- Appendix -

                   - Supporting Brief -

- - Proposed Federal Reserve Nationalization Act of 1992 - -

The presidential campaign organization of Lyndon LaRouche
announced the release of a draft Federal Reserve
Nationalization Act of 1992 on February 25, 1992, to reshape
the U.S. central bank along the model of the First National
Bank of Alexander Hamilton. The act would nationalize the
Federal Reserve System to create a new National Bank of the
United States, in order to direct credit to an expansion of
production of physical wealth, and away from the speculative
Wall Street ``junk finance'' of the 1980s.
  The legislation is based on the proposal by
Democratic candidate Lyndon H. LaRouche, Jr., to return
the United States to the method of central banking
originally envisioned by Hamilton, the nation's first
treasury secretary, and mandated in Article I of the U.S.
Constitution.
  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 fiat credit in the
hands of a powerful cartel of private bankers led by
Citibank and Chase Manhattan Bank, ``who dominate the
Federal Funds markets.'' This system encourages the
majority of funds to flow to speculative, non-productive
activities such as junk bonds, Leveraged Buyouts, and
other inflationary activities.
  LaRouche called 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. The text of the legislation
follows.

       - Amendments to the Federal Reserve Act -
  The Federal Reserve Nationalization Act of 1992
completely revamps the Federal Reserve Act of 1913, which
created the Federal Reserve System, to create a National
Bank under the Department of the Treasury. This is done
through a series of amendments which:
  1) Forbid the creation of new fiat credit through the
Federal Reserve's current mechanism of {open market
operations,} known as creation of ``money supply'';
  2) Create instead large amounts of credit through the
new National Bank's {discount window}, providing that all
loans presented for discounting by private banks to the
National Bank are earmarked for new real physical capital
investment, production, or transport of tangible wealth;
and
  3) Re-regulate {reserve requirements} on deposits of
private banks and use them to ensure banks maintain an
adequate proportion of lending for purposes of real
physical production.
       - 1) Curtailing Open Market Operations. -
The core of the problem with the Federal Reserve is
to be found in the way in which it creates money. The Fed
now adds new money supply to the banking system each week,
by printing fresh Federal Reserve Notes, the familiar
dollar bills, for the purpose of {buying a certain
portion of the U.S. Treasury debt} (Treasury bonds or
bills), that portion of government debt which would not
otherwise be purchased by money already in circulation in
the banking system. This is known as ``monetizing the
government debt,'' printing fiat money to finance the U.S.
budget deficit. It is thus axiomatic that since the
nation's deficit has ballooned to the $200 billion annual
mark during the 1980s, that the inflationary effects of
Federal Reserve open market operations have taken off.
  Worse than the question of ``how much fiat money?'' is
the question ``whose''? In practice, the Federal Reserve
does not purchase Treasury debt directly from the
Treasury, but from the two dozen leading Wall Street
government debt houses, such as Salomon Brothers and
Goldman Sachs, which have bought up the debt from the
Treasury Department in anticipation. The level of
corruption this arrangement almost automatically entails
has been but partially exposed by the recent indictments
of Salomon Brothers officials in a major Fed Open Market
Operations fraud.
  These Treasury security dealers then deposit the
proceeds of their Treasury debt sales--the new fiat money
just printed by the Federal Reserve--into accounts at the
top 20 New York commercial banks, led by Citibank and
Chase Manhattan. These commercial banks now have
additional deposits virtually created for them out of thin
air, at the expense of American taxpayers, who have to
pay the interest on the wildly expanding Treasury debt.
The banks then demonstrate the principle of the ``money
multiplier'': they create more money out of thin air, by
loaning out these deposits to a loan customer; the
customer's loan is then redeposited, and becomes a new
deposit; is again reloaned, and so on.
  Until 1982 there were minimal ``reserve
requirements'' limiting this ``money multiplier'' to about
2.5 times the original amount printed {de novo} by
the Federal Reserve. But under the deregulation of the
1980s the total phase-out of reserve requirements has
allowed the multiplier to grow at infinite rates.  With
all this credit, why then is the economy crashing?
  The reason is that the control of the nation's credit
rests with the above-described {private banking
cartel}, not with U.S. government as provided under
the Constitution. The Fed shares its monopoly power over
money-creation with a handful of big money center banks.
If these banks made most of their loans to the
goods-producing sector of the U.S. and world economy, many
of America's economic problems might have been avoided.
  The banks, however, do precisely the opposite. Half
the profits of the U.S. money center banks during the
1970s and early 1980s were made speculating in the
inflationary offshore Eurodollar market, making usurious
loans to foreign nations which could never be repaid.
During the later 1980s the speculation turned inward, to
the S&L debacle, real estate speculation, and assorted
Wall Street junk-securities schemes.
  Now the banks themselves, caught with all this
worthless paper, are desperately absorbing every bit of
new Fed credit issued just to keep their own balance
sheets from day to day. Even while the Fed is 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 1992
therefore limits the new National Bank's open-market
operations such as to prohibit that manner of creation of
new fiat money. Section 3 of the act sets a statutory
limit to the amount of U.S. government debt the National
Bank may hold. The Bank may continue to perform the other
necessary functions of open market operations, such as
short-term buying and selling of Treasury debt to stablize
the debt markets, but may not buy net new debt.
  This means Article I of the Constitution, which
arrogates to the U.S. government a monopoly in emitting
legal tender, will be re-implemented, for new Federal
Reserve notes will no longer be issued as the currency of
the United States. Rather, they will be gradually
withdrawn from circulation, and replaced by U.S. Treasury
bills, as described below.
  - 2) Expand Productive Credit Via Discount Window -
  The Act then proposes that new, long-term,
low-interest credit in the amount of approximately $1
trillion per annum be issued by the U.S. Treasury via the
new National Bank to the U.S. physical economy by an
entirely new mechanism. The National Bank is to open wide
its {discount window} for general lending of
{directed credit} to the productive,
infrastructure, and related sectors of the physical
economy. The bank may in fact create such credit
indefinitely without fear of inflation, as long as it
serves to create new 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,} gradually
replacing the old Federal Reserve notes in circulation.
This will return constitutional control to the U.S.
government over the creation of new money and new debt
obligations of the Treasury and taxpayers.
  Of the total $1 trillion per annum issued, approximately
$600 billion is to be spent by the U.S. Treasury itself in
the form of {basic economic infrastructure projects}, run
by federal, state, and local agencies and subsidiaries.
The objective is to employ approximately {3 million
people} directly in water projects, power generation and
distribution, transportation, urban infrastructure,
construction of medical facilities, schools, etc.
  These goverment projects will generate additional
credit demand in the area of another $400 billion per
annum of purchases and investments by private-sector firms
to be engaged in supplying these government projects, for
a total of $1 trillion new productive activity. The
results in the private sector are estimated to increase
employment by an additional 3 million operatives for a
total new increase in productive employment of some {6
million persons}. This means that the Treasury will
receive more than the initial 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 bank's use, in their own emergency cash flow 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 more
speculative purposes will find the paper may be discounted
only at much more expensive rates by the National Bank,
or not at all.
  For example, Chrysler Corporation would be easily
able to get a low-interest, long-term loan from a Detroit
bank, if it can document that the funds will be used to
build new plants, or modernize existing capital equipment
for production purposes. This is because the bank knows it
will be able to take the loan agreement to the National
Bank and borrow cash immediately, at interest rates in the
range of 2-4%, up to 50% of the value of the entire loan.
The National Bank's 50% requirement is to ensure that
private enterprise continue to be privately run, and to
ensure the private sector bear its share of the risk. If
the bank bears a 50% share of the loan risk, banks will
make sounder loans.
  If Chrysler, however, seeks loans to diversify into
real estate or casino gambling, or to relocate old plant
and equipment to cheap-wage Mexican
{maquiladoras,} its Detroit bank will advise them
that the National Bank will likely not discount such a
loan and therefore the bank must decline, or charge higher
interest rates.
  The new Act states in Section 4: ``Upon the
endorsement of any U.S.-chartered bank, any branch of the
National Bank may discount up to 50% of the face value of
notes, drafts, and bills of exchange arising from the
production of tangible wealth or capital
improvements.... This shall be defined as the purchase of
raw and intermediate materials and capital goods,
construction of facilities, or employment of labor to
produce or transport manufactured goods, agricultural
commodities, and construction materials; to work mines; to
build manufacturing, transportation, and mining facilities
or dwellings; to produce and deliver energy in all forms;
and to provide public utilities....''
        - 3) Protective Reserve Requirements. -
  To protect the safety of the banking system, and
prevent banks from re-depositing for re-lending, for
{non}productive purposes, large amounts of the new cheap
discount credit, the act re-regulates {reserve
requirements} for private banks.
  Until the deregulation of the 1980s, the Federal
Reserve required banks to keep on deposit with the Fed a
standard reserve fund, for use to pay depositors when
loans went bad, which until 1982 was 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
multiplying the number of times they re-deposited and
re-loaned Federal Reserve credit. Those safety reserve
requirements, however, were largely done away with by the
deregulation of the 1980s, making U.S. banks part of the
off-shore Eurodollar market. The resulting speculation is
a major cause of U.S. banks' problems today.
  Under the new Act, the 16% reserve requirement which
was standard post-war U.S. practice will be re-imposed.
Banks which maintain at least 60% of their loan assets in
the real physical productive activities listed above will
be subject to that standard requirement. However, 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 the 60% productive asset limit.

- Excerpts From the Federal Reserve Nationalization Act of 1992 -
  {Sec. 1} Sec. 1 of the Federal Reserve Act of
1913 is hereby amended to read: ``Under Article I of the
Constitution pertaining to the monopoly of the U.S.
government in emitting legal tender, the Federal Reserve
System is hereby nationalized and placed under the
jurisdiction of the Department of the Treasury of the
United States. Its name is hereby changed to the `National
Bank of the United States.' Regional headquarters of the
Federal Reserve System shall henceforth be known as the
appropriate regional branches of the National Bank of the
United States....
  ``Offices and personnel of the former Federal Reserve
System shall continue normal functions at the new National
Bank except for the amendments set forth below...
  ``Private-sector `member banks' of the former Federal
Reserve System shall henceforth be known simply as
U.S.-chartered banks ...
  {Sec. 2} Section 1 of the Federal Reserve Act
is hereby amended to read: ``The Federal Reserve shall
immediately cease issuance of Federal Reserve notes as
legal tender. As of the passage of this Act, the successor
National Bank of the United States shall commence issuance
of all new legal tender obligations of the United States
in the form of U.S. Treasury bills, to be deposited with
[the National Bank by the Treasury Department...
  ``Previously issued Federal Reserve notes may continue
to be circulated as currency until such time as the
Department of the Treasury shall formulate a currency
reform plan for their orderly withdrawal, said plan to be
promulgated no later than one year from the passage of
this Act ...''
  {Sec. 3} Section 14 of the Federal Reserve
Act of 1913 is hereby amended to include the following:
``The power of the National Bank of the U.S. to purchase
or sell bills, notes, and bonds of the United States shall
be limited to these functions:
    ``a) The anticipation of tax revenues accruing not
more than one year form the date of purchase of said
bills, notes, and bonds, in order to help maintain an
orderly flow of disbursements by the United States
Treasury;
  ``b) To maintain an orderly market in the bills,
notes, and bonds of the United States, and to meet the
temporary liquidity needs of regional branches of the
National Bank system and commercial banks in their
districts;
  ``c) The purchase of such liabilities of the United
States as may be presented by foreign governments for sale
to the National Bank by said governments;
  ``The Federal government, however, may not create
money supply by monetizing United States govenment debt.
To ensure this, the total holdings by the National Bank of
bills, notes, and bonds of the United States shall be set
as an annual ceiling as of the enactment of this act.
Said holdings may vary in size in the course of each year,
but may not increase in size at the end of the year,
following enactment of this act and at annual intervals
thereafter, except as a result of purchases of official
liabilities of the United States from foreign
governments.''
  {Sec. 4}  Section 14 of the Federal Reserve
Act of 1913 is hereby amended to read: ``Any regional
branch of the National Bank may receive from any bank, and
from the United States, deposits of current funds in
lawful money, National Bank notes, Treasury bills or
notes, or checks and drafts upon solvent U.S.-charted
banks, payable upon presentation; or, solely for exchange
purposes, may receive from other regional branches of the
National Bank, deposits of current funds in lawful money;
or checks and drafts upon solvement private banks or other
branches of the National Bank, payable upon
presentation....
  ``Upon the endorsement of any U.S.-chartered bank, any
branch of the National Bank may discount up to 50% of the
face value of notes, drafts, and bills of exchange arising
from the production of tangible wealth or capital
improvements ... This shall be defined as the purchase of
raw and intermediate materials and capital goods,
construction of facilities, or employment of labor to
produce or transport manufactured goods, agricultural
commodities, and construction materials; to work mines; to
build manufacturing, transportation, and mining facilities
or dwellings; to produce and deliver energy in all forms;
and to provide public utilities for communications.
  ``Such definition shall not include notes, drafts,
bills, or loans issued or drawn for the purpose of
conducting business except in the areas so defined, or for
carrying on or trading in stocks, bonds, or other
investment securities.
  ``Any National Bank branch may discount the full value
of acceptances which are based on the exportation of
goods, or 50% of the value of acceptances which are based
on the importation of goods, provided that such goods
conform to the restrictions set forth in the preceding
paragraphs.
  ``All National Bank branches shall meet all such
requests for discount of or participation in notes,
drafts, bills, and loans made by U.S.-chartered banks,
once the National Bank has determined that the purpose of
such credit conform to the restrictions set forth above.
There shall be no restrictions applied to such discounts
in furtherance of tangible wealth creation on the basis of
private banks capital positions...
  {Sec. 5}  Section 19 of the Federal Reserve
Act of 1913 is hereby amended to include the following:
``The above reserve requirements shall apply in the case
that private banks maintain 60% of their total assets in
the form of loans, bills, drafts, and advances to tangible
weath-creating borrowers, of a type eligible for discount
under Sec. 4 of this Act.  For every 1 percent by which
the bank's proportion of tangible wealth-creating assets
falls below 60% of total assets, the National Bank shall
require that banks place an additional 1 percent of demand
deposits in reserve with the National Bank system. To
permit orderly transition to this reserve rule, however,
the formula shall apply only to new assets appearing on
the balance sheets of banks after the date of enactment of
this Act.''

For more information:

Washington, D.C. 202-547-1492

Northern Virginia, 703-437-1266

Pittsburgh, PA 412-885-7270
Philadelphia, PA 215-734-7080

Baltimore, MD 301-247-4200
Norfolk, VA 804-531-2295
Richmond, VA 804-323-7462

Houston, TX 713-789-6900

Chicago, IL 312-907-4000
Detroit, MI, 313-942-0652
St. Louis, MO 314-961-6302
Minneapolis, MN 612-874-1860

Los Angeles, CA 213-259-1860
Livermore, CA 510-449-3622
Seattle, WA 206-362-9091


Ridgefield Park, NJ 201-641-8858
Boston, MA 617-380-4000

Paid for by Democrats for Economic Recovery, LaRouche
in 92. P.O. Box 690, Leesburg, Virginia, 22075.



----
        John Covici
         [email protected]

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