John Pierpont Morgan was no stranger to how central banks worked. He had witnessed their power firsthand.

Junius S. Morgan, Pierpont's father, became a partner at George Peabody and Company in 1854 and moved to London - where the American-born Peabody had been bankrolled by Baron Nathan Mayer Rothschild. At the time, the rich and powerful Rothschilds exerted extraordinary control over the Bank of England.

George Peabody and Company rode the mania for railroad shares, whose prices in 1857 were benefiting from the Crimean War's impact on rising grain prices, which Western railroads transported in huge quantities.

But the good times didn't last. As the Crimean War ended, wheat prices began to tumble, sinking railroad share prices and most stocks in the bargain. Another bank run was underway in New York. Banks stopped issuing gold, preventing Peabody's American correspondents from remitting payments to London.

Additionally, British investors were dumping American securities, adding to Peabody's cash crisis. George Peabody and Company was on the verge of failure when it was saved by an £800,000 credit line from the Bank of England. J.P. Morgan was twenty years old at the time and had just begun working for one of his father's correspondent agents in New York.

He would never forget how the Bank of England saved what would become the House of Morgan...

The meeting on Jekyll Island brought together banking competitors to essentially fashion a cartel to be overseen by a central bank enforcer.

John D. Rockefeller's Standard Oil of New Jersey had grown so big that it needed its own captive bank. Rockefeller deposited enough money, and did enough business through National City Bank of New York, the country's largest bank, to effectively control the bank. He also controlled the Chase National Bank through his brother, William.

Rockefeller wanted a lender of last resort, too. His banks were no less prone to depositor runs than any other institution. All of the men on Jekyll Island wanted the same thing: access to the unlimited liquidity backstop that only a central bank could provide.

The 'National Reserve Plan' that they came up with was nothing short of brilliant. To start with, the group knew that bankers putting forward a plan for a central bank - which they would control - would never get far. Banks had become evil-doers, and the most powerful bankers in the world had been vilified across Europe and the Americas.

Their creation was called the Federal Reserve System. It not only avoided the word bank, it cleverly implied federal, or government, control over the establishment of a pool of reserves that would backstop the new banking 'system'.

To address their competitors (especially the rapidly growing Midwestern and Western banks, none of whom were represented at the meetings) they invented a 12-bank system, so regional Federal Reserve Banks could serve more localized commercial banks.

Of course it was a ruse. Competing banks weren't getting access to their own regional central bank; all of the regional banks would be controlled by a board in Washington.

The plan called for federal debt to be converted into money, which would be lent to the government, and for the system to be the depository for all federal funds.

They wanted to be the official creators of money, and have their notes be made legal tender for all debts public and private. The money they designed incorporated official seals and symbols to make it look like it was issued by the United States Treasury.

Unfortunately for the bankers, opposition to the plan developed immediately upon its unveiling. Nelson Aldrich, who championed the 'bill' which he claimed to have co-authored as a result of being chairman of the National Monetary Commission, was known to be a mouthpiece for the banks. More work needed to be done to dupe the public and Congress before the grand scheme could be made law.

A political solution had to accompany the public relations assault being organized.

The Republicans, traditionally bank and big business backers, lost the House in 1910, making it impossible to even bring the plan to a vote.

But the bankers didn't just need a compliant Congress...they needed a willing President.

William Howard Taft, the popular Republican President, was up for re-election in 1912. However, the bankers were unhappy with Taft, who endorsed their plan heartily but demanded control of the beast for personal political reasons. The bankers didn't want a bunch of politicians dictating to them. Something had to be done about Taft.

It just so happened that several wealthy banker associates of Rockefeller's, J.P Morgan's and the Kuhn Loeb banking houses, were financial backers of the President of Princeton University, Woodrow Wilson.

Wilson was an academic who attended the College of New Jersey, and changed its name to Princeton University when he became president in 1902.It wasn't surprising to the bankers that Wilson came out publically in favour of their plan. Here, they thought, was a man they could do business with.

So, with the backing of directors of Rockefeller- and Morgan-controlled banks, Wilson was anointed Governor of New Jersey in 1910. He didn't realize it, but he was being groomed to enter the presidential race only two years later.

Since the bankers knew where Taft and Wilson, the Democrat, stood, it was only a matter of putting their man into the White House. The bankers were backing Taft, as they had before, and Wilson, too. They knew the unknown Wilson had no chance against the well-liked Taft.

To swing the election their way, the bankers devised an ingenious plan. They would bankroll the well-liked Teddy Roosevelt, a former Republican and Progressive, and bring him out of retirement to run as the Bull-Moose Party candidate.

The bankers spread their bets, but angled for Wilson. Just as planned, Teddy Roosevelt's entry into the race split Republican voters. Wilson was elected with only 42% of the popular vote.

The White House belonged to the bankers.The old Jekyll Plan was re-christened for its new voyage through Congress. It was the same plan, with some minor modifications. Only this time the bankers came out against it.

They had come to realize that if they were openly against any bill the public and Congress was for, it would appear that it was a bill that would bridle them - and once and for all bust what had been termed the 'Money Trust'.

It worked like a charm in Congress and with the public. The coup de grâce - which had, in reality, been a coup d'état - was that President Wilson was for it.

He signed the Federal Reserve Act into law two days before Christmas in 1913. It gave the bankers the gift of all gifts. The new Federal Reserve Notes would be made obligations of the United States government.

The Federal Reserve System is a central bank. Central banks don't have any money. They issue money or credit out of thin air. The money or credit they issue is backed by the taxing power of the governments they partner with.

When banks get into trouble, central banks have the authority to provide them with as much money as they need to remain solvent, get out of trouble, and become profitable again. The unlimited liquidity and backstop spigot that central banks control creates a self-perpetuating banking regime. Favoured banks will always get bailed out to become profitable another day.

Central banks - of which the Federal Reserve is, by far, the world's largest and most powerful - serve banks first and foremost. Secondly, they serve their host governments.

They are the ultimate tool of the rich and powerful.

If you don't realize that, think about what just happened in Cyprus. The European Central Bank, with the backing of Germany (whose banks have the most at stake in Europe) just reached into private depositors' accounts in two Cypriot banks to legally take out as much money as they needed.

To do what?

To give the money to the ECB to give to its constituent member banks (that want upfront cash) so the ECB can in turn make another loan - out of thin air - to Cypriot banks to give them the time to get their houses back in order.

This is how the world operates. If you understand how banks play and what central banks are doing, you can play along and make yourself a ton of money in the process.

Regards,

Shah Gilani
for The Daily Reckoning Australia