Thinking Positively About Monetary
Nationalizing the Federal Reserve
by Ellen Brown
www.webofdebt.com/, March 30th,
Nervous pundits are predicting the end
of American life as we know it, after Fed Chairman Ben Bernanke
announced on March 18 that he would be dropping yet another trillion
dollars in helicopter money - up to $300 billion to buy long-term
government bonds and an additional $750 billion to buy private
debt, with the Term Asset-backed Securities Loan Facility (TALF)
to be opened up for the sake of consumers and small businesses.
The dollar immediately experienced its worst drop in 25 years,
amid worries that the Fed's intervention would spur hyperinflation.
Typical of the concerned commentators expressing these sentiments
was Mark Larson, who wrote in "Money and Markets" on
"This is Banana Republic-type stuff!
And I'm not talking about the clothing store. Printing money out
of thin air at the central bank, only to turn around and buy debt
securities issued by your Treasury, is the kind of practice you
typically see in emerging market regimes. We're essentially monetizing
our country's debt and deliberately devaluing our country's currency."
Tim Wood wrote in "Financial Sense"
on March 21:
"I'm now beginning to wonder if the
powers that be are really in their minds trying to 'fix' things
or if they are actually trying to destroy the dollar, the free
markets and perhaps even the nation. To be honest, the latter
is starting to make more sense to me because surely there is enough
intelligence in Washington to understand the potential consequences
of these actions."
Commentators on the Financial Sense Newshour
suggested that the Fed's move toward "quantitative easing"
would be looked back upon as the watershed event in the beginning
of the end of the United States dollar. As explained in Wikipedia:
"The term quantitative easing refers
to the creation of a pre-determined quantity of new money . .
. In very simple layman's terms, the central bank creates new
money out of thin air. It then uses this money to buy what is
essentially an IOU [that is, to make a loan]. . . . Today the
new money is generally created electronically rather than physically
The Federal Reserve remains a privately-owned
"bankers' bank," and it has not asked Congress's permission
before engaging in its new policy of massive "quantitative
easing." The Fed has the capacity to create money on its
books and lend it to whomever it will. There is thus a danger
that we may just see more money being funneled to those same Wall
Street banks that got us into this crisis in the first place.
But while the Fed's new "quantitative easing" tool
is fraught with risk, it also has some interesting potential.
This funding mechanism could be extended not only to replace
the loans that banks have been unwilling or unable to make but
to fund Obama's stimulus package - at little or no cost to the
American taxpayer. What we are faced with today is not inflation
but deflation. Lending has dried up not only from banks but from
the "shadow banking system" - all those pension funds,
hedge funds, and foreign investors who used to snatch up mortgage-backed
securities - and that means the velocity of money has slowed.
Money is sitting in bank accounts rather than being lent into
the economy for consumer and homeowner use. The government's
stimulus plan is meant to pick up the slack, but who is going
to fund it? The Chinese and other foreign investors are balking
at buying more of our debt, and the taxpayers are tapped out.
That just leaves the central bank itself.
Thinking positively, in fact, we may look
back upon this as the watershed moment when the Federal Reserve
finally adjusted its focus and started to act more like a government
central bank, one that advances "the full faith and credit
of the United States" for the benefit of the United States
and its citizenry, rather than just for the bankers who have held
the government and its central bank hostage for so long. President
Obama suggested a move in that direction when he said on the Tonight
Show with Jay Leno on March 19:
"[W]e're taking a lot of steps to
. . . open up separate credit lines outside of banks for small
businesses so that they can get credit -- because there are a
lot of small businesses out here who are just barely hanging on.
Their credit lines are starting to be cut. We're trying to set
up a securitized market for student loans and auto loans outside
of the banking system. So there are other ways of getting credit
The Fed now appears to be taking on the
role of lender of last resort not just for its member banks but
for consumers, businesses, and the government itself. Provisos
and cautions aside, its new "quantitative easing" policy
at least has the potential to be harnessed to serve the government
and the people it represents; and that is a promising development.
Harnessing the Federal Reserve for Federal
The key to this potential is something
that is little known or appreciated: the Fed now rebates all of
its profits to the government after deducting its costs. [cite]
1 That means that it is actually the government that gets the
benefit of the interest on the Fed's loans; and that is how it
should be, since the U.S. dollar today is backed by nothing but
"the full faith and credit of the United States." The
dollar is the government's credit - its promise to repay value
for value, nothing more. If the government is taking the risk
that credit will not be repaid, the government should get the
interest on the loans.
The Federal Reserve was originally set
up in 1913 by a powerful Wall Street group to serve the private
banking system, and it agreed to return its profits to the government
only under duress. This happened after Congressman Wright Patman,
head of the House Banking and Currency Committee in the 1960s,
peered closely at its operations and pressed for its nationalization.
The developments were chronicled by Congressman Jerry Voorhis,
who wrote in 1973:
"As a direct result of logical and
relentless agitation by members of Congress, led by Congressman
Wright Patman as well as by other competent monetary experts,
the Federal Reserve began to pay to the U.S. Treasury a considerable
part of its earnings from interest on government securities.
This was done without public notice and few people, even today,
know that it is being done. 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."2
The potential for the Fed to acts as a
truly "federal" central bank that issues loans to the
public and returns the profits to the government has been there
since the 1960s; but until now, the Fed and the Administration
have not made much use of it. The Fed has used its dollar-issuing
power only to the extent necessary to provide the reserves to
backstop bank runs. The vast majority of the money supply has
continued to be created privately by banks in the form of loans;
and as Congressman Voorhis observed, "where the commercial
banks are concerned, there is no such repayment of the people's
money" as there is with the Federal Reserve. Commercial
banks do not rebate the interest they receive, although they also
"'buy' the bonds with newly created demand deposit entries
on their books - nothing more." This, Voorhis maintained,
was a violation of the Constitutional provision that "Congress
shall have the power to coin money [and] regulate the value thereof."
Bernanke's Greenback Solution
The Federal Reserve under Alan Greenspan
continued to operate in its traditional role of serving the interests
of its banker owners, but Ben Bernanke seemed to have other things
in mind as far back as 2002, when he made his notorious "helicopter
money" speech. The speech was made before the National Economists
Club in Washington, D.C. on November 21, 2002 and was titled "Deflation:
Making Sure 'It' Doesn't Happen Here." Dr. Bernanke stated
that the Fed would not be "out of ammunition" to counteract
deflation just because the federal funds rate had fallen to 0
percent and could not be brought down lower. Lowering interest
rates was not the only way to get new money into the economy.
He said, "the U.S. government has a technology, called a
printing press (or, today, its electronic equivalent), that allows
it to produce as many U.S. dollars as it wishes at essentially
no cost." Note that he said the government (not the central
bank) has a printing press, and that the government could print
money at essentially no cost. The implication was that the government
could create money without paying interest and without having
to pay it back to the Fed or the banks.
That fairly well characterizes the money
created by "quantitative easing" today. The Fed rebates
the interest only after deducting its costs, which are no doubt
quite generous; but in 2008, it reported that it rebated 85% of
the interest it received to the Treasury.3 Since interest on
long-term bonds is now under 3%, that means the interest paid
by the government is less than _ % - clearly the best deal in
town, particularly since the Chinese and other foreigners are
now balking at buying more U.S. debt. This is comparable to what
Australia did in the 1930s, when it avoided the serious depression
conditions suffered in other countries by funding public projects
with credit advanced by its government-owned central bank at a
fraction of one percent interest.4
Not only are the Fed's loans nearly interest-free,
but they are never paid back. The federal debt has not been paid
off since 1838, when Andrew Jackson shut down the Second U.S.
Bank. "Balancing the budget" just involves "servicing"
the debt with interest. Money that comes from an interest-free
loan that is rolled over indefinitely is essentially debt-free
The infamous helicopter line in Bernanke's
2002 speech came in when he was discussing how the government's
money-creating power could be used to cut taxes. He said, "A
money-financed tax cut is essentially equivalent to Milton Friedman's
famous 'helicopter drop' of money." Dropping money from
helicopters was Professor Friedman's hypothetical cure for deflation.
The "money-financed tax cut" discussed by Dr. Bernanke
was one in which taxes would be replaced with money that was simply
printed up by the government and spent into the economy. He added,
"[I]n lieu of tax cuts, the government could increase spending
on current goods and services or even acquire existing real or
financial assets." The government could reverse deflation
by printing money and buying hard assets with it - assets such
as real estate or corporate stock.
And that, for a Federal Reserve official
next in line to become its Chairman, was a pretty radical suggestion.
It was basically a Greenback proposal, the sort of government
self-funding used by Abraham Lincoln to finance the Civil War.
It was also the sort of money system endorsed by Benjamin Franklin,
Thomas Jefferson, and William Jennings Bryan, the system used
by the American colonists and demonstrated to be particularly
successful in colonial Pennsylvania.
Reviving the Banking Model of Benjamin
In Pennsylvania in the first half of the
18th century, the provincial government not only printed its own
money but owned its own bank. Colonial scrip was printed and
lent to farmers at 5% interest, and this money recycled back to
the government as it was repaid. The money went out and came
back in a circular flow, preventing inflation. This was quite
different from what happened in those Banana Republics that used
the power to print money simply to pay off foreign debts owed
in dollars. The invariable result was to invite speculators to
jack up the price of the dollars relative to the local currency,
causing the currency's rapid devaluation. The Bank of Pennsylvania,
by contrast, issued its fiat currency as loans for domestic use,
loans on which not only the principal but the interest came back
to the government. Since the provincial government had the power
to issue the local scrip, it could issue some extra to meet its
expenses; and this money filtered through the economy to provide
the additional sums needed to cover the interest on the loans.
During the time this provincial system was in place, the Pennsylvania
colonists paid no taxes, there was no government debt, and price
inflation did not result.
What the Fed is doing today could be considered
comparable: it is generating the equivalent of debt-free government-issued
colonial scrip with its "quantitative easing" tool,
and it is advancing credit for private use, with the interest
on the loans returning to the government.
The Case for Nationalizing the Fed
One major difference between the Federal
Reserve and the bank of colonial Pennsylvania is that the Fed
remains a private bank owned by other banks. There is the fear
that the powerful tool of "quantitative easing" could
turn into a dangerous weapon in the wrong hands. A private central
bank can be driven by a small financial elite in secret boardroom
meetings beyond congressional control. The power to create money
is a double-edged sword even for a government, but at least a
government must answer to the people in the public forum of a
That is true in theory, but we the people
don't have much more control over Treasury Secretary Tim Geithner,
a government official, than we have over Ben Bernanke. The Treasury's
Troubled Asset Relief Program (or TARP) has been heavily criticized
for moving "toxic" assets off the books of the culpable
Wall Street derivative banks and onto the backs of the taxpayers.
The problem is that government officials and Federal Reserve
officials alike believe that the only way the nation can have
a functioning credit system is to maintain business as usual on
Wall Street. This is not true. A public banking system headed
by a truly federal central bank could provide all the credit we
To prevent corruption and abuse, this
system of money and credit would need to be made subject to the
sort of public monitoring and control provided by the checks and
balances built into the Constitution. Stephen Zarlenga, president
of the American Monetary Institute, suggests that the money system
should be organized as a fourth branch of government alongside
the executive, judicial and congressional branches. The Fed is
acting like a fourth branch now, but without the public oversight
of a true government agency. Congressman Ron Paul has brought
a bill (HR1027) to audit the Federal Reserve, and Congressman
Dennis Kucinich told Congress earlier this month that he would
soon be bringing a bill to nationalize the Fed. He said:
"Banking is not a proper function
of the government, but oversight is. The Treasury Department should
not be outsourcing to the Fed its oversight responsibilities.
The Fed, which failed miserably to oversee the banks, should be
put under Treasury instead. It's time for the government to operate
in the public interest, not in the interest of private banks.
It's time to stop bailing out banks and begin building up America."
Note, however, that if the Fed is nationalized
and it continues to issue credit for the benefit of consumers,
small businesses, and the government itself, it will actually
be in the banking business; and that, arguably, is how it should
be. Our money system today is nothing more than a series of legal
agreements between parties. "Credit" is merely an agreement
to repay over time. While private parties and private banks should
be free to lend their own money or their investors' money, we
also need the sort of "credit" that is created on a
computer screen; and that sort of credit, as money reformer Richard
Cook observes, is properly administered as a public utility.
The dollar is backed by nothing but "the full faith and credit
of the United States" and should be dispensed and monitored
by the United States. As William Jennings Bryan declared in his
winning presidential nomination speech at the Democratic Convention
"[W]e 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. . . . [W]hen we have restored the money of the Constitution,
all other necessary reforms will be possible, and . . . until
that is done there is no reform that can be accomplished."
The loans the Fed creates by "quantitative
easing" are no more inflationary than the credit created
daily on a computer screen by private banks.5 At least, loans
used to be created daily by private banks, until their ability
to lend was frozen for accounting reasons. The Fed's credit facility
has the advantages over private banks' that (a) it is not subject
to the lending freeze, and (b) its profits are rebated to the
government, which ultimately serves the taxpayers' interest.
Nationalizing the Federal Reserve is the ideal solution; but while
we are waiting for that development, the government can do the
next best thing and tap into the very cheap, readily available
credit provided by its own central bank.
Ellen Brown developed her research skills
as an attorney practicing civil litigation in Los Angeles. In
Web of Debt, her latest book, she turns those skills to an analysis
of the Federal Reserve and "the money trust." She shows
how this private cartel has usurped the power to create money
from the people themselves, and how we the people can get it back.
Her earlier books focused on the pharmaceutical cartel that gets
its power from "the money trust." Her eleven books include
Forbidden Medicine, Nature's Pharmacy (co-authored with Dr. Lynne
Walker), and The Key to Ultimate Health (co-authored with Dr.
Richard Hansen). Her websites are www.webofdebt.com and www.ellenbrown.com.