By Ellen Brown / Original to ScheerPost
OCTOBER 30, 2025

There has been considerable discussion in recent years about reforming, modifying, or even abolishing the Federal Reserve. Proposals range from ending its independence, to integrating its functions into the U.S. Treasury Department, to dismantling it and returning monetary policy to direct congressional or Treasury oversight.

The Federal Reserve Board Abolition Act (H.R. 1846 and S. 869, 119th Congress, 2025-2026), introduced by Rep. Thomas Massie in the House and Sen. Mike Lee in the Senate on March 4, 2025, calls for abolishing the Fed’s Board of Governors and regional banks within one year of enactment, liquidating Fed assets and transferring net proceeds to the Treasury. It echoes earlier efforts like Ron Paul’s 1999 bill to “end the Fed”, but the odds of its passing are slim.

Less radical are proposals to curb the independence of the Federal Reserve. Former Fed governor Kevin Warsh is considered one of five finalists to take over as chairman after Jerome Powell. In a July 17 CNBC interview, he called for sweeping changes in how the central bank conducts business, and suggested a policy alliance with the Treasury Department.

Substantial precedent exists for that approach, both in the United States and abroad. In the 1930s and 1940s, before the Fed officially became “independent,” it worked with the federal government to fund the most productive period in our country’s history. More on that shortly.

The Werner Findings: Fed Independence Is Correlated with Economic Decline

In a Sept. 1 Substack post titled “Fed Faces Biggest Direct Challenge by a President Since JFK – and This Is a Good Thing”, UK Prof. Richard Werner cited multiple studies showing that central bank independence not only does not reduce inflation but can actually harm economic performance. He wrote:

“The published consensus is that there is no evidence that more independent central banks deliver lower inflation and better macroeconomic performance. In fact, more independent central banks deliver worse results: lower growth, greater inequality, higher unemployment. Considering the 1970s and 2020s we must also say: higher inflation.”

Werner referenced a 1993 paper by Alesina and Summers that claimed to show a correlation between independence and low inflation. But later analyses revealed that the data was cherry-picked and the methodology was flawed. Werner also pointed to the European Central Bank (ECB), one of the most independent in the world, which has reigned during a period of extended stagnation and deflation in much of the Eurozone. He suggests that the notion that independence is a universal ideal is a Western invention, often used to shield monetary policy from democratic accountability.

The Fed’s Historical Errors

The Federal Reserve’s track record, like the ECB’s, is less than pristine. In a 2002 speech honoring Milton Friedman, then-Fed Chair Ben Bernanke famously admitted, “Regarding the Great Depression … we did it. We’re very sorry. … We won’t do it again.”

Bernanke was referring to the Fed’s failure to act as lender of last resort during the banking panics of the early 1930s. Instead of expanding liquidity, the Fed tightened it. Its goal was to curb excessive stock market speculation, but reducing the money supply raised borrowing costs and triggered a contraction that cascaded globally. The result was a decade of mass unemployment, deflation, and social upheaval.

The Fed Was Not Independent During the Great Depression and World War II

Following the monetary contraction that triggered the Great Depression, the Fed shifted course in 1932, pegging interest at very low rates to support banking liquidity and boost economic development. Large public projects were funded and directed through the Reconstruction Finance Corporation (RFC), a federal agency established by Pres. Hoover to save the failing banks.

The RFC was greatly expanded under the New Deal to fund public works, agriculture, and housing. By 1941 it had injected over $10 billion into the economy, a sizable sum at the time. During WWII, the RFC transformed into a war production engine, financing synthetic rubber plants, aircraft factories, and shipyards, and establishing subsidiaries like the Defense Plant Corporation to accelerate industrial output. By the war’s end, the RFC had disbursed more than $35 billion, catalyzing both economic recovery and military victory.

During its existence between 1932 and 1957, the RFC authorized over $50 billion in loans and commitments, with significant portions directed toward self-liquidating infrastructure projects like bridges, dams, and utilities repaid through tolls or fees, along with factories and other emerging industries. It raised funds by issuing bonds, most of which were bought by the Treasury; but the Treasury also issued bonds, some of which were bought by the Fed. These Fed purchases were modest in the 1930s but were greatly expanded in the 1940s, when the United States was running deficits exceeding 40% of GDP funded largely by Treasury-issued debt. To support the war effort, the Fed committed to maintaining a very low interest rate on short-term Treasury bills, something it did by engaging in “direct debt monetization” – it bought large amounts of government securities with new reserves. This was later described in Fed papers as an early form of quantitative easing.

By 1945, the U.S. had full employment and rising wages; and infrastructure investment surged postwar, with returning veterans trained as engineers and builders. The Fed’s collaboration with the Treasury enabled economic development, technological innovation and full employment.

The Ideological Breakthrough that Mobilized the Economy 

“America’s response to World War II was the most extraordinary mobilization of an idle economy in the history of the world,” wrote Doris Kearns Goodwin in her 1992 article “The Way We Won”:

“Historians, economists, and politicians have long wondered why this remarkable social and economic mobilization of latent human and physical resources required a war. The answer, I think, is partly ideological. World War II provided the ideological breakthrough that finally allowed the U.S. government to surmount the Great Depression. Despite the New Deal, even President Roosevelt had been constrained from intervening massively enough to stimulate a full recovery. By 1938 he had lost his working majority in Congress, and a conservative coalition was back, stifling the New Deal programs. When the economy had begun to bounce back, FDR pulled back on government spending to balance the budget, which contributed to the recession of 1938. The war was like a wave coming over that conservative coalition; the old ideological constraints collapsed and government outlays powered a recovery.”

Fed holdings of Treasury securities rose from $2.25 billion at the end of 1941 to $24.26 billion at the end of 1945 (a $22 billion increase), while total Treasury indebtedness grew from $58 billion to $276 billion (a $218 billion increase). That means the Fed absorbed about 10% of the expansion of the federal debt to finance war deficits.

If the Fed did that today, it could purchase about $3.8 trillion of the $37.89 trillion federal debt, more than enough to pay the interest on it ($1.16 trillion) and close the federal deficit ($1.775 trillion). It could, but the economy would need to grow in tandem to avoid price inflation. More on that shortly.

The Fed Did Not Officially Become Independent Until 1951

Inflation was held to modest levels during World War II, and the economy boomed. But to support the war effort, the Fed’s commitment to buying large amounts of government securities with new reserves (basically QE) increased the money supply, and this increase was blamed for a surge in price inflation after the war. It was not the only reason prices went up. There were also major supply shortages – from global supply bulk bottlenecks, industrial retooling (e.g. turning auto industries that had been turned into airplane factories back into auto factories), labor strikes, and a surge in pent-up demand after the war.

But postwar inflation was the trigger for relieving the Fed of the federal mandate that it keep interest rates low by buying federal securities, and this was achieved in a 1951 Treasury-Fed Accord giving the Fed its independence. The Accord was not a law but was just a joint statement issued by the Treasury and the Fed after oral negotiations, but it did give the Fed independent control of interest rates and the money supply.

The Fed became independent of public control, but the Accord opened the door for Wall Street control of its operations for the benefit of the banks – particularly the largest banks. Bank mergers and consolidations in the 1950s and 1960s created “Too Big to Fail” institutions  including J.P. Morgan Chase and Citibank. Wall Street influence culminated in the 1999 repeal of major portions of the Glass-Steagall Act, formally fusing investment and commercial banking. Speculative bubbles and systemic risk then led to the financial crises of 2007-09 and the bailout of the Too Big to Fail banks, leaving the victims to bear the losses. See Nomi Prins, All the Presidents’ Bankers.

GDP Growth, Not Fed Independence, Curbed Postwar Inflation

The Consumer Price Index did stabilize after World War II, but it was not due to an independent Fed raising interest rates. It was the result of major productivity gains that drove up GDP, lowering the debt to GDP ratio to sustainable levels. Technological advances to meet war demands transformed domestic manufacturing; women joined the workforce; soldiers trained in the military brought new engineering skills; and the G.I. Bill provided low-cost higher education and affordable housing for returning veterans.

This GDP growth was greatly aided by RFC funding, with the help of the Treasury and the Fed. A 2025 Yale study showed that U.S. infrastructure as a share of GDP peaked in the 1940s–60s, then declined steadily. Productivity gains from infrastructure were highest during periods of federal investment, not austerity. Meta-analyses confirm that public infrastructure investment boosts private sector productivity, especially when targeted toward transportation, energy, and digital systems.

China’s Central Bank: Liquidity for Development, Not Speculation

Today, a number of central banks are not independent but align their policies with their national governments’. The leading and most successful example is China, the chief economic competitor of the United States. The People’s Bank of China (PBOC) operates under the State Council, aligning credit creation with the government’s five-year plans. Through policy banks including the China Development Bank, the PBOC channels liquidity into infrastructure, energy, and industrial development.

In 2024, the PBOC and Finance Ministry held their first joint meeting to align treasury bond issuance with monetary policy, with fiscal and monetary tools synchronized to support national development goals. According to the State Council, “The two authorities will coordinate development and security, strengthen policy synergy, maintain the stable development of the bond market, and provide a sound environment for the central bank’s treasury bond trading in its open market operations”.

The PBOC also engaged in massive sovereign money printing over the 28 year period from 1996 to 2024, increasing the national money supply by more than 5300% — from 5.84 billion to 314 billion Chinese yuan. Details are in my earlier article here.

The PBOC Collaborates with the China Development Bank in Funding Productive Investment

Like the RFC during the New Deal and World War II, the China Development Bank (CDB) plays a pivotal role in coordinating and executing long-term infrastructure funding for China. With over $2.6 trillion in assets, CDB is larger than the World Bank, the European Investment Bank, and Germany’s KfW combined. In collaboration with the PBOC, it provides capital for large infrastructure projects such as railways, energy grids, and green technology. In 2025, CDB increased loan support for logistics, housing, and ecological restoration, including a ¥185 billion boost to leading regional economies.

The Chinese model has lifted hundreds of millions out of poverty and built unprecedented infrastructure. Rather than the sort of speculative finance that profited from the Fed’s 2007-09 QE, the CDB and PBOC target liquidity for productive expansion aligned with national priorities. This joint mechanism allows China to issue new bonds for specific purposes — transport, housing, manufacturing — and to have them absorbed by the central bank with newly created currency. CDB then executes the plan by deploying the funds. Supply rises with demand, stabilizing prices.

Other Non-Independent Central Banks

Other central banks operating in coordination with their governments today include the Reserve Bank of India, which has limited independence and works closely with the Ministry of Finance; the Central Bank of Russia, which is state-aligned and supports national development goals; and the central banks of many African nations, which coordinate with their ministries of finance to support infrastructure and agriculture.

This has also been true of a number of central banks historically. Besides the U.S. Fed itself, notable examples include the Commonwealth Bank of Australia, the Reserve Bank of New Zealand, and the Bank of Canada, all of which funded substantial development in their early years either by direct money issuance or by money issued as bank credit without full reserve backing. Those early experiments in “sovereign” money creation deserve a separate article, but in the meantime if interested you can read about them in my book The Public Bank Solution.

The lesson of these precedents is that when government-issued money is spent on productive assets – roads, factories, energy grids and the like – supply expands along with demand and prices remain stable.

Can the United States Generate the Necessary Supply? 

The U.S. government also has the sovereign capacity to issue money directly, provided that real productivity rises in tandem with monetary expansion to maintain stable price levels. But is that possible today? The current economic landscape shows signs of recession and systemic strain, yet the stock market continues to soar. Why? Much of the momentum is fueled by investor optimism around artificial intelligence (AI), which is seen as a transformative engine of future productivity.

Hopefully those visions will manifest, but to compete with China’s rapid development, we also need a national development bank similar to the CDB. A dedicated development bank can ensure that credit creation is funneled into productive endeavors rather than speculative bubbles, and it can finance long-term, large-scale projects that are beyond the reach of private capital.

A bill for a national infrastructure bank on the Hamiltonian model, HR5356: The National Infrastructure Bank Act of 2025, is currently before Congress and has 42 cosponsors. Like the RFC and the early 20^th century banks of Australia, New Zealand and Canada, it can provide off-budget financing for a wide range of urgently needed infrastructure projects without tapping the federal budget. For more information, see NIBCoalition.com.

Conclusion: Print to Build, Not to Bail

Printing money is not inherently inflationary. It depends on what the money is used for. If it funds speculation, it inflates bubbles. If it funds production, it builds prosperity. The vaunted independence of the Fed is not a constitutional mandate but is a political choice. As Prof. Werner wrote in an October 10 Substack post:

“Given the facts of the credit creation process and the powers of central bankers, we know that whenever we see a country in recession, this is a policy-decision by the central planners, because the tools are available to quickly exit any recession and deliver high growth and prosperity for all.”

History shows that sovereign money creation can be a tool for public good when wielded wisely. It is time to reclaim that tool, not to serve the banks and speculative investment but to serve the public and the productive economy.

First Published on Scheerpost.com.

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By Ellen Brown / Original to ScheerPost

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“It was not the highly visible acts of Congress but the seemingly mundane and often nontransparent actions of regulatory agencies that empowered the great transformation of the U.S. commercial banks from traditionally conservative deposit-taking and lending businesses into providers of wholesale financial risk management and intermediation services.”

— Professor Saule Omarova, “The Quiet Metamorphosis, How Derivatives Changed the Business of  Banking” University of Miami Law Review, 2009

While the world is absorbed in the U.S. election drama, the derivatives time bomb continues to tick menacingly backstage. No one knows the actual size of the derivatives market, since a major portion of it is traded over-the-counter, hidden in off-balance-sheet special purpose vehicles. However, when Warren Buffet famously labeled derivatives “financial weapons of mass destruction” in 2002, its “notional value” was estimated at $56 trillion. Twenty years later, the Bank for International Settlements estimated that value at $610 trillion. And financial commentators have put it as high as $2.3 quadrillion or even $3.7 quadrillion, far exceeding  global GDP, which was about $100 trillion in 2022. A quadrillion is 1,000 trillion.

Most of this casino is run through the same banks that hold our deposits for safekeeping. Derivatives are sold as “insurance” against risk, but they actually add a heavy layer of risk because the market is so interconnected that any failure can have a domino effect. Most of the banks involved are also designated “too big to fail,” which means we the people will be bailing them out if they do fail.

Derivatives are considered so risky that the Bankruptcy Act of 2005 and the Uniform Commercial Code grant them (along with repo trades) “super-priority” in bankruptcy. That means if a bank goes bankrupt, derivative and repo claims are settled first, drawing from the same pool of liquidity that holds our deposits. (See David Rogers Webb’s The Great Taking and my earlier articles here and here.) A derivatives crisis could easily vacuum up that pool, leaving nothing for us as depositors — or for the “secured” creditors who are junior to derivative and repo claimants in bankruptcy, including state and local governments.

As detailed by Pam and Russ Martens, publisher and editor, respectively of Wall Street on Parade, as of Dec. 31, 2023, Goldman Sachs Bank USA, JPMorgan Chase Bank N.A., Citigroup’s Citibank and Bank of America held a total of $168.26 trillion in derivatives out of a total of $192.46 trillion at all U.S. banks, savings associations and trust companies. That’s four banks holding 87 percent of all derivatives at all 4,587 federally-insured institutions then in the U.S.

In June 2024, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board jointly released their findings on the eight U.S. megabanks’ “living wills” – their resolution or wind-down plans in the event of bankruptcy. The Fed and FDIC faulted all of the four largest derivative banks on shortcomings in how they planned to wind down their derivatives.

How Banks Guarding Our Deposits Became the Biggest Gamblers in the Derivatives Casino

Banks are not just middlemen in the derivatives market. They are active players taking speculative positions. In this century, writes Professor Omarova, the largest U.S. commercial banks have emerged “as a new breed of financial super-intermediary—a wholesale dealer in financial risk, conducting a wide variety of capital markets and derivatives activities, trading physical commodities, and even marketing electricity.” She notes that the Federal Reserve has allowed several financial holding companies to purchase and sell physical commodities (including oil, natural gas, agricultural products and electricity) in the spot market to hedge their commodity derivative activities, and to take or make delivery of those commodities to settle the transactions.

It was not Congress that authorized that expansive definition of permitted banking activities. It was the Office of the Comptroller of the Currency (OCC), part of the “administrative deep state,” that permanent body of unelected regulators who carry on while politicians come and go. As Omarova explains: 

“Through seemingly routine and often nontransparent administrative actions, the OCC effectively enabled large U.S. commercial banks to transform themselves from the traditionally conservative deposit-taking and lending institutions, whose safety and soundness were guarded through statutory and regulatory restrictions on potentially risky activities, into a new breed of financial “super-intermediaries,” or wholesale dealers in pure financial risk. …

“Moreover, some of the most influential of those decisions escaped public scrutiny because they were made in the subterranean world of administrative action invisible to the public, through agency interpretation and policy guidance. “

The OCC’s authority to regulate banks dates back to the National Bank Act of 1863, which grants national banks general authority to engage in activities necessary to carry on the “business of banking”, including “ such incidental powers as shall be necessary to carry on the business of banking”. The “business of banking” is not defined in the statute. Omarova writes:

“Section 24 (Seventh) of the National Bank Act grants national banks the power to exercise all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes. “

No mention is made of derivatives trading or dealing.

The powers of banks were further limited by Congress in the Glass-Steagall Act of 1933, which explicitly prohibited banks from dealing in corporate equity securities, and by other statutes passed thereafter. However, the portion of the Glass-Steagall Act separating depository from investment banking was reversed in the Commodity Futures Modernization Act in 2000. Omarova writes that this allowed the OCC to articulate “an overly expansive definition of the ‘business of banking’ as financial intermediation and dealing in financial risk, in all of its forms, and … this pattern of analysis allowed the OCC to expand the range of bank-permissible activities virtually without any statutory constraint” .

What Then Can Be Done?

The 2008 financial crisis is now acknowledged to have been largely a derivatives crisis. But massive efforts at financial reform in the following years have failed to fix the underlying problem. In a Forbes article titled “Big Banks and Derivatives: Why Another Financial Crisis Is Inevitable,” Steve Denning writes:

“Banks today are bigger and more opaque than ever, and they continue to trade in derivatives in many of the same ways they did before the crash, but on a larger scale and with precisely the same unknown risks.

Most of this derivative trading is conducted through the biggest banks. A commonly held assumption is that the real derivative risk is much smaller than the “notional amount” stated on the banks’ balance sheets.

[A]s we learned in 2008, it is possible to lose a large portion of the “notional amount” of a derivatives trade if the bet goes terribly wrong, particularly if the bet is linked to other bets, resulting in losses by other organizations occurring at the same time. The ripple effects can be massive and unpredictable.

In 2008, governments had enough resources to avert total calamity. Today’s cash-​strapped governments are in no position to cope with another massive bailout.”

He concludes:

“Regulation and enforcement will only work if it is accompanied by a paradigm shift in the banking sector that changes the context in which banks operate and the way they are run, so that banks shift their goal from making money to adding value to stakeholders, particularly customers. This would require action from the legislature, the SEC, the stock market and the business schools, as well as of course the banks themselves.”

A Paradigm Shift in “the Business of Banking”

In a September 2023 paper titled “Rebuilding Banking Law: Banks as Public Utilities,” Yale law professor Lev Menand and Vanderbilt law professor Morgan Ricks propose shifting the goal of banking so that chartered private banks are “not mere for-profit businesses; they have affirmative obligations to the public.” The authors observe that under the New Deal framework, which was rooted in the National Bank Act of 1864, banks were largely governed as public utilities. Charters were granted only where consistent with public convenience and need, and only chartered banks could expand the money supply by extending loans.

The Menand/Ricks proposal is quite detailed and includes much more than regulating derivatives, but on that specific issue they propose:

“While member banks are permitted to enter into interest-rate swaps to hedge rate risk, they are not allowed to engage in derivatives dealing (intermediation or market making) or take directional bets in the derivatives markets. Derivatives dealing and speculation do not advance member banks’ monetary function. Apart from loan commitments, member banks would not be in the business of offering guarantees or other forms of insurance. “

Would that mean the end of the derivatives casino? No – it would just be moved out of the banks charged with protecting our deposits:

The blueprint above says nothing about what activities can take place outside the member banking system. It says only that those activities can’t be financed with run-prone debt [meaning chiefly deposits]. In principle, we could imagine a very wide degree of latitude for non bank firms, subject of course to appropriate standards of disclosure, antifraud, and consumer and investor protection. So securities firms and other nonbanks might be given free rein to engage in structured finance, derivatives, proprietary trading, and so forth. But they would not be allowed to “fund short” .

By “funding short”, the authors mean basically “creating money”, for example through repo trades in which short-term loans are rolled over and over. In their proposal, only chartered banks are delegated the power to create money as loans.

Expanding the Model

University of Southampton business school professor Richard Werner, who has written extensively on this subject, adds that banks should be required to concentrate their lending on productive ventures that create new goods and services and avoid inflating existing assets such as housing and corporate stock.

Speculative derivatives are a form of “financialization” – money making money without producing anything. The winners just take money from the losers. Gambling is not illegal under federal law, but the chips in the casino should not be our deposits or loans made with the backing of our deposits.

The Menand/Ricks proposal is for private banks, but banks can also be made “public utilities” through direct ownership by the government. The stellar model is the Bank of North Dakota, which does not speculate in derivatives, cannot go bankrupt, makes productive loans, and has been highly successful. (See earlier article here.) The public utility model could also include a national infrastructure bank, as proposed in H.R. 4052, which currently has 37 co-sponsors.

The “business of banking” can include making money for private shareholders and executives, but that business should be junior to the public interest, which would prevail when they conflict.

Unfortunately, only Congress can change the language of the controlling statute; and Congress has been motivated historically to make major changes in the banking system only in response to a Great Depression or Great Recession that exposes the fatal flaws in the existing system. With the reversal of “Chevron deference”, however, the OCC’s rules can now be challenged in court. A powerful citizen’s movement might be able to catalyze needed changes before the next Great Depression strikes.

A financialized economy is not sustainable and not competitive. The emphasis should be on investment in the real economy. That is the sort of paradigm shift that is necessary if the U.S. is to survive and prosper.

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