cost of borrowing money has gotten more expensive. So that means that you are going to go and you are going to demand higher interest rates from your loans because you need to make your money back. So whereas before, you could maybe borrow money at 20, at 0.25% and lend it out at three for a Thomas's mortgage. Well, because you're now having to borrow money at 5%, you can't offer Thomas a 3% mortgage.

You're going to offer Thomas a 7% mortgage. Right. Because I'm going to be paying that out of you know, anyway. Or you're going to be offering a 7% car loan.

Or so basically, in many ways that overnight Fed Fund rate is essentially the interest rate floor of America. Because banks have to make some form of money on top of that, so all the lending on top of it has to be higher than that floor. Now, it's not technically correct to say that that is the floor of the interest rate in America, but it kind of de facto is. I mean you could probably go to some weird private institution that would lend you smaller if they have an only hand.

You could. They're not running a bank. You're going to your dad's going to lend you the money under the interest rate. I mean, they have.

They have. But in terms of like the national banking system, when the Fed raises interest rates, banks are going to raise their interest rates, mortgages are going to get more expensive, and borrowing money is going to get harder. And so if, let's say Thomas really, let's say Thomas had a great idea for a business, a drive through liquor store. And he has a drive.

You have a text. I know that blew my mind. That's why I use it as an example because it blows my mind if I drive through liquor stores and Texas. I'm like that seems like that car until like 15 years ago.

I'll look up on the government of the law. All right. Anyway, Thomas has a idea for business. If interest rates are low and Thomas can borrow money to like open a second.

So if maybe he's going to open up a second, be his boozes on like, you know, the highway or whatever, he'd either save his money and paid out of pocket. That's going to take a long time. Or he'll go and take out a loan. And if interest rates are low, Thomas can do that.

And if he does that, Thomas is hiring people. He's in September 1, 2001. There you go. How?

20 years ago, you could still drink in the car. This is what they've taken from us. They're not going to take my freedom. So Thomas can open a second, be his boozes.

And he's employing people. He's buying products. So that means that the producers of that product are employing people. And Thomas can do this because he's borrowed money on a low interest rate.

If interest rates are too high, Thomas may be like, het man, I'm not opening a second be's, I'm just going to hold out, save some cash. And those potential employees of the second be's, now don't have a job. So if you raise interest rates, you can eventually sort of hurt employment. Why would the Fed want to raise interest rates in the first place?

Well, if their other job is to stabilize prices of things. So if there's lots of money sloshing around out there and maybe is like, maybe it's like, maybe can borrow money at nearly 0%. And he's opening like 40 be's, is boozes and he money is cheap and easy to get. And he is, you know, having to fill out all of these be's, boozes without like, if there's a lot of money out there, over time, prices of things are going to go up.

So here's the analysis that I give. Let's say your freshman class, AJ, every single one of those freshmen through sheer luck, all won the lottery one year. Cool. And every single freshmen's got like 800 grand at peace.

And let's say that there is, you know, the Dr. Pepper machine downstairs and, and there's like, there's only like a couple of cans of Dr. Pepper left. That's me bidding more.

There's going to be a big more. There's going to be a big more. And those freshmen, they're not smart. They're going to pay like 50 bucks for Dr.

Pepper because what do they care? They got 800 grand, I don't know where. They have like money that means nothing. So they're going to buy a $50 can of Dr.

Pepper. When now they're going price of Dr. Pepper's 50 bucks. That's inflation.

When you have lots of money, prices can go out of whack. Also, if we didn't have any Dr. Pepper anymore, we could have inflation because people really want that Dr. Pepper.

But there's lots of money sloshing around the world, prices are going to go up. And the Federal Reserve doesn't want prices to go up because that can create all sorts of social problems. So what they do is they raise interest rates and that makes borrowing harder. And that means that Megbee is not going to borrow as much money.

And that means eventually prices are going to settle down because the money is not easy money anymore. But you do that for too long and then people aren't starting businesses. People aren't taking out loans. They're not going to school.

They're not buying cars. They're not buying cars. They're not buying cars. They're not doing things that are either consumptive or they're not doing things that are productive.

And that is eventually going to hit employment. Whoever was going to work at Beases Booses is now not going to work at Beases Booses, and their employment needs to be absorbed in the system somewhere else. And if they can't be absorbed in the system somewhere else, they're unemployed. And if that happens nationwide, then the unemployment numbers go up.

And then the Federal Reserve says, crap, we got lower interest rates and get some money flowing. So this is an example of how you might come into poverty without being a waste or a loser. So the Federal Reserve has this sort of mission where they need to basically have one tool, which is raising or lowering basically the floor of interest rates for banks. And if they lower interest rates, it's kind of like pushing on the gas of the economy.

And the hope is that the banks will take the hint and loan. And if they raise the interest rates, kind of like putting the brakes on the economy and hopefully the banks are also going to raise their interest rates and they're going to be less loaning and less money out there. Because then people don't want to get loans just like they don't want to buy a house of a 9% interest rate. But I would have three.

So anyway, so this is the Federal Reserve. This is their mission or this is basically their mandate. Do this. This is your social function.

It's going to have one big lever to shift the entire flow point. And there's tons of debate as to whether or not their lever is an adequate tool to basically meet the mandate that they've been given. Maximum employment and stable interest rates. We have not had the same level of financial crises.

I know we had 2008 and we've had COVID, but we have not had the same, you know, the Dacham bubble. We have not had the same kind of bank failure crises as you had every like seven years from like 1836 to 1907. Like every couple of years you just had banks blowing up and people losing all their life savings and stuff. Yeah.

But what are the FDIC? Doesn't the federal government sort of guarantee that I can get my... Yes. And that's part of the charter of being a bank.

You pay money in. You pay money in. You pay money in. You pay money in.

And then there's a certain amount of money that's guaranteed. I think it's $250,000 of deposits are guaranteed by the FDIC. Per deposit or per account? Per deposit or per account?

Yeah. You only get one account. But anyway, like if you're married, you can have two separate accounts plus a joint one. But that didn't start till 1933.

So it's a little bit after all this. But now there's sort of an un... There was a de facto insured deposits on everything because like... No one won.

If the big five banks fail, the government is going to bail them out. The government is not just going to bail out $250,000 of their deposits. You know, like it's kind of this... Yes.

There are other problems with this in that it's... The problem of being unregulated and decentralized created its whole host of problems of people getting taken advantage of and tons of fraud. And basically being the Wild West and no trust in the system and people thought money was this thing that banks were these big criminals because many times they were. There are problems with a massively centralized system.

And that we have... Now we're not going to get into those problems. Maybe we can talk about them in between if we care about it. But there are definitely problems.

And there are people whose whole political careers have been based on pointing out these problems and the concerns that they have of it. But I mean, basically all I wanted to do with today's episode is to talk about this sort of like historical thing that happened a hundred years ago creating this agency, this bank that is sort of very central not only to our lives, but if you remember from the last economics episode we did, because the world is so reliant on the amount of United States dollars that exist in the system, when the Federal Reserve makes decisions, it affects other countries. Like you and I don't sit here and say, oh man, I wonder what the central bank of the Netherlands is going to do. With their gold holdings, no one cares.

But what the Federal Reserve does to the amount of dollars in the system really has an effect on South Africa and the EU and everybody else who transact in dollars. Material things happen to their countries based on the Federal Reserve's decisions that they're only making just for the American economy of maximum employment. So it's kind of this weird system. And it probably is one of these things that maybe my read of it as someone who didn't grow up in the United States is that there's a little bit of this, well, maybe we'll say this for the between, that that system that is meant to solve a national problem probably ends up creating an international friction with other people.

Some international bitterness maybe has inadvertently kind of soured people to the US sometimes, because you've got this national instrument in the United States that makes decisions that affect Belgium or affect Slovakia. Anyway, that was all I wanted to get through. Hopefully that wasn't too complicated. No, that's fine.

Okay, I have a couple questions. You got to come up for me. So question number one, Illuminati, yes or no? So probably then I mean I did mention the Rothschilds, so that's got to be in their summer.

So no, they're probably not running the Fed. I don't think so. Sorry. It's like a bunch of boring PhD people.

No, like shadow agents, shadow conglomerate that's running all the banks of the world. No blood magic. No blood magic. Well, there is the world bank.

I mean, there is a like the international monetary fund. They're not shadowy. They have a conference. Okay.

That's just what they want you to think is they're out in the open. Okay. So no, Illuminati, who's yeah, you said that the National Government reaps all the extra funds. So I mean, there is there can be some sort of gross incestuous things, right?

Like you could go from the private sector of running Goldman Sachs to being the chairman of the federal reserve to being in the government to being the to going and being the treasury person, right? No, or knowing all that stuff might give you a certain insight to your own from private. So during 2008 when Lehman failed, but other banks didn't fail, some people. So the chairman of the federal reserve at that point was Ben Bernanke.

Yeah, it was Ben Bernanke and Ben Bernanke apparently had beef with Dick Fold, who was the head of Lehman and the conspiracy theory is that Ben Bernanke allowed Lehman to go under and then bailed out the banks just to like stick it to Richard Fold. That's like the whispers and that's the like, you know, the fun story. It's probably not true. No, that guy's like filthy rich anyway.

Oh, of course he went just fine. But he's also persona non-gratitic fold these days. But anyway, you know, there's fun things like that. I don't know if that's true.

Maybe you were to say, what did you hear? What was the word on the street? Nothing. Yeah, nothing interesting.

You weren't inducted into some sort of... None that I can talk about on a podcast. The logic magic? Yeah.

I can't talk about my secret cult connection. I don't even know. Nothing. Okay.

That's what I wanted to know. Because it's always been, you know, I've seen, I saw the documentary with air quotes as I guys. Oh, my word. Yeah, I think that's nuts.

Talk about how the federal government now, like we all are money is controlled by private agency. Why do you watch this? What is this? It's too am I'm using calls.

You have to. You have to. You have to. I have some weird friends.

No, it's much more boring than that. But it is something that does create incentives or when you have like one, when you have one job and you have one tool, it can get into weird places. Like all you can do is raise and lower interest rates and we can get to weird places like negative interest rates which happened for a while. But if my job is hammering nails and all I have is a hammer, like every problem looks the same.

Exactly. I'll just say I have an easy job. Okay. That's very straightforward.

But that's right. Yeah. But anyway, so that's the knickerbocker crisis and why the Federal Reserve exists. I was hoping the knickerbocker, right?

It sounds like a pants issue. It does sound like a pants issue. A lot of people lost their pants. But that's where we'll end.

So this is classical stuff. You should know you can reach us at the guys at classicalstuff.net. That's our email. You could also check out our website, theclasscles.net.net.