|This report and proposed legislation appears in the November 21, 2008 issue of Executive Intelligence Review.
PROPOSED ACT OF 1993
Nationalize the Federal Reserve
This report, and the proposed legislation that follows, was first issued by Lyndon LaRouche's 1992 Presidential campaign, LaRouche for President: Independents for Economic Recovery.
The Presidential campaign organization of Democrat Lyndon H. LaRouche, Jr. announced on Feb. 25, 1992 the release of a draft "Federal Reserve Nationalization Act" to recreate the U.S. central bank on the model of the First National Bank of Alexander Hamilton. The act would nationalize the Federal Reserve System, creating new National Bank of the United States, under the Treasury Department, returning to the U.S. government the right to issue legal tender (currency) granted in the Constitution.
The legislation is based on LaRouche's proposal to return the United States to the method of national banking originally envisioned by Hamilton, rather than the current British system of central banking represented by the Federal Reserve.
Article I Section 8 of the Constitution states: "The Congress shall have power... to pay the debts of the United States... to borrow money on the credit of the United States... to coin Money, regulate the Value thereof, and of foreign Coin, ... and to make all laws which shall be necessary and proper for carrying into execution the foregoing powers..."
The current Federal Reserve System's method of monetary creation via Federal Funds "open-market operations" is "unconstitutional," LaRouche states, because it leaves "the power to create credit in the hands of a powerful cartel of private bankers" led by Goldman Sachs, Salomon Brothers, Citibank, and Chase Manhattan Bank. This encourages cash to flow to speculative, nonproductive activities.
LaRouche calls instead for a return to "the constitutional obligation of the federal government" to ensure that the nation's credit goes to productive manufacturers, agriculture, basic infrastructure, and other necessary public services, to direct credit to an expansion of physical wealth.
LaRouche has also requested the drafting of a second, companion Bank Reorganization Act of 1993, to detail how the National Bank shall regulate the rapid write-off of the more than $5 trillion of speculative loans, "derivatives," and paper for nonproductive activities, now on the books of U.S. financial institutions.
The Federal Reserve Nationalization Act of 1993 completely revamps the Federal Reserve Act of 1913, which enacted the Federal Reserve System, establishing a National Bank under the Treasury Department, via amendments which:
1. Curtailing Open Market Operations
The core of the problem with the Federal Reserve is the way in which it creates central bank money, also called "money supply" or "reserves." The Fed adds new money to the banking system each week by buying a certain portion of the U.S. Treasury debt. That portion of government debt which is not purchased by cash already in circulation in the banking system, is financed by the Fed creating new Federal Reserve Notes, either as computer entries or as the familiar dollar bill.
This is known as "monetizing the government debt," printing central bank fiat money to finance the U.S. budget deficit. Since the U.S. deficit has ballooned to $200 billion a year of new Treasury debt in the 1980s, the inflationary effects of Federal Reserve open market operations have skyrocketed.
Creation of new money by a government national bank is not by itself wrong. Hamilton, in his Report on a National Bank, praised the Bank as "an engine of paper credit" to foster agro-industrial growth. The real question is: "Whose money?" and "To what purposes?"
In practice, the Federal Reserve does not purchase Treasury debt directly from the Treasury. Rather, the entire process is controlled by three dozen Wall Street financial houses, either Treasury bill brokers such as Salomon Brothers and Goldman Sachs, or commercial banks such as Citibank and Chase Manhattan. The Treasury sells its debt each week to these financiers who "make a market" in Treasury debt, buying it for their own investment portfolios, for a customer, or to trade and resell. The level of corruption this entails has been but partially exposed by the mid-1992 indictments of Salomon Brothers officials in a major Fed Open Market Operations fraud.
When the Federal Reserve creates new "reserves," it then buys a portion of these Treasury securities from those Wall Street financierswith central bank money just created. The brokers and bankers then deposit the cash in accounts at the top 20 New York commercial banks, as "nonborrowed reserves"new deposits virtually created out of thin air. When the amount of debt issued by the Treasury is increasing, as it has since 1980, the Fed is issuing new cash to Wall Street at a rate even faster than the increase of debt.
The private commercial banks then demonstrate the principle of the money multiplier: They create more money out of thin air, by loaning out the central bank deposits to a customer; the customer's loan is then redeposited, and becomes a new deposit, and is reloaned, and so on.
Again, private commercial bank credit creation is not necessarily inflationary. Hamilton notes in the Report on a National Bank that commercial banks are a wonderful invention which "will be seen to abridge rather than to promote usury."
The problem again is, "whose money" and "to what purposes?" Until 1982, there were minimal regulations limiting the money multiplier to about 2.5 times the original central bank money printed de novo by the Federal Reserve. Under 1980s deregulation, however, certain "reserve requirements" which limit the multiplier were lowered or removed, and whole new classes of paper created in "derivative" markets which are now treated as cash. This allowed the multiplier to grow exponentially.
With all this credit, why then is the economy crashing?
Whose money is it, and to what purposes is it being used? Control of the nation's credit rests with the above private financial cartel, not with the U.S. government. Wall Street has a monopoly power over the creation and deployment of fiat money by the Federal Reserve. This is not a "technical issue." Technically, if loans and investments from this arrangement had gone to the goods-producing sector of the economy at low rates, many of our economic problems might have been avoided.
If fish had wings, they could fly. Wall Street has had no desire to make such investments; precisely the opposite. More than half of the profits of the U.S. financial houses during the 1970s and early 1980s were made speculating in the inflationary offshore Eurodollar market, and making usurious loans to foreign nations which could never be repaid. During the latter 1980s the speculation turned inward, to the Savings & Loan debacle, real estate speculation, junk securities, and derivative paper.
Since 1979, when the Federal Reserve raised interest rates to 20% and above, loan rates for the public have also been kept usuriously high. Although during 1992 the Fed has brought its own lending rate to the banks down to 2-3% at the Fed discount window and in Federal Funds markets, banks and brokers have kept their lending rates to business above 7-8%, and consumer loan and credit card market rates at 12-19%.
Today, the banks themselves, caught with all this worthless paper, are desperately absorbing every bit of new Fed credit issued just to maintain their own balance sheets from day to day. Scandalously, the Treasury is paying these same banks 8% and more on Treasury debt, so that the banks are making a clear 5% profit on the difference between the Fed Funds they borrow and what the Treasury is payingright out of taxpayers pockets. Even with the Fed pumping money hand over fist, the money does not reach the capillary system of the physical economy, because the aorta has a leak.
The Federal Reserve Nationalization Act of 1993, therefore, forbids the new National Bank to use open market operations to create central bank fiat money. Section 3 of the act sets a statutory limit to the amount of U.S. government debt the National Bank may hold, and forbids the National Bank's purchase of net new Treasury debt.
This means Article I of the Constitution, which arrogates to the U.S. government a monopoly in emitting legal tender, will be reimplemented. New Federal Reserve bank notes will no longer be issued as the currency of the United States.
2. Expand Productive Credit via Discount Window
The act then proposes that new long-term low-interest national bank credit in the amount of approximately $1 trillion per annum be issued by the U.S. Treasury, via the new National Bank, to the physical economy. Loans are to be made by an entirely new mechanism: the National Bank is to open wide its discount window for lending of directed credit to the productive, infrastructure, and related physical economy. The Bank may create such credit indefinitely without inflation, provided it go toward lending for productive wealth.
All new credit and currency of the U.S.A. is to be thus issued by the U.S. Treasury under Article I of the Constitution, as U.S. Treasury bills. Such Treasury bills will replace, over time, the old Federal Reserve notes in circulation.
As LaRouche outlined the details in his March 8, 1992 national television broadcast "The Industrial Recovery of the United States," under the act, the President will request Congress to authorize "the issue of more than a trillion dollars in U.S. Treasury bills from the Treasury, to be deposited with the new National Bank, to be loaned at low interest. The federal government will so issue over $600 billion in low-cost loans to state and federal authorities for basic economic infrastructure projects" run by federal, state, and local agencies, and subsidiaries. The objective is to employ approximately 3-4 million people directly in government-run water projects, power generation and supply, transportation, urban infrastructure, construction of hospitals and schools, etc.
These projects will generate additional credit demand of a similar magnitude or more from private-sector firms contracted in these projects, which will seek private bank loans. For private firms supplying these government projects, and other desireable high-technology capital investment projects, the National Bank will make up to an additional $400 billion in government credit available for private bank loan discounting. The results in the private sector are estimated to increase employment by an additional 3-4 million operatives.
This will result in a total of over $1 trillion in new productive activity since the private banking sector supplements a portion of this government credit. The total new increase in productive employment of some 6-8 million persons means that the Treasury will receive more than the monies outlaid through increase in the tax-revenue base of the government.
The Federal Reserve's present discount window currently provides marginal amounts of credit, largely for the banks' use, in their own emergency cashflow needs. Via the window, the Fed loans money to the banks, at a discount, against financial paper and bills of trade on third parties presented by the banks.
The advantage, however, of conducting general national bank credit operations via the discount window, is that the window may easily discount large amounts of bills of trade. These bills, held by the banks as loans to productive enterprises, are chits representing actual physical production of goods and services, so as to guarantee that new national bank credit goes to creation of new productive wealth.
This will constitute a system of directed credit, or what has been called a "two-tier credit system." Private enterprise will be encouraged, but wisely managed enterprises more than others. Enterprises seeking to borrow at the banks for productive purposes, and their bankers, will find the banks can readily discount this paper for cheap credit. Those seeking to borrow for speculative purposes will find discounting difficult.
For example, Chrysler Corp. would be easily able to get a low-interest long-term loan from a Detroit bank, if it can document the funds will be used for productive purposes, because the bank knows it can to take such a loan agreement to the National Bank and discount it for cash at low rates.
To ensure private enterprise continues to be privately run, and to ensure that the private sector bear its share of the risk, the National Bank will require that a private bank put up at least 50% of the value of any loan from its own deposit base. If banks bears 50% or more of risk, banks will make sounder loans.
If Chrysler, however, seeks loans to diversify into real estate, or to relocate old plant and equipment to cheap-wage Mexican maquiladoras, its Detroit bank will advise them that the National Bank may not discount such a loan, and therefore the bank must decline, or charge higher interest rates.
The new Act states in Section 4:
3. Protective Bank Re-Regulation
To protect the safety of the banking system, and ensure private banks do not abuse the money multiplier in speculative lending as credit is eased, the act re-regulates strong reserve requirements and other bank regulations.
Until the 1980s deregulation, the law required banks to keep on deposit with the Fed a standard "reserve fund" on all deposits, for use to pay depositors when loans went bad, roughly calculated at an average rate of 16% of a bank's total deposits. This cost banks money, since the funds could not be loaned out at interest, and thus prevented banks from wildly multiplying the redepositing and relending of Federal Reserve credit.
Bank safety laws, however, were gutted by the deregulation of the 1980s. Reserve requirements were reduced on several basic categories of domestic bank deposits. Worse, the 1982 creation of International Banking Facilities (IBFs) at major U.S. banks removed reserve requirements completely on international deposits, those by "foreigners." Because in practice it is impossible to tell which deposits are foreign and which are domestic deposits being moved in and out from offshore, the creation of IBFs effectively merged the U.S. banking system with the offshore Eurodollar market, run out of London.
The rise of the "derivatives" market in unregulated financial instruments created entire new categories of what in fact are types of cash, subjected to no reserve requirements. The resultant speculation has bankrupted our financial houses.
Under the Act, the 16% reserve requirement, a standard post-war U.S. practice, will be reimposedon all deposits in U.S. banks. If foreigners do not choose to keep their "Eurodollars" in U.S. banks as a result, that becomes their problem, not America's, especially since "Eurodollars" were never legitimately issued by the Treasury.
Furthermore, 16% will be a floor rate for bank reserves, such that only banks which maintain at least 60% of their loan assets in the real physical productive activities listed above will be assessed this standard requirement. Otherwise, for every 1% by which the banks proportion of tangible wealth-creating loan assets falls below 60% of total assets, the National Bank shall require an additional 1% reserve requirement charge. That will discourage banks from falling below 60% of productive assets.
The derivatives market will be shut down by provisions in the forthcoming Bank Reorganization Act of 1993.
The Federal Reserve Nationalization Act of 1993
Sec. 1 Sec. 1 of the Federal Reserve Act of 1913 is hereby amended to read:
Sec. 2 Section 1 of the Federal Reserve Act of 1913 is hereby amended to read:
Sec. 3 Section 14 of the Federal Reserve Act of 1913 is hereby amended to include the following:
Sec. 4 Section 13 of the Federal Reserve Act of 1913 is hereby amended to read:
Sec. 5 Section 19 of the Federal Reserve Act of 1913 is hereby amended to include the following:
 "The Federal Reserve System: Purposes and Functions," Board of Governors of the Federal Reserve System, Washington, D.C., 1984 edition, p. 41.