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SUPPLEMENT
No. 36September 26, 2020
The Banking Sector of the Economy
An Important Sector Over Which the Working People Must Exercise Control
- Workers' Centre of CPC(M-L) -
 
For Your Information
• U.S.
Institute
for Public Banking Demands
Banking Become a Public Utility
• The
New International Financial Institution for U.S.
Expansion
- Ansonith Albano -
• How
Was the World Bank Formed? A Brief History
• U.S.
Federal
Reserve System
- K.C. Adams -
The Banking Sector of the Economy
- Workers' Centre of CPC(M-L) -
Why should banking be considered a private
matter to enrich those in control and concentrate
money and power in fewer hands? This is an
important question.
 A key issue is the
role of the state at all levels. Should the state
and its many institutions serve the people or a
tiny minority of rich oligarchs? With food
insecurity now a serious issue facing one in eight
people; unemployment, poverty and homelessness
constant threats; governments incapable of
mobilizing the people and science to bring the
pandemic under control; and racial and other forms
of inequality and injustice plaguing the society,
people are questioning the reactionary role of the state and its authority within the conditions
that have developed.
Does the state at all levels, as the most
important and powerful institution, not have a
social responsibility to ensure the well-being of
all? Would that not include the broad functioning
of the economy in a manner that serves the public
interest and not simply a select wealthy
privileged few?
The imperialist system in both the U.S. and
Canada gives state-sanctioned private banks the
social responsibility of creating new money and
moving it into the economy as credit. This broad
social responsibility to increase the money supply
and supply credit to meet the needs of the economy
and people comes into contradiction with the
narrow aim of private banks to make maximum profit
for their private owners.
This contradiction between a private aim and
social responsibility exists throughout the
imperialist economy. This unresolved contradiction
is a leading reason for the recurring economic
crises and the inability of the imperialist
economy to mobilize the tremendous productive
power of modern industrial mass production to meet
the needs of the people and guarantee their rights
and well-being.
State-Sanctioned Banking to Pay the
Rich
In assessing the role of the state
within the banking sector and the important role
of providing credit and creating new money the
reality is clear: the state has awarded
positions of power to private enterprises and
individuals that use their state-sanctioned
privilege for private gain. Those in control of
the banking sector act with impunity to serve
their narrow private interests and are not held
to account for their actions. They refuse to
uphold social responsibility as a matter of
course, as they consider banking a private
matter to enrich those in control and
concentrate money and power in fewer hands.
 The working people
take an opposing view and demand change. Banking
and the provision of credit and creation of the
money supply are a public matter and entail broad
social responsibility. Banking in a modern economy
is a necessary public infrastructure or utility
required for the proper functioning of the economy
in the production and distribution of the goods
and services the working class produces to meet
the needs of the people.
The banking sector controls the creation of a
national money supply at an appropriate level to
serve the extended reproduction of the economy in
conformity with the growth and development of the
productive forces and the actual and potential
amount of social product. Further, banks are meant
to provide a safe place for people and businesses
to keep their savings and for the use of those
savings for nation-building to serve the local and
national economy. These tasks cannot and should
not be considered private responsibilities with
the aim of enriching a privileged few.
Banking is a necessary infrastructure that
carries important social responsibilities for the
well-being of all and society. How to uphold
social responsibility on all fronts and in new
forms necessary to fulfil their roles are
important issues to be discussed for all the
different sectors of the economy and politics.
The old forms and aim that arose with the origin
of the country, constitution and economy are
obsolete. New political, economic, social and
constitutional forms, institutions and authority
are necessary that are in conformity with a modern
economy and country of industrial mass production
where the productive forces are completely
socialized and workers who sell their capacity to
work and produce the social product constitute the
vast majority of the people.
Within the modern world and conditions that have
developed, working people demand their rights, as
they must. They demand an authority in conformity
with the modern conditions; they require control
over the political and economic power so as to
deal effectively with those affairs that affect
their lives and in ways that favour the people.
Banking is an important sector over which the
working people must exercise control.
The people are determined to bring into being new
forms that conform to the socialized nature of the
basic economy, how they acquire their living, and
how they relate to one another and to nature.
Modern forms must serve the broad public interest,
uphold social responsibility, and have an aim to
guarantee the rights and well-being of the people.
 The banking and credit system is a sector that
needs immediate and radical reform. The old form
of state-sanctioned private banks holding the
savings of the people and businesses, providing
credit throughout the economy, and creating the
money supply, has degenerated into parasitism and
decay. Private banking has become a form of paying
the rich, which plays a negative destructive role
in the economy and the lives of the people.
Private banking and
its aim of maximum profit for the few have become
factors contributing to recurring economic crises
and the further concentration of wealth and power
in fewer hands. Private control of banking is part
of the overall pay-the-rich economy. The ruling
oligarchy uses its control of banking to block and
deprive the people of the power and control they
need to deal with the issues that affect their
lives and to take action to solve the mounting
economic, social and natural problems facing the
country and the world.
State-sanctioned private banking reflects the
contradiction between the conditions that have
changed and an authority that has not. The
resolution of this contradiction requires the
renewal of the democracy with equality for all
members of the polity at the core, the development
of friendly peaceful relations with all humanity,
and the humanization of the social and natural
environment. Fighting consciously on all fronts
for a new pro-social direction for the economy and
country brings to the fore the human factor and
democratic personality necessary to resolve the
contradiction.
The Banking and Credit System Must Become a
Public Utility in the Service of the People and
Under Their Control
The contradiction in the economy between the
state-sanctioned private aim for maximum profit
and the need for social responsibility to serve
the people and society is starkly evident in the
banking system. People are discussing and coming
to the realization that the banking system must be
torn from the clutches of the imperialist
oligarchs. How to deprive the rich of their power
over banking and to organize to make this reform
of the economy permanent are major concerns of the
movement for the New. Bringing into being a public
banking system that upholds its social
responsibilities to the economy, people and
society is an important part of the overall
struggle to build the New in opposition to
imperialism.
For
Your Information
Activists in the United States are discussing
and taking action on the issue of the regressive
destructive role of the state-sanctioned private
banks. Organizations such as the Public Banking Institute are demanding a new pro-social
direction for the economy and, in this instance, the
banking sector. They are speaking of the necessity
for banking to be recognized as a public utility
with a modern aim to serve the public interest and
uphold social responsibility in all its affairs.
 No one can deny that the people of the United
States are facing enormous challenges to move
their country in a new direction. The unending
aggressive wars abroad, social despair at home
amid economic collapse and increasing poverty and
a failure of governments at all levels to mobilize
the people to control the pandemic pose difficult
questions for all on how to organize effectively
to move society forward in a new pro-social
direction.
According to its website, the Public Banking
Institute in the U.S. "was formed in January 2011
and is a national educational non-profit
organization working to achieve the implementation
of Public Banking at all levels of the American
economy and government: local, regional, state,
and national. [...] Our current private banking system
has presided over the greatest concentration of
wealth in human history, while the vast majority
of America and the world has endured stagnant
wages, declining wealth, and recurring
recessions."
The founder of the Public Banking Institute, Ellen
Brown, writes, "Shock waves from one Wall Street
scandal after another have completely
disillusioned us with our banking system; yet we
cannot do without banks. Nearly all money today is
simply bank credit. Economies run on it, and it is
created when banks make loans. The main flaw in
the current model is that private profiteers have
acquired control of the credit spigots. They can
cut off the flow, direct it to their cronies, and
manipulate it for personal gain at the expense of
the producing economy. The benefits of bank credit
can be maintained while eliminating these flaws,
through a system of banks operated as public
utilities, serving the public interest and
returning their profits to the public."
Brown writes, "The advantages of public over
private banking are not rocket science. A
government that owns its own bank can keep the
interest and reinvest it locally, resulting in
potential public savings of 35 per cent to 40
per cent. Costs can be reduced across the board;
taxes can be cut or services increased; and market
stability can be created for governments,
borrowers and consumers. Banking and credit become
public utilities, sustaining the economy rather
than mining it for private gain."
Under discussion is the concept that banking
should be considered a public utility to be owned
and managed by a public institution with the
mandate and social responsibility to serve the
public interest, with branches throughout the
country and an authority accountable to the
people. Money creation should be a public function
with the social responsibility falling to the
public banks. Enterprises and individuals with
excess money could lend out the amounts they have
but not create new money as the state-sanctioned
U.S. commercial banks and Canadian chartered banks
now do.
With the creation of public banks, working people
and their allies in the middle strata and small
and medium-sized businesses would be encouraged to
keep their money and savings in public banks and
not funnel them into the hands of private
financial enterprises. Workers in particular
should demand and direct their pension and mutual
funds be held within public banks that have the
mandate and aim to serve the public interest,
economy and society. The creation of public banks
is a front in the movement to stop paying the rich
and to increase investments in social programs,
public services and public enterprise.
- Ansonith Albano -
In the framework of the institutional
transformations that the United States is
advancing to regain global hegemony, in January
2020 it launched the so-called International
Development Finance Corporation (DFC), as the new
agency that will control the necessary financing
for its repositioning in the world.
The intention to modernize the international
development financing scheme is contained in the
new National Security Strategy (NSS), promulgated
at the end of 2017, and where it states that the
United States must arm itself with new tools to
face the growing influence of China and other
powers on the international scene.
The NSS recognizes that the United States has
been losing the battle for that global
pre-eminence, and provides orientation to the
formation of the new financing scheme,
understanding that this action will be essential
to update its geopolitical position. The
questioning that the document makes of the
situation of U.S. hegemony is linked to its
inability to offer fair and attractive trade
relations, in contrast to what China has been
achieving, especially in Latin America and the
Caribbean. "Today, the United States must compete
for positive relationships around the world. China
and Russia direct their investments in the world
to expand their influence and gain competitive
advantages against the United States," reiterates
the NSS.
China and its promotion of a multi-polar world
is defined in the NSS as the greatest threat to
the objectives of the United States. And from this
criterion, the NSS states that this country must
use a new methodology for international financing,
prioritizing the promotion of private capital over
areas that contribute to the great objectives of
imperial foreign policy.
The new U.S. national security doctrine proposes
that the new DFC should openly confront the China
Belt and Road initiative,[1] and at the same
time, favour the expansion of U.S. private
capital, to foster new alliances and strengthen
existing ones: "The United States can play a
catalytic role in promoting economic growth, led
by the private sector," the document clarifies.
The legal initiative that creates the DFC,
approved by consensus by Republicans and
Democrats, merges the former Overseas Private
Investment Corporation (OPIC), and the Development
Credit Authority (DCA), belonging to USAID, in a
supra development aid agency, the largest and most
important created in that country.
To materialize this geopolitical operation, the
DFC will manage some U.S.$60 billion, doubling the
financial capacity of its predecessor OPIC. The
new corporation will also assume the management of
the credit portfolios of OPIC and DCA; that is, it
starts its work, managing just under U.S.$30 billion, distributed in a variety of projects around
the world.
The legislation provided the DFC with innovative
financial tools, which guarantee it greater
flexibility in its new role, and prioritizing its
line of action, in the investment in energy and
infrastructure projects, contained in the
following regional initiatives arranged by the
United States for its geopolitical repositioning:
Connect Africa, 2X Women's Initiative, Feed the
Future, América Crece [America Grows],
Indo-Pacific Strategy, U.S.-India Development
Foundation and, European Energy Security and
Diversification.
From this perspective, in December 2019 the
United States government launched the "America
Grows" initiative as the response of Donald
Trump's government to the significant progress
made by China and Russia on the continent.
In recent years, Latin American and Caribbean
countries have deepened their economic relations
with China, establishing more and more agreements
and trade flows with the Asian nation. According
to a 2018 World Economic Forum report, China
displaced the United States as the main trading
partner of Argentina, Brazil, Chile, Peru and
Uruguay, and has invested more than $110 billion
in government projects across the region. The
report highlights the peculiarity that Chinese
banks refrain from imposing political conditions
on the governments receiving loans.
In this scenario, which envisions a transition of
the political, economic, and cultural order in
Latin America and the Caribbean, the United States
raises the America Grows initiative, as an updated
implementation of the old Monroe Doctrine.
 Among other things,
with the implementation of the America Grows
initiative, the United States seeks to change the
energy matrix of the Caribbean region, in order to
redirect its growing surpluses of liquefied
natural gas (LNG) there. The International Energy
Agency (IEA) noted in a report dated November
2017, that in 2025, the United States will become
the world's largest exporter of LNG, from the
extraction of shale gas on its territory. A
substantial core of the projects, contained in the America Grows initiative, reflects the intention
of the United States to move its gas surpluses to
the Caribbean region.
On July 21, 2020, the United States and Honduras
signed a memorandum of understanding, in which the
Central American country formalizes its
incorporation into the America Grows initiative,
with the promise of investment of U.S.$1 billion,
in private projects, during the next three years,
prioritizing the energy issue: "Our focus will be
on projects to strengthen the country's
infrastructure, advance digital connectivity,
strengthen the health sector, expand financial
services, and help lay the foundations for a more
prosperous future," declared the Executive
Director of the DFC Adam Boehler during the
signing of the document, which was attended virtually by the Honduran President Juan
Orlando Hernández.
The document, negotiated between the United
States and Honduras, adopts reference points from
the agreements already signed with Panama, Chile,
Argentina, Jamaica, Colombia, Brazil, Peru, and El
Salvador, and establishes the legal framework of
reference for future financial actions of the DFC
in Latin America and the Caribbean.
Unlike the type of financing that China provides
to Latin American and Caribbean countries, where
national projects are prioritized, and the
capacities of governments are strengthened to
generate higher levels of well-being for the
population, the action of the DFC would reinforce
economic dependence and the expansion of U.S.
private capital, commodifying the phenomenon of
development assistance.
The configuration of the DFC as the new financial
body of U.S. foreign policy has generated
enthusiasm in anti-Chinese conservative groups. On
August 14, 2020, Senators Marco Rubio (Republican)
and Bob Menéndez (Democrat), characterized by
their extremist positions against sovereign
governments in Latin America and the Caribbean,
presented the bill entitled Advancing
Competitiveness, Transparency and Security in the
Americas Act (ACTSA). According to the initiative
presented, the bipartisan proposal would seek, on
the one hand, to strengthen the economic
competitiveness of the United States, and on the
other, to criminalize China's political and
commercial presence in the region. "China's goal
is to use economic power to displace the U.S. I
am proud to join Senator Menéndez in presenting
this project, which seeks to strengthen our
economic capacity, to counter the growing evil
influence of Beijing in Latin America and the
Caribbean," Senator Rubio pointed out on his
social networks. The ACTSA project involves the
new DFC, and will propose, for the approval of
Congress, that 35 per cent of the financial budget
of said agency be dedicated to the region during
the next 10 years.
The DFC's agenda, since the formal start of its
operations on January 2 of this year, has been
affected by the institutional rearrangement, the
capture of human capital that will make the work
of this body effective, and, of course, the
consequences of the COVID-19 pandemic.
However, its Executive Director Adam Boehler, a
young businessman linked to the provision of
health services who graduated in 2000 in economics
from the University of Pennsylvania, has wasted no
time and has established work meetings with
different characters and officials of Latin
America and the Caribbean, carrying the promise of
the Trump administration to generate large
investments for the projects that may be presented
to this institution.
Before the end of 2019, he visited the Colombian
President, Iván Duque, in Cartagena, where he
confirmed that his agency will promote efforts
that guarantee the financing of the largest number
of projects, especially in energy and
infrastructure. He also held meetings with the
same discursive criteria, with President Nayib
Bukele from El Salvador, Juan Orlando Hernández
from Honduras, Alejandro Giammattei from
Guatemala, and Mexican Foreign Minister
Marcelo Ebrard with whom he signed a letter of
intent to finance a gas pipeline, which will be
built by the company Rassini SAB de CV in the
southern states of the country, for U.S.$632 million.
As the new agenda of the DFC is proposed, based
on the guidelines set forth in the U.S. National
Security Strategy, it could contribute to the
deepening of political instability in the region,
and even more explosive scenarios, with the
intensification of economic inequality, inequity
in the distribution of resources, and political
dependence.
Ansonith Albano is a professor in the Faculty
of Political Sciences, National Autonomous
University of Nicaragua.
TML Note
1. The Belt and Road Initiative is a global
infrastructure development strategy adopted by the
Chinese government in 2013 to invest in nearly 70
countries and international organizations. Its
stated aim is to strengthen China's connectivity
with the world. It combines new and old projects,
covers an expansive geographic scope, and includes
efforts to strengthen hard infrastructure, soft
infrastructure, and cultural ties. Originally
called One Belt, One Road it is a Chinese economic
and strategic agenda by which the two ends of
Eurasia, as well as Africa and Oceania, are being
more closely tied along two routes -- one overland
and one maritime.
Signing of the agreement founding the World Bank,
December 27, 1945.
The following is an excerpt from an article by
Gustavo Castro Soto, Chiapas al Dia
Bulletin, May 8, 2002, No. 289.
Together with the International Monetary Fund
(IMF), the World Bank (WB) was formed in 1945 with
the participation of 38 countries -- it now has
181 member countries. The WB was formed with the
principal goal of boosting the economies of the
European countries that participated in World War
II and that ended up destroyed and impoverished.
Among these countries were France, Germany, Japan,
Italy, the United Kingdom and others. France was
the first country to receive a loan for the
equivalent of $250,000,000 at the time. Later,
loans were given to Chile, Japan and Germany, among
many other countries. Bit by bit the WB Group was
formed, composed of diverse types of banks for
diverse types of loans. Since its foundation, the
WB has had profits each year from the payment of
interest, speculation on the stock exchange and
for the fees that the governments must pay to be members and thus have a right to
request loans from the bank. For example, in 1970
the WB lent out $2 billion and two years
later in 1972 it lent out $3 billion and then $10 billion in 1979.
The debt of the poorest countries or those in the
process of developing reached such height that the
WB began to lend these governments money to pay
the interest on their original debts to the WB. In
1980, the owners of the WB took advantage of these
debts to grant Turkey a loan of $200,000,000
under the severe conditions of the so called
Structural Adjustment Program (SAP), the function
of which will be explained later. For the year
1990, Mexico received the largest loan ever
granted for a total amount of $1,260,000,000 in
order to pay its external debt. In 1992,
Switzerland, the Russian Federation and twelve
republics of the former Soviet Union became part
of the WB.
The protests and pressure against the WB, its Structural Adjustment Programs and it debt policies were such that, in 1994
the Public Information Centre was opened so that
citizens could obtain information about the
projects that the WB was carrying out in different
nations. In 1997, Uganda was the first country to
which the Heavily Indebted Poor Countries (HIPC)
Initiative was applied. Part of Uganda's debt with
the WB would be pardoned in exchange for the
application of the very extreme policies of
structural adjustment. However, this pardon will
take place years after these changes have been in
effect.
What Institutions Make Up the WB Group?
The WB Group is made up of five institutions:
1) The International Bank for Reconstruction and
Development (IBRD): This was the first WB
institution created in 1946. It grants loans to
countries with average incomes and to the poorest
nations which are able to pay their debts and low
interest rates but at the cost of other conditions
which impoverish nations. For this reason, their
external debts are now unsustainable. The majority
of its funds come from international capital
markets (speculation on the stock exchange). The
number of votes held by its members is according
to the member's economic contribution and its
offices are in the country that contributes the
most money. That is to say that the U.S. both
hosts and operates this institution. The loans and
low interest should be repaid within 15 to 20
years. All of the countries have been obliged to
pay on time. If a country wants to be a member of
the IBRD, it must pay into the IMF which also
controls the economies of the nations. The IBRD
consists of 181 member countries. Mexico became
part of the IBRD in 1945 and it is from this bank
that it receives its loans.
2) The International Development Association
(IDA): Formed in 1960, the IDA gives loans to the
poorest nations -- those that do not have resources
and hence, only pay a commission (less than 1 per
cent) for administrative costs. The loan should be
paid back over a 35-40-year time period with the
first payment being made after 10 years. Not one
country has delayed its debt. The money comes
mainly from the U.S., France, Japan, the United
Kingdom and Germany, and other developing
countries such as Argentina, Brazil, Hungary,
Botswana, Korea, Turkey and Russia.
There are almost 40 countries that contribute to
this fund and they recover their contributions
every three years. In the past few years, the
IDA's funds have represented 25 per cent of the
total resources of the WB. If a country wishes to
join the IDA, it must be a member of the IBRD and
it must pay its fee. The IDA presently has 160
member countries. Mexico joined the IDA in 1961
though it does not actually fit the bill of an
impoverished country since, according to the WB,
Mexico has the 13th largest economy in the world.
Only a very few countries are categorized as being
very poor. Such is the case for Haiti, Bolivia,
Honduras and El Salvador.
3) The International Finance Corporation (IFC):
The IFC was created in 1956 to lend money to
companies with the goal of promoting foreign
investment after World War II. If a country wants
to join the IFC, it must be a member of the IBRD,
and to join the IBRD, it must be a member of the
IMF. The IFC has loaned funds to about two
thousand companies in 129 countries. In 1999
alone, the IFC lent $5,280,000,000 to companies.
The IFC has a membership of 174 countries.
4) The Multilateral Investment Guarantee Agency
(MIGA): MIGA was created in 1988 and it provides
security for company investments in the event that
wars, civil unrest or terrorism arise or if a
government does not comply with the rules of the
market or if it expropriates goods that affect
investment. This is another way in which the poor
governments benefit companies in that these
governments must repay MIGA the money that was
given out to the insured companies for losses. For
this reason, not all countries want to accept that
there are political conflicts within their
borders. MIGA offers insurance to countries for no
more than $225,000,000 at a rate of $50,000,000
of insurance per company project. Until now, MIGA
has provided insurance to no more than 300
companies in 52 countries and not one has had to
collect its insurance. Given that both MIGA and
the IFC offer loans to companies, they do not give
out much public information and society does not
have the power to influence the projects that it
supports nor to evaluate their impacts. MIGA has
151 countries as members.
5) The International Centre for Settlement of
Investment Disputes (ICSID): The ICSID was created
in 1966 to resolve the differences and conflicts
that arise between foreign investors and the
national governments where the investment is
taking place. It has 131 member countries.
Although this allows companies to secure their
investments (i.e., they can procure compensation
from the government via insurance), Indigenous
peoples, campesinos and the general population
have no insurance against the damage caused by WB
projects.
Who Is the Owner of the WB?
Although one might suppose that all of
the member countries are the "owners" of the WB,
the five most important shareholder countries
are the real owners. Among these shareholders
are: the United States (which contributes 16.98
per cent of the WB funds), followed by Japan
(6.24%), Germany (4.82%), France
(4.62%) and the United Kingdom (4.62$). These five nations, along with Canada and
Italy make up the G7. Obviously, the one that
contributes the most, has the greatest influence
over the decisions that are made.
What Is the Structure of the WB?
The Board of Governors meets once a year
(September or October) and is made up of the
government representatives from the 181 member
countries. At this meeting, nothing is decided. It
is an information meeting only. Later, the 181
countries divide into 24 Executive Directors
according to their economic contribution to the
WB. The United States, Germany, France, Japan and
the United Kingdom each have their own post and
they have the greatest weight in the making of
decisions. The remaining 176 countries make up the
rest of the 19 groups in such as way that the sum
of their economic contributions equals one vote.
In these latter groups, countries take turns
representing their group. Mexico shares its
Executive Director post with eight other countries
-- El Salvador, Costa Rica, Guatemala, Nicaragua,
Panama, Honduras, Venezuela and Spain. Some of
these countries will also share in the Plan
Puebla-Panama.
The Executive Directorate names the president of
the WB. This position is always filled by the
country that contributes the most economically to
the WB and is renewed every five years. Hence, the
United States always occupies this position. The
current WB president is James Wolfensohn. There
are also six regional vice-presidents: East Asia
and the Pacific, South Asia, Europe and Central
Asia, Middle East and North Africa, Africa
Sub-Saharan and, Latin America and the Caribbean.
As well, there are four sector vice-presidents.
The WB employs around 6,000 people around the
world.
Where Are the Offices of the WB?
In addition to the main offices in
Washington, DC, USA, there are 67 offices
in total throughout the world and 25 per cent of
them are in Latin America. In Latin America
there are 17 offices in 15 countries: Mexico,
Jamaica, Haiti, Guatemala, Honduras, Venezuela,
Nicaragua, Costa Rica, Colombia, Ecuador, Peru,
Bolivia, Paraguay, and Argentina and there are three
offices in Brazil.
Where Does the WB Get Its Money?
The main source of money is from the personal
taxes and other public funds that governments
collect and then use to pay their WB fee. This
makes them WB members and hence, they are able to
solicit WB loans. As well, the WB makes a lot of
money from stock exchange speculation -- money that
does not generate employment and that is not
taxable. Finally, the foreign debts that have been
created in many countries are so great that the WB
makes easy money from the interest paid by these
indebted governments.
How Does the WB Lend Money?
The WB is the largest financial institution in
the world and each year it loans out around $30
billion to its client governments and companies.
The WB states that it wants "to fight poverty with
passion..." and it promises loans with low
interest rates. Nonetheless the number of people
who now live in poverty, with less than two
dollars a day to live on, is at three billion and
growing. How is it then that the WB states that it
has combatted poverty for the past 50 years of the
WB's existence? The key to understanding this is
in the other conditions that the WB imposes on
those who ask for a loan under the Structural
Adjustment Program. As with all banks, the
WB is a bank intent on doing good financial
business, as they themselves acknowledge. It is
not a humanitarian bank nor a charity and much
less a bank to distribute the wealth of the world.
The SAPs that the WB imposes as a condition on
those governments that are granted money, consist
of adjusting the economic and political structure
of the nations with the goal of adapting the
country to the free market and to liberal
macroeconomic policies, thus, facilitating the
investment of transnational capital from the most
powerful companies in the world. If, with one hand
they "lend" money to the poorest nations via the
IDA, with the other hand they demand that severe
measures be taken to benefit their economies,
their companies and to secure their investments
with the MIGA.
The severe measures of the WB's SAPs are made in
close coordination with the IMF, with the goal of
increased economic liberalization and reform.
Thus, loans are made with the conditions that
governments carry out the following:
1) Privatize the companies, institutions and
other areas controlled by the government (in
Mexico -- CONASUPO, telephones, highways, mines,
ports, airports, gas, petroleum, natural
resources, water, electrical energy, education,
health care, research centres, etc). This leaves
investors with a monopoly on basic services, in
addition to generating unemployment and leaving
the state without resources.
2) Eliminate subsidies and liberate price
controls (on corn, social programs for the poorest
sectors, etc.). The companies argue that subsidies
for only some are unfair, that it is not
equitable, etc. However this would cause more
poverty, migration, an increase in the price of
basic products, etc.
3) Eliminate or reduce social costs (health care,
education, services, etc). Companies argue that
private investment will be responsible for the
distribution of these services to people. For its
part, the WB wants to be certain that the
government will have money to pay its debt.
4) Adjust laws and rules to eliminate obstacles
for transnational companies (labour laws,
investment laws, etc).
5) Strengthen the judicial systems to give
security to investments, combat corruption, etc.
6) Assure property rights with the goal being
that companies have legal security regarding land
ownership.
7) Free the market by eliminating duties on
imports and all mechanisms (administrative, legal
and economic) that impede exportation and
importation of goods.
8) Devalue the national currency.
In the event that a government is complying with
the SAP, the WB pays, bit by bit, the rest of the
loan. The WB also lends to areas that will benefit
foreign investment -- these are called sector
adjustment loans. In this way the WB loans money
to a country to improve the highway infrastructure
necessary for businesses; to improve railways and
other companies that it might later demand be
privatized; to endow an industrial park with the
infrastructure necessary for investment; to do
feasibility studies for investors; to allow a
government to modify its laws in such a way as to
benefit the free market and/or to execute
privatizations; to pay the same WB and/or other
loaning institutions the money that it owes; to
modify property laws with the goal that the
government is guaranteed more taxes for paying the
debt; etc.
The WB has loaned money to those countries that
have had to pay compensation to the workers and
employees that were dismissed from their jobs when
state companies were closed or privatized.
Nonetheless, when the government has to pay back
this loan, the cost for the compensated unemployed
is the trimming of other subsidies and services as
part of the Structural Adjustment with which the
government is obliged to comply.
Each year, the WB promises more loans for the
Structural Adjustment of countries (more than 65
per cent of its funds in recent years) and for the
payment of interest and capital that is owed to
them by these same clients. Less money goes
towards development projects, specific investments
and aid to the poorest nations. To these, the
poorest nations, the WB offers to pardon their
debts years after they have put into place the
severe measures of Structural Adjustment. In this
way, the IDA takes the lead in promising loans for
business development in Latin America. Society, of
course, is not able to check out such projects, to
examine their impacts and success because such
loans are for private initiatives. We recall that
at the first Summit of the Americas carried out in
1994 to form the Free Trade Area of the Americas
(FTAA), the governments of the continent mandated
that the IDA be in charge of returning more and
more funds to the WB as regards financing of
businesses and governments.
Who Pays the Consequences?
To avoid having its policies exacerbate misery,
the WB grants loans to cushion poverty's blow. The
"Advisory Group for Aid to the Poorest lends
support to financial institutions that grant
loans, generally between $50-$100, and usually
for women, to assist them in starting up small
businesses such as the production of clothing,
artesania and milk." This demonstrates an
intention to keep the labour of the poorest at a
subsistence level but it does not make them
competitive in the international market. The
interests behind the WB will never permit that
their assistance leads to their own death:
competition.
During the 1980s, the policies of the WB created
alarming conditions of poverty. In its 1990 Report
on World Development, the WB proposed to reduce
the number of poor in the world to 300 million by
the year 2000; but it didn't take long for them to
realize that it would be the opposite. In 1994 the
WB confirmed that the measures of economic
stabilization and adjustment had not overcome
illiteracy, malnutrition and growing misery; and,
now there were 219 million more poor people in the
world.
The WB recently confirmed that of the 4.7 billion
people living in the 100 client countries of the
WB: 3 billion people live on less than two dollars
a day; ... 130 million children do not attend
primary school (80 per cent of these children are
girls); 1.3 billion lack drinking water. Moreover,
it stated that, "...the increase in poverty can
produce adverse effects in the wealthier nations,
decreasing their markets and investment
opportunities ...."
Given the social complaints against the
sharpening impoverishment of women in the world,
in 1994 the WB published its first document about
gender policy. For this to happen many years had
to pass and millions of women and children had to
lose their lives to poverty. In 1995, the WB
carried out an evaluation of its projects and it
concluded that, "about one-third of the projects
(33%) financed by the WB, once completed,
had been categorized as "unsatisfactory" by the
Operations Evaluation Department. And the failure
rate (33%), had stayed at this level for
five years." It added that, "the global results
after 20 years of this monitoring and evaluation
initiative have been disappointing ... and have
been characterized by a lack of completion." Among
other lamentable things is the fact that this
poverty that the WB has provoked is subsidized by
the same taxes taken from the increasingly poor.
In other words, the poor provide the money to make
them even poorer.
In general we can say that there are three
positions regarding the WB:
1) Those that consider the WB to be contributing
effectively to development and to the fight
against poverty in the world and who believe that
the WB's projects are effective. This position is
one that even the officials of the WB don't dare
defend.
2) Those that consider that, although the WB is
the body structurally responsible for poverty, it
is possible to influence and even pressure the WB
on its policies at a high level and, from below to
monitor and evaluate their projects, demanding the
incorporation of better policies and citizen
participation.
3) Those that consider that, even though it is
necessary to influence the policies of the WB, in
the end it will continue to put forward the
neo-liberal model and generate more structural
poverty. For this reason, the WB should disappear
and resign itself to other world mechanisms in a
new economic model that balances justice with a
real distribution of wealth.
And you, what do you think?
Chiapas al Dia Bulletin was a publication of the
Centre for Economic and Political Investigations of Community
Action of Chiapas (CIEPAC). CIEPAC was a member of the
Movement for Democracy and Life (MDV) of Chiapas, the Mexican
Network of Action Against Free Trade (RMALC).
- K.C. Adams -
Originally published in TML Daily, July 3,
2002.
The U.S. Federal Reserve System (Fed) was
established as a federal government agency in 1913
by an act of Congress. The Fed consists of a Board
of Governors (BoG) in Washington and twelve
Reserve Banks situated throughout the country. The
BoG overseas all the operations of the Fed
including the twelve Reserve Banks. The most
important bank with the greatest responsibilities
is the Federal Reserve Bank of New York. The Board
of Governors consists of seven members appointed
by the President of the United States and
confirmed by the U.S. Senate. The full term of a
Board member is fourteen years; the Chairman and
the Vice Chairman of the Board are also appointed
by the President, confirmed by the Senate and must
be members of the Board. A Washington staff
numbering about 1,700 supports the Board of
Governors.
Shareholders privately own the twelve Reserve
Banks. The shares are owned by banks that are
members of the federal reserve system. Member
banks must subscribe to stock in their regional
Federal Reserve Bank in an amount at least equal
to 3 per cent of their capital and surplus. The
holding of this stock is a legal obligation that
goes along with membership, and the stock may not
be sold or pledged as collateral for loans. Member
banks receive a 6 per cent dividend annually on
their stock, as specified by law, and vote for the
Class A and Class B directors of the Reserve Bank
in their district. The BoG appoints Class C
directors. The stock is not available for purchase
by individuals.
The presidents and directors of the Reserve Banks
are powerful members of the Fed, holding key
positions on committees that decide U.S. fiscal
and monetary policy. They also participate in
selecting nominees to the BoG. Studies that chart
the history of Reserve Bank directorships and
members of the BoG since 1913 reveal a "who's who"
of the U.S. (and European) financial and
industrial elite. (See charts below) The most
powerful families of the financial oligarchy were
responsible for the original design of the Fed and
at its inception manoeuvred to own a controlling
interest of stock in the Reserve Banks.
The Fed is a powerful arm of the U.S. capitalist
state controlled directly by the richest families.
It is only marginally accountable to elected
representatives. The Fed is somewhat unusual as a
U.S. state institution as it makes no attempt to
hide its control by the monopoly capitalist class.
Most state institutions try to create an illusion
of being above classes, operating in the interests
of all the people regardless of social class --
not the Fed. The most powerful U.S. capitalists
have never allowed any interference with the
workings of the Fed. Most proceedings of the BoG
and the Reserve Banks are secret even from
Congress and the Executive Branch. Only a small
sector of its financial accounts are subject to
audit by the General Accounting Office (GAO) and
its decisions cannot be overturned by the
President, the Senate or House of Representatives.
The Chairman of the BoG routinely reports to a
Senate Oversight Committee and publishes reports
on the activities and decisions of the Fed but
that is about the extent of elected political
contact. The Congress usually receives the
Chairman of the BoG as a paramount leader with
such influence that no individual or group dare
criticise him. The Fed is extremely profitably in
its own right returning 95 per cent of its
earnings after expenses to the U.S. Treasury. Only
five per cent of earnings is needed to pay the
established annual six per cent dividend to
shareholders of the Reserve Banks.
Activities of the Federal Reserve System
The Fed conducts U.S. monetary policy,
distributes currency within the U.S. and abroad,
operates a payments system, supervises the banking
industry, has international responsibilities and
serves as central banker for the U.S. Treasury.
The Fed's activities fall into four general
areas:
1) Conducting the nation's monetary and economic
policy by influencing the money and credit
conditions in the economy; 2) Supervising and
regulating banking institutions; 3) Maintaining the
stability of the financial system and containing
systemic risk (collapse) that may arise in
financial markets and monopolies; and 4) Providing certain
financial services to the U.S. government, to the
public, to financial institutions, and to foreign
official institutions, including playing a major
role in operating the nation's payments system.
Monetary Policy
The Federal Reserve System conducts monetary
policy using three major tools:
1) Open market operations-the buying and selling of
U.S. government (mainly Treasury) securities in
the open market to influence the level of reserves
in the depository system; 2) Reserve
requirements-deciding the amount of funds
commercial banks and other depository institutions
must hold in reserve against deposits; 3) Discount
rate-the interest rate charged commercial banks
and other depository institutions when they borrow
reserves from a regional Federal Reserve Bank.
These activities all influence and control the
amount of money circulating within the U.S.
economy and abroad, the amount of hard currency
and coins needed at home and abroad, the level of
borrowing, the foreign exchange rate and the
credit rate. Monetary policy also affects economic
activity generally, prices of most commodities,
the real income of the working class, the
purchasing power of consumers and the level of
capital flowing from within the U.S. and abroad
into the stock markets, bonds or other interest
bearing securities.
Federal Open Market Committee
The Federal Open Market Committee (FOMC) consists
of twelve members: the seven members of the Board
of Governors of the Federal Reserve System; the
president of the Federal Reserve Bank of New York;
and, for the remaining four memberships, which
carry a one-year term, a rotating selection of the
presidents of the eleven other Reserve Banks. The
FOMC holds eight regularly scheduled meetings per
year to direct the conduct of open market
operations by the Federal Reserve Bank of New
York. The FOMC is charged under law with
overseeing open market operations, the principal
tool of national monetary policy. These operations
influence the amount of reserves available to
depository institutions, the amount of money in
the economy and interest rates. The FOMC sets
ranges for the growth of the monetary aggregates
and directs operations undertaken by the Fed in
foreign exchange markets. Decisions in the FOMC
directly influence money market conditions and the
growth or contraction of money and credit. The
actions of the Fed affect the volume of money and
credit and their price-interest rates, thus
influencing the level of prices generally in the
economy.
Controlling "Systemic" Disruptions
The Fed is charged by the ruling class with
containing wide-scale "systemic" (complete)
disruptions, such as those that can occur during a
plunge in stock prices, recession at home or
abroad or the serious difficulties of a monopoly
such as the Long-term Capital Management in 1998,
a hedge fund with great influence in the Fed.
Monopolies are a combination of banking and
industrial capital and through their financial arm
have direct access to the resources of the Fed. If
a threatening disturbance develops, the Fed can
sometimes cushion its effects on the monopoly or
monopolies involved, the financial markets and the
economy by providing liquidity through its
monetary policy tools, mainly capital to cover
debts of a troubled monopoly or monopolies.
Covering shortfalls of capital by a monopoly
within a federal reserve bank are highly guarded
secrets and extremely difficult to confirm. Even
borrowing by financial institutions at the Fed
discount window is secret. In order to contain
rumours, no accounting of Fed monetary actions is
allowed by any other state agency including the
powerful General Accounting Office. The Fed argues
that secrecy is important, as the stock price of a
monopoly would fall if emergency borrowing were
confirmed, or worse, a panic removal of deposits
from financial institutions may occur as happened
in Argentina. The ability to provide almost
unlimited emergency capital to financial
institutions has made the Fed one of the most
powerful and influential agencies in the United
States. Control of the Fed and its most important
decisions by certain wealthy families has
guaranteed their leading position within the U.S.
ruling class. A monopoly's relations, good or bad,
with the BoG, especially its chairman and the
president of the Reserve Bank of New York, may
determine its survival or demise during a crisis.
This may explain the dearth of criticism of the
Fed by official political circles or academics
even though the Fed is grossly undemocratic by
modern standards and unaccountable to the people
in any way, shape or form.
The Reserves Market
The Fed's policies influence the demand for or
supply of reserves at banks and other depository
institutions. The demand for reserves has two
components: required reserves and excess reserves.
Congress expanded the Fed's role in the payment
system with the enactment of the Monetary Control
Act of 1980 (MCA). The MCA subjected all
depository institutions, not just member banks, to
reserve requirements and also gave all depository
institutions access to the Federal Reserve's
payment services. All depository
institutions-commercial banks, saving banks,
savings and loan associations, and credit
unions-must retain a percentage of certain types
of deposits to be held as reserves (subject to
reserve requirements set by the Fed) in specified
assets, either as cash in their vaults or as
non-interest-bearing balances at the Federal
Reserve. At the end of 1993, 4,148 member banks,
6,042 non-member banks, 495 branches and agencies
of foreign banks, 61 Edge Act and agreement
corporations, and 3,238 thrift institutions were
subject to reserve requirements. Since the early
1990s, reserve requirements have been applied only
to transaction deposits (basically,
interest-bearing and non- interest-bearing
checking accounts). Required reserves are a
fraction of such deposits; the fraction-the
required reserve ratio-is set by the BoG.
The BoG has tremendous power to impose reserve
requirements on transaction deposits and on
non-personal time deposits solely for the purpose
of implementing monetary policy. The MCA also
empowers the BoG under extraordinary circumstances
to establish a supplemental reserve requirement of
up to 4 percentage points on transaction accounts
if such an action is deemed essential for the
conduct of monetary policy.
Changes in Required Reserve Ratios
Increasing the ratios reduces the volume of
deposits that can be supported by a given level of
reserves and, in the absence of other actions,
reduces the money stock and raises the cost of
credit. Decreasing the ratios leaves depositories
initially with excess reserves, which can induce
an expansion of bank credit and deposit levels and
a decline in interest rates; it also lowers the
costs of bank funding by reducing the amount of
non-interest- bearing assets that must be held in
reserve.
Total required reserves expand or contract with
the level of transaction deposits and with the
required reserve ratio set by the Board.
Depository institutions hold required reserves in
one of two forms: vault cash (cash on hand at the
bank) or, more important for monetary policy,
required reserve balances in accounts with the
Reserve Bank for their Federal Reserve District.
Depositories use their accounts at Federal Reserve
Banks not only to satisfy their reserve
requirements but also to clear many financial
transactions. Given the volume and
unpredictability of transactions that clear
through their accounts every day, depositories
need to maintain a cushion of funds to protect
themselves against debits that could leave their
accounts overdrawn at the end of the day and
subject to penalty. Depositories that find their
required reserve balances insufficient to provide
such protection may open supplemental accounts for
required clearing balances. Some depository
institutions choose to hold reserves even beyond
those needed to meet their reserve and clearing
requirements. These additional balances, which
provide extra protection against overdrafts and
deficiencies in required reserves, are called
excess reserves; they are the second component of
the demand for reserves.
Supply of Reserves
The Federal Reserve supplies reserves to
the banking system in two ways:
1) Lending through the Federal Reserve discount
window Buying government securities (open market
operations).
2) Reserves obtained through the first channel are
called borrowed reserves. The Fed supplies these
directly to depository institutions that are
eligible to borrow through the discount window.
Access to such credit by banks and thrift
institutions is established by rules set by the
BoG, and loans are made at a rate of interest-the
discount rate-set by the Reserve Banks and
approved by the BoG.
Basic Discount Rate
The basic discount rate that each Federal Reserve
Bank charges on its loans is established by the
Bank's board of directors, subject to review and
determination by the BoG. In the past the U.S.
banking system was fragmented and state-based. The
Fed has fought this feature on behalf of the
largest financial institutions. Gradually, smaller
local banks have been eliminated as big banks and
the Fed gained power and influence. Regional
credit markets are almost a thing of the past as a
national credit market has been created with a
national discount rate. Today, the Federal Reserve
maintains a uniform structure of discount rates
across all districts of the Reserve Banks.
Discount Window
Institutions eligible to borrow at the Fed's
discount window include domestic commercial banks,
U.S. branches and agencies of foreign banks,
savings banks, savings and loan associations, and
credit unions. Many depository institutions meet
the eligibility criteria -- about 11,000 banks
(including U.S. branches and agencies of foreign
banks) and 16,000 thrift institutions (including
credit unions) at the end of 1993. Any institution
holding deposits subject to reserve requirements
(such as transaction accounts and non-personal
time deposits) whether it is a Fed member or not
have access to the discount window.
All discount window credit must be secured to the
satisfaction of the Federal Reserve Bank that is
providing the credit. Satisfactory collateral
generally includes U.S. Treasury and federal
agency securities and, if of acceptable quality,
mortgage notes covering one to four -- family
residences; state and local government securities;
and business, consumer, and other customer notes.
Types of Credit
The three basic types of discount window credit
are adjustment credit, seasonal credit, and
extended credit.
Adjustment credit helps depository institutions
meet short-term liquidity needs. For example, an
institution experiencing an unexpectedly large
withdrawal of deposits may request adjustment
credit overnight or for a few days until it finds
other sources of funding. Seasonal credit assists
institutions in managing liquidity needs that
arise from regular, seasonal swings in loans and
deposits, such as those at agricultural banks
associated with the spring planting season or
during the Christmas gift buying season when
people traditionally drain their accounts.
Extended credit may be provided to depositories
experiencing somewhat longer-term liquidity needs
that result from exceptional circumstances. The
Fed sometimes provides credit to troubled
depositories to facilitate an orderly closure of
the institution and stop "contagion" to other
companies or allow a takeover.
Buying Government Securities (Open Market
Operations)
The other source of reserve supply is
non-borrowed reserves. The Fed exercises a certain
control over this supply through open market
operations-the purchase or sale of securities by
the Domestic Trading Desk at the Federal Reserve
Bank of New York. When the Fed buys securities in
the open market, it creates reserves to pay for
them, and the supply of non-borrowed reserves
increases. Conversely, when it sells securities,
it absorbs reserves in exchange for the
securities, and the supply of non-borrowed
reserves falls. In other words, the Federal
Reserve adjusts the supply of non-borrowed
reserves by purchasing or selling securities in
the open market, and the purchases are effectively
paid for by additions to or subtractions from a
depository institution's reserve balance at the
Federal Reserve. A Federal Reserve securities
transaction changes the volume of reserves in the
depository system: A purchase adds to non-borrowed reserves, and a sale reduces them.
When the Federal Reserve buys securities from any
seller, it pays, in effect, by issuing a check on
itself. When the seller deposits the check in its
bank account, the bank presents the check to the
Federal Reserve for payment. The Fed, in turn,
honours the check by increasing the reserve
account of the seller's bank at the Federal
Reserve Bank. The reserves of the seller's bank
rise with no offsetting decline in reserves
elsewhere; consequently, the total volume of
reserves increases (the amount of money in the
economy). Just the opposite occurs when the Fed
sells securities: The payment reduces the reserve
account of the buyer's bank at the Federal Reserve
Bank with no offsetting increase in the reserve
account of any other bank, and the total reserves
of the banking system decline (less money in the
economy). This characteristic-the
dollar-for-dollar change in the reserves of the
depository system with a purchase or sale of
securities by the Fed makes open market operations
the most common tool of monetary policy
(controlling the money supply).
The only financial instrument that is suitable
for open market operations is U.S. government
securities. The Fed carries out the greatest part
of its open market operations in that market. The
U.S. government securities market, in which
overall trading averages more than $100 billion a
day, is the broadest and most active of U.S.
financial markets. Transactions are handled over
the counter (that is, not on an organized stock
exchange), with the great bulk of orders placed
with specialized dealers (both bank and non-bank).
Although most dealer firms are in New York City, a
network of telephone and wire services links
dealers and customers regardless of their location
to form a worldwide market.
Most Fed purchases and sales of securities to
adjust conditions in the reserves markets are not
undertaken as a result of a general policy
decision. Rather they are made to offset other
influences on reserves. Certain factors beyond the
immediate control of the Fed stimulate purchasing
of securities such as the amount of currency in
circulation and the size of Treasury balances at
Federal Reserve Banks. The amount of currency in
circulation rises late in the year because
individuals tend to hold more currency during the
holiday shopping season. This rise in currency in
circulation drains reserves from the depository
system because, when a depositor withdraws
currency from a bank, the bank turns to the
Federal Reserve to replenish its depleted vault
cash and pays for the shipment of currency by
drawing down its reserve account. In contrast, a
decline in currency in circulation provides added
reserves.
Effects on Other Rates
The Fed's monetary policy works through the
market for reserves and involves the federal funds
rate. A change in the reserves market will trigger
a chain of events that affect other short- term
interest rates, foreign exchange rates, long-term
interest rates, the amount of money and credit in
the economy, even levels of employment, output,
and prices. For example, if the Federal Reserve
reduces the supply of reserves, the resulting
increase in the federal funds rate tends to spread
quickly to other short- term market interest
rates, such as those on Treasury bills and
commercial paper. Because interest rates paid on
many deposits in the money stock adjust only
slowly, holding balances in money (in a form
counted in the money stock) becomes less
attractive. As investors pursue higher yields
available in the market (for example, on Treasury
bills), the money stock declines. Moreover, as
bank reserves and deposits shrink, the amount of
money available for general lending may also
decline.
Bank Supervision
The Federal Reserve also plays a major
role in the supervision and regulation of the
U.S. banking system. The Fed's supervisory
responsibilities extend to all national banks,
which by law are automatically members of the
Reserve System, the roughly 1,000 state banks
that are members of the Federal Reserve System,
all bank holding companies, the foreign
activities of member banks, the U.S. activities
of foreign banks, and Edge Act and agreement
corporations (institutions that engage in a
foreign banking business). One member of the BoG
serves as the Fed's representative to the
Federal Financial Institutions Examination
Council (FFIEC), which is responsible for
coordinating, at the federal level, examinations
of depository institutions and related policies.
International Responsibilities
The Fed Chairman has formal responsibilities in
the international arena. He is the alternate U.S.
member of the Board of Governors of the
International Monetary Fund, a member of the board
of the Bank for International Settlements (BIS),
and a member, along with the heads of other
relevant U.S. agencies and departments, of the
National Advisory Council on International
Monetary and Financial Policies. Fed staff
represent U.S. and Fed interests at meetings at
the BIS in Basle and at the Organisation for
Economic Co-operation and Development in Paris.
The Chairman is also a member of U.S. delegations
to key international meetings, such as those of
the finance ministers and central bank governors
of the seven largest industrial countries-the
Group of Seven, or G7.
Federal Reserve Banks
A network of twelve Federal Reserve Banks and
their twenty-five Branches operates a nationwide
payments system, distributes the nation's currency
and coin, supervises and regulates member banks
and bank holding companies, and serves as banker
for the U.S. Treasury. All U.S. currency carries
the letter and number designation of the Reserve
Bank that first puts it into circulation. Each
Reserve Bank acts as a central depository for the
banks in its own District. The income of the
Federal Reserve System is derived primarily from
the interest on U.S. government securities that it
has acquired through open market operations. Other
major sources of income are the interest on
foreign currency investments held by the System;
interest on loans to depository institutions (the
rate on which is the so-called discount rate); and
fees received for services provided to depository
institutions, such as check clearing, funds
transfers, and automated clearinghouse operations.
The twelve Federal Reserve Banks are privately
owned through stocks by member banks. Stockholders
and the BoG choose the leadership of the Reserve
Banks. Theoretically the Reserve Banks have
unlimited access to U.S. securities for use in
emergencies. They are accountable to the BoG and
in a more limited way to a Congressional Oversight
Committee.
Member Banks of the Fed System
U.S. banks can be divided into three
types according to which governmental body
charters them and whether or not they are
members of the Federal Reserve System. Those
chartered by the federal government (through the
Office of the Comptroller of the Currency in the
Department of the Treasury) are national banks;
by law, they are members of the Federal Reserve
System. Banks chartered by the states are
divided into those that are members of the
Federal Reserve System (state member banks) and
those that are not (state non-member banks).
State banks are not required to join the Federal
Reserve System, but they may elect to become
members if they meet the standards set by the
BoG. At the end of 1993, 4,338 banks were
members of the Federal Reserve System -- 3,360
national banks and 978 state banks -- out of 11,212
commercial banks nationwide.
Payment System
The U.S. payments system is the largest in the
world. Each year billions of transactions, valued
in the trillions of dollars, are conducted between
payers (purchasers of goods, services, or
financial assets) and payees (sellers of goods,
services, or financial assets). The Fed is an
active intermediary in clearing and settling
interbank payments. The Fed Banks play this role
because they maintain reserve or clearing accounts
for the majority of depository institutions. They
can settle payment transactions by debiting the
accounts of the depository institutions making
payments and by crediting the accounts of
depository institutions receiving payments. The
Reserve Banks, as the mandated central bank, are
immune from liquidity problems (not having
sufficient funds to complete payment transactions)
and credit problems. Payments received in accounts
maintained at the Federal Reserve are free of
liquidity and default risk. For depository
institutions, the Fed Banks maintain reserve and
clearing accounts and provide various payment
services including collecting checks,
electronically transferring funds, and
distributing and receiving currency and coin. For
the federal government, they act as fiscal agents,
maintaining the U.S. Treasury Department's
transaction account, paying Treasury checks,
processing electronic payments, and issuing,
transferring and redeeming U.S. government
securities. The Fed Banks also perform numerous
specialized services for the federal government
and its agencies, such as redeeming food coupons
and monitoring special accounts -- Treasury tax and
loan accounts -- in which tax receipts are held until
the Treasury needs funds to make payments.
Providing Guarantees to the Largest Banks
The Fed's direct and ongoing participation in the
operation of the payments system lessens the risks
for individual banks. For example, the Fed's final
and irrevocable Fedwire funds transfer service
reduces the risk that failure of one institution
could be transmitted rapidly to other
institutions. One of the most controversial and
powerful weapons of the Fed is to provide
emergency funds to U.S. financial institutions in
trouble such as the billions of dollars loaned to
the Long-term Capital Management hedge fund in
1998. The Fed states that this is necessary to
"ensure that the inability of a depository
institution to make or process payments will not
trigger its insolvency and that the institution's
problems can be resolved in an orderly fashion
with minimum disruptive effects." This ability to
furnish large amounts of capital in emergencies
has long been a major weapon in the hands of those
wielding influence at the Fed.
Providing Currency and Coins
The Federal Reserve, the nation's central bank,
distributes, processes, and accounts for U.S.
currency and coin in the United States and abroad.
The Federal Reserve Act delegates the Fed "to
furnish an elastic currency," or to ensure that
there is enough currency and coin to meet demand.
According to the U.S. Constitution, Article I,
Section 8, the Congress has the power "to coin
Money, regulate the Value thereof, and of foreign
Coin, and fix the Standard of Weights and
Measures." In 1913, the Congress delegated this
authority to the Fed, a private institution
controlled by the financial oligarchy. The thirty-seven Federal Reserve Bank cash offices provide
cash services to more than 9,600 of the 22,000
banks, savings and loans, and credit unions in the
United States. The remaining depository
institutions obtain currency and coin from
correspondent banks rather than directly from the
Federal Reserve. The amount of currency in
circulation as cash is a decision of the Fed.
Domestic demand largely results from the use of
currency in transactions and is influenced
primarily by prices for goods and services, income
levels, and the availability of alternative
payment methods. International demand for U.S.
currency is high due to neo-liberal globalisation
and the annexation of other economies by the U.S.
Recent estimates show that about two-thirds of the
value of currency in circulation is held abroad.
Currency and Coin
Ninety-nine per cent of U.S. currency in
circulation is composed of Federal Reserve notes;
the remainder is composed of United States notes,
national bank notes, and silver certificates, all
of which remain legal tender. Each year the Fed
determines the need for new currency and submits a
print order to the Treasury's Bureau of Engraving
and Printing (BEP). Typically, most of the newly
printed currency replaces currency destroyed by
the Reserve Banks because it is unfit for further
circulation. The remainder is printed to meet Fed
increases in the amount of currency in circulation
if any. The Federal Reserve pays the BEP the cost
of printing new currency and arranges and pays the
cost of transporting the currency from the BEP
facilities in Washington, D.C., and Fort Worth,
Texas, to the Federal Reserve cash offices across
the country. Before the Reserve Banks issue
currency to the banking system, the currency must
be secured by legally authorized collateral, most
of which is in the form of U.S. Treasury and
federal agency securities held by the Reserve
Banks. The notes are a first lien on the assets of
the issuing Reserve Bank and are obligations of
the U.S. government. The Federal Reserve System
pays the Bureau of Engraving and Printing only for
the cost of printing the notes. The Fed
distributes a large amount of currency to overseas
markets through its Extended Custodial Inventory
(ECI) program, which was established in 1996 to
introduce the Series-1996 $100 notes to the
international community. ECI locations are
selected overseas depository institutions that
hold U.S. currency in their vaults but carry the
inventory on the books of the Federal Reserve Bank
of New York.
From 1990 to 2001, the number of Federal Reserve
notes in circulation increased 61.6 per cent,
which represents an average annual growth rate of
3.8 per cent. Over the past several decades, the
value of currency in circulation has risen
dramatically -- from $31.2 billion in 1955 to $365.3
billion in 1993. The total number of notes in
circulation (15.5 billion at the end of 1993) and
the demand for larger denominations ($20, $50, and
$100 notes) have also increased.
The Federal Reserve's role in coin operations is
more limited than its role in currency. The U.S.
Mint determines the annual coin production and
monitors the Federal Reserve coin inventories
weekly to identify trends in coin demand.
Federal Reserve Accounting for Currency and Coin
Federal Reserve notes are liabilities on the
Fed's balance sheet. The Fed pledges collateral,
usually U.S. Treasury securities, equal to the
face value of currency in circulation. As payments
to and receipts from depository institutions
change the value of currency in circulation on a
daily basis, the Fed ensures that the currency in
circulation is fully collateralised. When a
Reserve Bank makes a currency payment to a
depository institution, the Reserve Bank charges
the depository institution's account (or the
account of the bank that acts as the settlement
agent) for the amount of the order. Similarly,
when a depository institution returns excess
currency to a Federal Reserve Bank, it receives a
corresponding credit to its account.
Unlike currency, coin is represented on the
Federal Reserve's balance sheet as an asset. Coin
is a direct obligation of the U.S. Treasury; the
Fed buys coin from the Mint at face value. When a
depository institution orders and deposits coin,
its Reserve Bank adjusts the institution's account
accordingly.
Non-Cash Transactions
Checks continue to account for the
largest share of non-cash payments by number
(about 90 per cent in 1993) but for a minor
share in terms of value (less than 4 per cent).
Fedwire funds transfers, in contrast, accounted
for less than 1 per cent of the number of
non-cash transactions processed by the Federal
Reserve in 1993 but nearly 55 per cent of the
value.
In 1993, an estimated 59 billion checks were
written in the United States. The Fed collected 19
billion checks with a value of $14.1 trillion.
Also in 1993, the Fed, acting as fiscal agent for
the U.S. Treasury, paid 480 million checks and 192
million postal money orders.
Federal Reserve Automated Clearinghouse
Operations
The automated clearinghouse (ACH) is a nationwide
mechanism that processes electronically originated
batches of credit and debit transfers. ACH credit
transfers include direct deposit payroll payments
and payments to contractors and vendors. ACH debit
transfers include consumer payments on insurance
premiums, mortgage loans, and other kinds of
bills. Debit transfers also include new
applications such as the point-of-sale (POS)
check conversion pilot program. The Federal
Reserve Banks are collectively the nation's
largest automated clearinghouse operator and in
2000 processed more than 80 per cent of commercial
interbank ACH transactions.
Fedwire Funds Transfers
The Fedwire funds transfer system is a real-time
gross settlement system in which more than 9,000
depository institutions initiate funds transfers
that are immediate, final, and irrevocable when
processed. Depository institutions that maintain a
reserve or clearing account with a Federal Reserve
Bank may use Fedwire to send payments to, or
receive payments from, other account holders
directly. Through the Fedwire service, depository
institutions typically transfer large dollar
payments (the average value of a Fedwire transfer
in 1993 was approximately $3 million). Depository
institutions generally use the ACH for
small-dollar payments. In 1993, the Reserve Banks
processed 70 million Fedwire payments having a
total value of $208 trillion. When the Fed
processes a funds transfer, it electronically
debits the account of the sending institution and
credits the account of the receiving institution.
The Fed guarantees the payment to the bank
receiving the transfer and assumes any risk if the
bank sending the payment has insufficient funds in
its Fed account to complete the transfer.
Fedwire also allows depository institutions to
transfer the ownership of U.S. Treasury securities
and the securities of various federal agencies,
such as the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation,
for themselves and for their customers. Most of
these securities are held in safekeeping by the
Reserve Banks as book entries (as electronic
records of securities holdings rather than as
paper certificates). The Federal Reserve Banks
safekeep and transfer U.S. government securities
in their capacity as fiscal agents for the U.S.
Treasury. They carry out these functions for
government agencies as a service to depository
institutions. In 1993, 12.7 million book-entry
securities transfers with a value of $154 trillion
were transferred using Fedwire.
When the Fed receives a request to transfer a
security, it determines that the security is held
in safekeeping for the institution requesting the
transfer and withdraws the security from the
institution's safekeeping account. It then
electronically credits the proceeds of the sale to
the account of the depository institution,
deposits the book-entry security into the
safekeeping account of the receiving institution,
and electronically debits that institution's
account for the purchase price. The Fed guarantees
payments to institutions sending book-entry
securities transfers.
Fiscal Agency Functions
As fiscal agents of the United States, the
Federal Reserve Banks function as the federal
government's bank and perform several services for
the U.S. Treasury. These services include the
following:
- Maintaining the
Treasury's funds account
- Clearing Treasury checks drawn on that account
- Conducting nationwide auctions of Treasury
securities
- Issuing, servicing, and redeeming Treasury
securities
Federal Reserve Banks also perform fiscal agency
services for various federal and federally
sponsored agencies. One service performed by the
Reserve Banks on behalf of the Treasury is the
daily monitoring of federal tax receipts. Taxes
paid by businesses and individuals flow into
special, interest-earning accounts, called
Treasury tax and loan (TT&L) accounts, at more
than 12,000 depository institutions (TT&L
depositaries) nationwide. The TT&L
depositaries accept tax payments directly from
employers and individuals and report the amount
received to a Fed office.
The Reserve Banks also handle the weekly,
monthly, and quarterly auctions of Treasury
securities, through which the Treasury raises
money to finance government spending and to
refinance the national debt. The Reserve Banks
announce the sales, accept the bids (called
tenders), communicate the bids to the Treasury,
issue the securities in book- entry form once the
Treasury has chosen the successful bids, collect
payment from the successful bidders, and deposit
the money in the Treasury's funds account at the
Fed. The Federal Reserve Banks provide another
unique securities service for the Treasury: They
maintain a separate safekeeping system, called
Treasury Direct, which holds book- entry Treasury
securities purchased by individuals who wish to
hold their securities directly with the Treasury
instead of with a depository institution. At
year-end 1993, 1.2 million investor accounts were
maintained on the Treasury Direct system, and the
securities holdings had a par value of more than
$60 billion. The Federal Reserve Banks also issue,
service, and redeem tens of millions of U.S.
savings bonds each year on behalf of the Treasury.
As authorized by the Treasury, they also qualify
depository institution and corporations as issuing
agents and paying agents for savings bonds.
The federal government disburses funds to the
public from the account it maintains with the Fed.
These disbursements can be made as Fedwire funds
transfers, ACH payments, or checks. Fedwire
disbursements are typically associated with, but
not limited to, the redemption of Treasury
securities. Certain recurring payments, such as
social security benefits and government employee
salaries, are increasingly processed by the ACH
and electronically deposited directly to the
recipients' accounts at their depository
institutions. Other government payments, such as
income tax refunds, are usually made using
Treasury checks drawn on the Treasury's funds
account at the Federal Reserve.
International Services
As the central bank of the United States, the Fed
performs services for foreign central banks and
for international organizations, such as the
International Monetary Fund, the World Bank, and
the Bank for International Settlements. The
Federal Reserve Bank of New York generally
provides these services. At the Federal Reserve
Bank of New York, a foreign official institution
can establish a non-interest-bearing funds account
(in U.S. dollars), safekeeping accounts for
book-entry and definitive securities, and an
account for safekeeping gold.
The following charts
and comments are from: Federal Reserve Directors:
A Study of Corporate and Banking Influence --
Published 1976; and from, Federal Reserve
Directors: A Study of Corporate and Banking
Influence -- Published 1983.
Chart 1
Source: "Federal Reserve Directors: A Study of
Corporate and Banking Influence"-- Published 1976 (Click on image to enlarge)
Chart 1 reveals the linear connection between the
Rothschilds and the Bank of England, and the
London banking houses which ultimately control the
Federal Reserve Banks through their stockholdings
of bank stock and their subsidiary firms in New
York. The two principal Rothschild representatives
in New York, J. P. Morgan Co., and Kuhn, Loeb
& Co. were the firms which set up the Jekyll
Island Conference at which the Federal Reserve Act
was drafted, who directed the subsequent
successful campaign to have the plan enacted into
law by Congress, and who purchased the controlling
amounts of stock in the Federal Reserve Bank of
New York in 1914. These firms had their principal
officers appointed to the Federal Reserve Board of
Governors and the Federal Advisory Council in
1914. In 1914 a few families (blood or business
related) owning controlling stock in existing
banks (such as in New York City) caused those
banks to purchase controlling shares in the
Federal Reserve regional banks. Examination of the
charts and text in the House Banking Committee
Staff Report of August, 1976 and the current
stockholders list of the 12 regional Federal
Reserve Banks show this same family control.
Chart 2 
Source: "Federal Reserve Directors: A Study of
Corporate and Banking Influence" -- Published 1983 (Click on image to enlarge)
The J. Henry Schroder Banking Company chart
encompasses the entire history of the twentieth
century, embracing as it does the program (Belgium
Relief Commission) which provisioned Germany from
1915-1918 and dissuaded Germany from seeking peace
in 1916; financing Hitler in 1933 so as to make a
Second World War possible; backing the
Presidential campaign of Herbert Hoover; and even
at the present time, having two of its major
executives of its subsidiary firm, Bechtel
Corporation serving as Secretary of Defense and
Secretary of State in the Reagan Administration.
The head of the Bank of England since 1973, Sir
Gordon Richardson, Governor of the Bank of England
(controlled by the House of Rothschild) was
chairman of J. Henry Schroder Wagg and Company of
London from 1963-72, and director of J. Henry
Schroder, New York and Schroder Banking
Corporation, New York, as well as Lloyd's Bank of
London, and Rolls Royce. He maintains a residence
on Sutton Place in New York City, and as head of
"The London Connection," can be said to be the
single most influential banker in the world.
Chart 3
 Source:
"Federal Reserve Directors: A Study of Corporate
and Banking Influence" --
Published 1976 (click on image to enlarge)
The David Rockefeller chart shows the link
between the Federal Reserve Bank of New York,
Standard Oil of Indiana, General Motors and Allied
Chemical Corporation (Eugene Meyer family) and
Equitable Life (J. P. Morgan). Chart 4
Source: "Federal Reserve Directors: A
Study of
Corporate and Banking Influence"
-- Published 1976
This chart shows the interlocks between the
Federal Reserve Bank of New York J. Henry Schroder
Banking Corp., J. Henry Schroder Trust Co.,
Rockefeller Center, Inc., Equitable Life Assurance
Society ( J.P. Morgan), and the Federal Reserve
Bank of Boston.
Chart 5
Source: "Federal Reserve Directors: A
Study of
Corporate and Banking Influence"
-- Published 1976
This chart shows the link between the Federal
Reserve Bank of New York, Brown Brothers Harriman,
Sun Life Assurance Co. (N.M. Rothschild and Sons),
and the Rockefeller Foundation.
(To access articles
individually click on the black headline.)
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