Ron,
You are quite right about both Rothschild’s quote and your statement that Britain does not have a 100% reserve system.
Private banks played an extremely important role in financing nations and issuing their currencies in the 19th Century, and the Rothschild’s among others profited greatly from this. During the 20th Century governments took more of this responsibility themselves; the American formation of the Federal Reserve system was part of that trend. If you look at the politcal rhetoric at the time, gaining control over such parties as Morgan and the Rothschilds was one of the main objectives of the creation of the system. As late as World War I the British govenment allowed a Morgan - Rothschild syndicate to monopolize the issuance of government debt. Winston Churchill marveled in his history of World War II that he was able to finance the whole of WWII with directly issued bonds at 2% interest, when the WWI bonds had required 6% interest. There were other reasons for the difference, but the profits of the Morgan - Rothschild syndicate were surely among them.
Time was not kind to the Rothschilds. Their American affiliate, LF Rothschild, failed in the savings and loan crisis in the 80’s, and the French Government - at that time in the hands of the Socialists - nationalized all French banks, including Rothschild, and paid the stockholders almost nothing. The Rothschilds complained at the time that the price paid was less than the market value of only one of their bank’s holdings, the metals firm Le Nickel. Today the Rothschilds mainly make the finest wines in the world - Lafitte Rothschild and Mouton Rothschild.
The Morgan firm survived and prospered. It was split in three in the 1930’s - Morgan Bank, Morgan Stanley Securities, and Morgan Grenfell in London - by the Glass Steagall Act. Morgan bank over time absorbed most of the other New York banks except Citibank, and Morgan Stanley is still a bulge bracket Wall Street firm. Now that Morgan Chase has taken over Bear Stearns, J.P. Morgan’s old universal bank has now regained all the functions it used to have. And of course the Chase in the title means it has taken over the old Rockefeller interests as well. Morgan’s son, J.P. Morgan, Jr. decided to go with the Morgan Stanley rather than the bank. The Morgan and Rockefeller interests have been so diluted over the years by acquisitions and the effect of inheritance taxes that neither family plays a significant role in any of the successor companies today.
Britain does NOT have a 100% reserve system. It has no explicit reserve requirements at all. That is why it is considered the mother of all debt creation. In practice, British banks do keep some reserves, but that usually amounts at most to a few percent, rather than the 10% US banks must keep, or the 17% that Chinese banks must currently keep. (China has been raising its reserve requirement in a failing attempt to contain inflation).
The real issue here is the money supply. The money supply consist of currency in circulation and the value of bank checking deposits. Economists call this M1. If the money supply keeps pace with economic growth, the economy’s overall price level tends to be stable. If the money supply fails to keep up with economic growth, there is a deflation in the general level of prices, and if the money supply grows faster than ecconomic growth, there is inflation in the general level of prices. Keynesian economics exploits a loophole in this general rule, but that’s really beyond this discussion. Economists have spent their whole careers arguing about the proper definition of the money supply, but the best research shows that M1 is the most usable measure. So there are two ways in which an inflation can occur - the government can print too much money (currency in circulation) or banks can create too many checking deposits.
A banking system - any banking system - creates money in the form of checking accounts. This money arises from debt. When a bank makes a loan, it deposits the proceeds in the customer checking account. This loan is self-funding i.e. the deposit that the bank is lending comes from the customers own money. Now this money doesn’t stay in the bank very long because the customer will spend it, but at the end of the day, it will wind up in some bank. Hence the total money supply has been increased. The bank just needs to be sure that it has enough money coming in from new deposits to fund the loan. In a certain sense this is free money to the banking system as a whole, and that is what the critics find objectionable.
A 100% reserve system would not permit banks to lend out any money at all from deposits; they would have to maintain 100% of the deposit in currency, so that the money supply would consist totally of currency in circulation. It is not at all clear that this would be a better system, for one thing bank service charges would increase dramatically, since banks would get no economic benefit from the deposits, and for another loan rates would rise signigicantly, since all loans would have to be funded by money raised in capital markets. The bottom line is that this would represent a huge free loan from the public to the government (because after all that is what currency is, a piece of paper which cost the government almost nothing but by legal tender statutes must be accepted in payment).
Using gold for the 100% percent reserve would create its own problems, since the supply of gold rarely matches the growth in the economy. The US has some history in this policy; when the country was on a gold standard in the 19th Century, it experienced an inflation when the discovery of gold in California increased the money supply significantly, and it experienced a deflation from about 1870 - 1900, as the economy grew faster than the gold supply. That deflation was fairly severe - the general price level dropped about 30%. Hence William Jennings Brian’s famous declamation “Thou shalt not crucify mankind upon a cross of gold!”. The economy experienced regular depressions and panics.
We’ve really had only one depression since the formation of the Federal Reserve system, and that was caused by the failure of the Federal Reserve chairman, Eugene Meyer, and the Treasury Secretary, Andrew Mellon, to use the system to prevent the banking failures of the early thirties, which led to the Bank Holiday declared by Franklyn Roosevelt, which really crashed the economy already weakened by the stock market decline in 1929.
There are indeed people exploiting our banking and investment systems today; not the dead hand of J.P. Morgan or Amshel Rothschild, but rather George Soros, Michael Milken, and their brethren who have been looting the wealth of America through junk bonds, subprime mortgages, structured investment vehicles, collaterized debt obligations, etc.
Is the Federal Reserve system a good system? As Churchill said about democracy “It’s the worst possible system, except for all of those other systems.”