Death by Taxes: The Federal Reserve

In the first two installments of the Death By Taxes series we discussed the history, motivation and reasoning for adopting an income tax and its ramifications for both consumers and entrepreneurs. In this third installment, we will discover “Cui bono” or who benefits the most from the income tax. The truth is far from what most people have been led to believe. Like most legislation, what is sold to the public may not always be the realized once a bill or amendment is passed.

The Federal Reserve Act

To understand the true intentions of the 16th Amendment is to understand how the Federal Reserve System works. It’s no coincidence that they were both passed into law at the same time. Today, the Federal Reserve System is the primary source of federal government financing and funding. When Congress decides to pass a new fiscal budget increase, it is usually followed up by the Treasury issuing bonds for the amount required to fund the next fiscal year. Some are purchased by foreign banks, some by Wall Street, but the largest bonds are reserved for somebody with a printing press. These bonds are purchased by one of the Federal Reserve preferred member banks. These banks are also a part of the cartel known as the Federal Reserve System. The bond is then sold to the Fed, at a commission, at which the required amount of new currency is created out of nothing, by way of an accounting entry, into the reserves of the member bank. In the name of remaining “independent”, the Fed is not allowed, by its charter, to directly purchase bonds from the Treasury. After all, the preferred “too big to fail” banks need to make their little bit of side money too, right? The reasoning behind this part of its charter is to supposedly decouple the Fed from politics by not allowing it to directly monetize the national debt. Again, the reality is quite different because that is exactly what it is doing, by proxy, through the banking system.

This new currency is then spent by Congress on its various contractors, and employees. They, in turn, deposit their incomes into their bank accounts. Surprise, surprise! These banks are members of the Federal Reserve System as well. At a ratio of 10:1, this new currency is loaned out into the economy, increasing the base supply of money many times over. This is the first tax that the average person pays to the well connected. Because this process is inflationary. It increases the supply of money without there being an increase in capital goods. As the new currency flows throughout the economy, its effect is a loss of purchasing power for all the currency already in existence. More currency is needed to purchase those higher end production goods that will later be transformed into consumer goods, thus raising the end prices that the consumer pays. This is a clever and covert way of transferring money from the citizen to the “too big to jail” banksters, both at home and abroad. Let us not forget that all of this prestidigitation is being charged interest. An interest rate which the Federal Reserve Board has the monopoly power to set.

The Federal Reserve Act was touted as a way to safeguard the public from the bank trusts. When in reality, it actually created a bank trust that is protected by the force of law. It created a leviathan that was given, by congress, the monopoly power to decide how the economy will be managed. The entire economy! Not only domestically, but around the world through the Fed’s position at the World Bank, the IMF and its leveraged influence over other central banks.

Which brings us back as to why the income tax and Federal Reserve System were both passed into law at the same time. It is Federal income taxes that pay the interest on the national debt. Your Federal taxes go to the Fed to service the debt that Congress continues to rack up. It doesn’t pay for education, school lunches, student loans, defense spending, on and on. You are being taxed to pay interest on a debt that was created from nothing! Remember that the next time you do your “patriotic duty” and pay your taxes, citizen.

Enter: Beardsley Ruml

An interesting thing happened during World War II. The federal government found itself in desperate need of funds to wage global warfare. Not enough patriots were purchasing War Bonds and raising the income tax to the required levels to wage such a huge war would have caused war-weariness and civil unrest among the public. The solution came by a man named, Beardsley Ruml.

Beardsley Ruml was an interesting character. According to Wikipedia, in the 1920s, he directed a Rockefeller fund that studied social and behavioral science and advised President Hoover on farm issues. In the 1930s, he became Dean of the University of Chicago’s Division of Social Science. This technocrat wasn’t popular among the other faculty members, so he left to end up as chairman of R.H. Macy & Company. During this time, he served as a director of the New York Federal Reserve Bank and became its chairman in 1941.

In 1942, Ruml proposed a withholding tax to the US Treasury. This “pay-as-you-go” system would not collect the taxes for the previous year as usual. Instead of having the public write that yearly tax check, the government would make up the difference in the current year by withholding the required taxes right out of every wage and salary earner’s paycheck. No surprise, Congress loved the idea of directly having access to the citizen’s earnings and adopted the withholding system.

The Treasury Department turned to one of its brightest young New Dealer economists to work out the technical aspects of the new withholding, the Chicago School economist Milton Friedman. In his own words, Friedman said the biggest hurdle was getting the IRS on board. As any bureaucracy, the IRS wasn’t interested in trying out something new. They argued that such a withholding would be impractical. But Ruml, being the social engineer that he was, assured the government that the public would get used to the idea of having their wages garnished. Well, he was right. Friedman’s rationale for the withholding tax was to avoid the inflation that happened during World War I which, he explained, doubled the prices during and after the war. Milton Friedman doesn’t apologize for his role in implementing the withholding as he found it a necessary measure to finance the war effort.

In a 1995 interview for Reason magazine he said,

“I played a significant role, no question about it, in introducing withholding. I think it’s a great mistake for peacetime, but in 1941-43, all of us were concentrating on the war. I have no apologies for it, but I really wish we hadn’t found it necessary and I wish there were some way of abolishing withholding now.”

The scheme was so popular with politicians that other countries began implementing the same withholding on their citizens. Now, most of the western world directly garnishes income taxes from workers.

No More Gold Dollars

By 1933, the US found itself in a bit of a pickle. Because of the Fed’s inflationary policy of the 1920s, there wasn’t enough gold bullion in reserves at the Fed or the Treasury. In order for the banks to be able to honor the “gold-clause” attached to every Federal Reserve note in circulation, the Treasury and Fed would have to be holding over 54,000 metric tons of gold. The reality was more like 6,000 metric tons.
The public and foreign banks were beginning to question whether the US government would be able to redeem gold-backed notes for the actual gold specie. The New Deal was very expensive and gold redemption became a great concern. Roosevelt bailed out the Federal Reserve Bank by issuing the unconstitutional executive order 6102, outlawing the private ownership of gold bullion. This also freed up Congress to begin new rounds of public sector spending, all backed by the Fed’s printing press.

In his own words, FDR stated the following during his May 7th, 1933 Fireside Chat, 

“Behind government currency we have, in addition to the promise to pay, a reserve of gold and a small reserve of silver, neither of them anything like the total amount of the currency.”

The currency, until FDR’s confiscation of gold, has been historically backed by “the full faith and credit” of the US government to redeem their paper for the gold specie. But what about now that there would no longer be any redemptive value attributed to the currency? The understanding of “full faith and credit” took on a new meaning. From 1933 to today that statement implies the US government’s ability to tax its citizens. In other words, the labor of the public would be forever held in collateral for every worthless piece of paper or account entry the Fed has and will ever create.

The circle is now complete. The Federal Reserve System can now function in its limitless capacity as it was always intended to function. The 16th Amendment is the engine and your labor is the fuel for this monstrosity of a vehicle to redistribute wealth from the bottom to the well connected at the top. Like chattel slavery, you, your children and grandchildren have been pledged off to the international bankers so that governments around the world can continue to grow and fight wars.


We understand that taxing the citizens’ earnings just to pay interest on the debt owed to the Federal Reserve is an immoral act. We shouldn’t forget that taxing the incomes of people through the force of government is, in of itself, theft and therefore immoral, as well. Beardsley Ruml played an important role in much of this in an act of social engineering. In the next and final installment of the Death by Taxes series, we will learn a lot more about the social technocrat named Beardsley Ruml. What you may learn will probably surprise you.


[Image credit: David Dees Illustration ]


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