October 30, 2025 | How a Fed Overhaul Could Eliminate the Federal Debt Crisis, Part II: Curbing Fed Independence

from ScheerPost

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.

Ellen Brown October 30th, 2025

Posted In: Web of Debt

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