Time to Make the Federal Reserve a Public Utility

December 23rd, 2013, marks the 100th anniversary of the Federal Reserve, warranting a review of its performance.  Has it achieved the purposes for which it was designed?

The answer depends on whose purposes we are talking about.  For the banks, the Fed has served quite well.  For the laboring masses whose populist movement prompted it, not much has changed in a century.

Thwarting Populist Demands

The Federal Reserve Act was passed in 1913 in response to a wave of bank crises, which had hit on average every six years over a period of 80 years. The resulting economic depressions triggered a populist movement for monetary reform in the 1890s.  Mary Ellen Lease, an early populist leader, said in a fiery speech that could have been written today:

Wall Street owns the country. It is no longer a government of the people, by the people, and for the people, but a government of Wall Street, by Wall Street, and for Wall Street. The great common people of this country are slaves, and monopoly is the master. . . . Money rules . . . .Our laws are the output of a system which clothes rascals in robes and honesty in rags. The parties lie to us and the political speakers mislead us. . . .

We want money, land and transportation. We want the abolition of the National Banks, and we want the power to make loans direct from the government. We want the foreclosure system wiped out.

That was what they wanted, but the Federal Reserve Act that they got was not what the populists had fought for, or what their leader William Jennings Bryan thought he was approving when he voted for it in 1913. In the stirring speech that won him the Democratic presidential nomination in 1896, Bryan insisted:

 [We] believe that the right to coin money and issue money is a function of government. . . . Those who are opposed to this proposition tell us that the issue of paper money is a function of the bank and that the government ought to go out of the banking business. I stand with Jefferson . . . and tell them, as he did, that the issue of money is a function of the government and that the banks should go out of the governing business.

He concluded with this famous outcry against the restrictive gold standard:

You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.

What Bryan and the populists sought was a national currency issued debt-free and interest-free by the government, on the model of Lincoln’s Greenbacks. What the American people got was a money supply created by private banks as credit (or debt) lent to the government and the people at interest. Although the national money supply would be printed by the U.S. Bureau of Engraving and Printing, it would be issued by the “bankers’ bank,” the Federal Reserve. The Fed is composed of twelve branches, all of which are 100 percent owned by the banks in their districts. Until 1935, these branches could each independently issue paper dollars for the cost of printing them, and could lend them at interest.

1929: The Fed Triggers the Worst Bank Run in History

The new system was supposed to prevent bank runs, but it clearly failed in that endeavor. In 1929, the United States experienced the worst bank run in its history.

The New York Fed had been pouring newly-created money into New York banks, which then lent it to stock speculators. When the New York Fed heard that the Federal Reserve Board of Governors had held an all-night meeting discussing this risky situation, the flood of speculative funding was retracted, precipitating the 1929 stock market crash.

At that time, paper dollars were freely redeemable in gold; but banks were required to keep sufficient gold to cover only 40 percent of their deposits. When panicked bank customers rushed to cash in their dollars, gold reserves shrank. Loans then had to be recalled to maintain the 40 percent requirement, collapsing the money supply.

The result was widespread unemployment and loss of homes and savings, similar to that seen today. In a scathing indictment before Congress in 1934, Representative Louis McFadden blamed the Federal Reserve. He said:

Mr. Chairman, we have in this Country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks . . . .

The depredations and iniquities of the Fed has cost enough money to pay the National debt several times over. . . .

Some people think that the Federal Reserve Banks are United  States  Government  institutions.  They are private monopolies which prey upon the people of these United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory money lenders.

These twelve private credit monopolies were deceitfully and disloyally foisted upon this Country by the bankers who came here from Europe and repaid us our hospitality by undermining our American institutions.

Freed from the Bankers’ “Cross of Gold”

To stop the collapse of the money supply, in 1933 Roosevelt took the dollar off the gold standard within the United States. The gold standard had prevailed since the founding of the country, and the move was highly controversial. Critics viewed it as a crime. But proponents saw it as finally allowing the country to be economically sovereign.

This more benign view was taken by Beardsley Ruml, Chairman of the Federal Reserve Bank of New York, in a presentation before the American Bar Association in 1945. He said the government was now at liberty to spend as needed to meet its budget, drawing on credit issued by its own central bank. It could do this until price inflation indicated a weakened purchasing power of the currency. Then, and only then, would the government need to levy taxes—not to fund the budget but to counteract inflation by contracting the money supply. The principal purpose of taxes, said Ruml, was “the maintenance of a dollar which has stable purchasing power over the years. Sometimes this purpose is stated as ‘the avoidance of inflation.’”

It was a remarkable realization. The government could be funded without taxes, by drawing on credit from its own central bank. Since there was no longer a need for gold to cover the loan, the central bank would not have to borrow. It could just create the money on its books. Only when prices rose across the board, signaling an excess of money in the money supply, would the government need to tax—not to fund the government but simply to keep supply (goods and services) in balance with demand (money).

Ruml’s vision is echoed today in the school of economic thought called Modern Monetary Theory (MMT). But after Roosevelt’s demise, it was not pursued. The U.S. government continued to fund itself with taxes; and when it failed to recover enough to pay its bills, it continued to borrow, putting itself in debt.

The Fed Agrees to Return the Interest

For its first half century, the Federal Reserve continued to pocket the interest on the money it issued and lent to the government. But in the 1960s, Wright Patman, Chairman of the House Banking and Currency Committee, pushed to have the Fed nationalized. To avoid that result, the Fed quietly agreed to rebate its profits to the U.S. Treasury.

In The Strange Case of Richard Milhous Nixon, published in 1973, Congressman Jerry Voorhis wrote of this concession:

It was done, quite obviously, as acknowledgment that the Federal Reserve Banks were acting on the one hand as a national bank of issue, creating the nation’s money, but on the other hand charging the nation interest on its own credit—which no true national bank of issue could conceivably, or with any show of justice, dare to do.

Rebating the interest to the Treasury was clearly a step in the right direction. But the central bank funded very little of the federal debt. Commercial banks held a large chunk of it; and as Voorhis observed, “[w]here the commercial banks are concerned, there is no such repayment of the people’s money.” Commercial banks did not rebate the interest they collected to the government, said Voorhis, although they also “‘buy’ the bonds with newly created demand deposit entries on their books—nothing more.”

Today the proportion of the federal debt held by the Federal Reserve has shot up, due to repeated rounds of “quantitative easing.” But the majority of the debt is still funded privately at interest, and most of the dollars funding it originated as “bank credit” created on the books of private banks.

Time for a New Populist Movement?

 The Treasury’s website reports the amount of interest paid on the national debt each year, going back 26 years. At the end of 2013, the total for the previous 26 years came to about $9 trillion on a federal debt of $17.25 trillion. If the government had been borrowing from its own central bank interest-free during that period, the debt would have been reduced by more than half. And that was just the interest for 26 years. The federal debt has been accumulating ever since 1835, when Andrew Jackson paid it off and vetoed the Second U.S. Bank’s renewal; and all that time it has been accruing interest. If the government had been borrowing from its central bank all along, it might have had no federal debt at all today.

In 1977, Congress gave the Fed a dual mandate, not only to maintain the stability of the currency but to promote full employment.  The Fed got the mandate but not the tools, as discussed in my earlier article here.

It may be time for a new populist movement, one that demands that the power to issue money be returned to the government and the people it represents; and that the Federal Reserve be made a public utility, owned by the people and serving them. The firehose of cheap credit lavished on Wall Street needs to be re-directed to Main Street.

Ellen Brown is an attorney, president of the Public Banking Institute, and author of twelve books including the bestselling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her blog articles are at EllenBrown.com. She is currently running for California State Treasurer on the Green Party ticket.

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  • http://www.BaltimoreGreenCurrency.org Shrapnel

    Come on all you Festivus people, time for airing of grievances.

  • http://www.byebyedemocracy.org/ kokanee

    This is a big, “Duh!” But here in the US, do we even know what is a “public utility?”

    • MechyTechy

      The general public is way too tolerant. And confused. Not to mention uninformed. Unaware that they are misinformed. Mislead. How can it be . . ? The public has bought the outrageous notion that compromise is essential to governance. It’s a violation of the principles of system design. If you want a thing to work, it must be designed to work in a specific way. There is a point beyond which (any) thing cannot be compromised if it is to accomplish the purpose for which it was intended. The public tolerates the situation in which the intent is continually in dispute, accepting the excuses for the failures of leadership. The public needs to learn to set the objectives of government in the public interest, first realizing it will not happen under the existing bi-polar system.

      • http://www.byebyedemocracy.org/ kokanee

        There were lots of great point in your post. Nikki Giovanni was on Democracy Now last Monday and had a few things to say about leadership:

        I think we need leadership. I thought that was a pitiful statement the president made. Washington certainly does make changes, and usually they’re negative changes. Washington says take off your shoes before you can get on an airplane. Or Washington says we’re only going to have, you know, so much fluoride. Washington makes changes. So why is it, when it comes to gun control, all of a sudden it’s “We need the American people”? No, we need leadership. We need the president, and we need our senators, we need the people who care, to be as strong in their views as the NRA is strong about wanting every American on Earth to have a gun. Obviously guns are a bad idea. They’re an idea of the 18th and 19th century. They’re just not a 20, 21st century thing. You know, they’re just not necessary. It’s just not the way we do that. And we need leadership. And I’m tired of watching the people that say they care bow down to the people that we know don’t.

      • didactic1

        As long as poor and working class kids in public schools are taught by well meaning but basically ill educated teachers that the most important official is the President, and not the Fed Chair, the Fedscam will go on and on and on and on…..

    • didactic1

      Good point. We think the local electric utiility is a public utility. Au contraire!

  • MechyTechy

    Democracy (the word) is defined as being a participatory form of government. I dream of the public developing the will to insist upon it. Compromise is NOT ESSENTIAL to the democratic process. Concensus (the expression of the will of the people -real people- not corporations) should be actualized and elevated as the primary essential element of self-governance. To assure the ability to achieve concensus, leaders need to be compelled to communicate to -and with- the voting constituancy. That means listening to the responses received in reply to the information (not deception) provided. Modern communication technology makes this more practical than it has been at any time in the past. ANYTHING that is big enough to impede, control, or subvert government by the people should simply be broken into manageable pieces, painful though that may be. We are now well aware, as a nation, of the many hazards precipitated by the failure to do so.

  • didactic1

    I’ve read about this matter in both libertarian and progressive journals, but rarely has a complex matter like the Fed been summarize so clearly and yet thoroughly.
    Add this to the progressive bucket list with Single Payer, Education for Good Jobs, Full Employment, Radical Expansion of National Parks and Wilderness, Shut Down all Foreign Bases and Air Craft Carrier Groups and Tax Reform including a stiff carbon tax.

    No support for the neoliberals like the Clintons or Obamas without their full embrace of these issues; not a dime, even when Michelle or Hilary send nice emails appealing to “women”, the “middle class” or other such groups that are utterly ignored once the White House state dinners and Camp David high life are in full swing.
    If no candidate to endorse the Fed reforms and others, then boycott.
    Real simple.

    Just dont go anywhere on Election Day or before except for a fundraising party to finance a longterm struggle for these issues.

    • http://www.byebyedemocracy.org/ kokanee

      Better: start voting against Dims and Pugs.

      • didactic1

        Boycott

        • http://www.byebyedemocracy.org/ kokanee

          Those that don’t vote become irrelevant. It also says that one doesn’t believe in democracy.

  • MechyTechy

    Sometimes someone says something that is worth repeating until everyone gets it. Except that about half of us never will never “get it,” as it means something different once it been consolidated into their pre-existing belief system. Which, of course, does not mean that the originator didn’t get it right.
    “Life can only be understood backwards. It must be lived forwards.”
    Soren Kierkegaard
    The simple, and valuable, truth in this quotation reflects the observation that we are bound to screw up from time to time. The results of our actions (or inactions) will not reflect our intentions at the time that our choices (decisions) were made. We are all likely to be compelled to make choices which will produce an uncertain outcome. The actual outcome then becomes clear later. Looking back, we can see our mistake.
    One of the reasons we need to study our own history, and that of others. That is the collective “we”. Maybe the problem is one that “they” created.
    Maybe we’ll need to insure that they can’t do it again.
    Maybe we can go back and fix it. Maybe we can avoid doing it again. Maybe we need to finish something we left incomplete. Maybe we need to accomplish something we neglected to do when we had the opportunity. Maybe we need to do it a different way, to produce a different outcome.
    Asking, “How did we get into this mess?” may produce the answer to: “How do we get out of this mess.”
    The real question is, “How do we keep ‘them’ from getting ‘us’ into a mess like this.” And, it should be obvious that “we” cannot expect ‘them’ to provide the answer. Nor the corrective action.
    The wise men who “framed” (doesn’t mean “finished”) our constitution probably didn’t imagine and anticipate that we (the court), 200 years later, would be confused about what “people” are or are not. We need to insist that congress fix that by law. Only individual human beings are people. Elections are not for sale.
    The banking and monetary system was not adequately defined in the constitution. We, the people, need to finish that part. Our experience to date should serve as a guide for what needs to defined under the law to serve the needs of all the people of the nation.