Chapter Six The Federal Government declares the Federal Reserve Privately Owned

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The Federal Government declares the

Federal Reserve Privately Owned

Fed sets own budget

Fed was never audited

Politicians and Big Business

Object to Fed Audit

Social Security Largest Economic

Fiasco In History

Eighteen Trillion Debt Can the System Live ?

What well known people say
about the Social Security Trust Fund

Excerpts of the Privacy Act

Chapter Six

Federal Court Declared Fed Is Privately Owned B8

Fed Owned By Mega bankers-Establishment Comes Clean 89

Fed Sets Own Budget 90

Control Of Money Spells People Control 91

Bank Exempt From Audit 9P

Rockefeller's Allies Battle Proposed Audit 93 A Bill Making The Twelve Federal Reserve Districts

The Property Of The American People 9 i

Fed Is Not Being Audited 95

Famous Critics Of The Fed 96 Social Security Shown To Be The Largest Economic

Fiasco In History 9"

The Cover Up-Even Dukakis Was Fooled 9;

The Hidden Numbers Game 9 7

$18,000,000,000,000.00, Give Or Take A Trillion 99

Hollings: "i want a divorce"

After The Cover-Up: The Scandal 99

Can The System Live? 99

Excerpts From The Privacy Act ' n

Here's What Well Known People Are Saying About The Social Security Trust Fund:

Federal Court Declared

Fed is Privately Owned

James Townsend is chairman of Redeem Our Country (ROC), the purpose of which is to abolish the Federal Reserve System, P.O. Box 333, Fullerton, Calif, 92632. He also is editor and publisher of the "National Educator," from which this article is excerpted.


The Federal Reserve banks are privately owned, locally controlled, separate corporations. Who says so? In "Lewis vs. United States, the Ninth Circuit Court says so.

This, after years of senators, and members of the House of Representatives denying the Federal Reserve banks were privately owned, the Ninth Circuit Court has finally, officially, given the lie to the scam imposed on the people of this nation 70 years ago.

The court's decision has vast implications. Now that the bankers' hoax has been legally exposed, what impact will it have on the paper issued as Federal Reserve notes?

As private bankers, it would appear they have no more right to issue and circulate their paper than does the local counterfeiter. In fact, if one could choose between the two, the local counterfeiter would be the one chosen, because he charges no interest on his paper.

The Federal Reserve counterfeiter not only distributes worthless paper, he collects interest by loaning it into circulation.

The court decision has been known for more than three months, but the kept media has been as quiet as a mouse.

Neither the printer nor electronic media has found it newsworthy, even though the ramifications will be mind-boggling.

Key members of the two houses of Congress were advised of the court findings, but, the public has not heard even a '- peep from the guardians of the public welfare. In fact, no one will admit to knowing anything about it. But they do know, and the question is, "What are they going to do about it?"


There are so many things that come to mind when one realizes the Federal Reserve banks have been operating un-Constitutionally for all these years that it staggers the imagination. What about homes the Federal Reserve member ,_ banks have foreclosed?

What about the interest the United States has been paying on foreign loans negotiated by these same private bankers? Is this not a gift of the people's funds?

What about the interest the Federal Reserve banks now collect on the national debt? Would that not be declared illegal under the circuit court decision?


Below, for the benefit of our readers, we are reprinting the main part of the Ninth Circuit Court's findings:

Examining the organization and function of the Federal Reserve banks, and applying the relevant factors, we conclude that the Reserve banks are not federal instrumentalities for purposes of the Federal Torts Claim Act, but are independent, privately owned and locally controlled corporations.

Each Federal Reserve bank is a separate corporation owned by commercial banks in its region. The stock holding commercial banks elect two thirds of each bank's nine-member board of directors. The remaining three directors are appointed by the Federal Reserve Board.

The Federal Reserve Board regulates the Reserve banks, but direct supervision and control of each bank is exercised by its board of directors (See 12 USC 301.) The "United States vs. Orleans," 425 US 807, 96 SCt 1971, 48 LEd 2d 390 (1976), the Supreme Court held that a community action agency was not a federal agency or instrumentality for purposes of the act, even though the agency was organized under federal regulations and heavily funded by the federal government.

Because the agency's day-to-day operation was not supervised by the federal government, but by local officials, the court refused to extend federal tort liability for the [negligence] of the agency's employees. Similarly, the Federal Reserve banks, though heavily regulated, are locally controlled by their member banks.

Unlike typical federal agencies, each bank is empowered to hire and fire employees at will. Bank employees do not participate in the Civil Service Retirement System. They are covered by worker's compensation insurance, purchased by the bank, rather than the Federal Employees Compensation Act.

Employees traveling on bank business are not subject to federal travel regulations and do not receive government employee discounts on lodging and services.


There you have it. The high-biding, swindling Federal Reserve banks are just what we have for years said they were: private corporations which have bankrupted the nation.

We now owe a bigger debt than the total net worth of the country. We pay this privileged and pampered class of counterfeiters almost 20 cents of every tax dollar collected--and it's going up.

As Thomas Edison said, "It's foolish to say we can issue a bond that is good, but not a dollar bill."

The time has come to return to a Constitutional money system that puts into circulation a debt-free dollar. Debt-free money would save the Social Security System and put millions of unemployed workers back to work.

Fed Owned by Megabankers Establishment Comes Clean

VINCE RYAN... Chairman of the Board.

The influential Washington Post--America's newspaper of political record--has candidly admitted that the megabanks that make up the Federal Reserve System are privately owned. This is perhaps the first time this fact has been acknowledged by an Establishment newspaper.

Invariably, until now, when the Fed is discussed in any of the Establishment's controlled newspapers, magazines or journals (or in any of the broadcast media), the privately owned and operated Federal Reserve banks are characterized as "federal" entities. As demonstrated in the pages of this special report on the Fed, they are not federal, however, The Federal Reserve banks are private entities. That the Post has acknowledged this is indeed significant.

This admission appeared in an article published October 3, 1989 as part of the Post's regular feature "The Federal Page," reporting on Congress and the bureaucracy.

Interestingly the article did not focus on the ownership of the Federal Reserve banks. The reference to the private nature of the Fed was buried within the closing paragraphs of an article that detailed a new pay hike for the employees of the Federal Reserve System's Board of Governors.

The board is the seven-member, presidentially appointed body that governs the affairs of the Federal Reserve System, and thus of the nation's economy. (It is in this sense only that the Fed is actually federal.)

The Federal Reserve System is composed of the heads of the 12 privately-owned regional Federal Reserve banks, dominated by the influential Federal Reserve Bank of New York which is largely under the control of the Rockefeller family and their corporate allies.


The article noted that under the direction of Alan Greenspan, chairman of he board of governors, the Fed has set in place a new pay schedule "to meet competition from the private sector for key senior workers."

Incredibly enough, Congress has no say whatsoever regarding in-house Fed pay hikes--this being part and parcel of the Fed's vaunted "independent" status--and, it might be added, immunity--from independent, outside audits of its internal spending and the monetary policies it conducts.

The Fed, in fact, is authorized to set any pay schedule it wishes; that is, free to spend the taxpayer's dollars at will. In the past, though, the Fed has generally followed civil service pay schedules.

Under the latest pay hike, set to go into effect immediately, current salaries within the Fed system range from $11,614 a year to $85,000 for employees who are impositions below that of board officers. Salaries for board officers (on seven different levels) range from $62,200 to $140,000, the latter figure itself considerably higher than the salary of $89,500 paid to the chairman of the Fed's board of governors.

(The six remaining board members receive $82,500 a year--a salary, like that of the chairman's, that is set by law. A PRIVATE CORPORATION

However, as the Post noted in the intriguing paragraph in question (revealing the private nature of the Fed), "The new pay schedule, which covers all 1,500 board employees, is not quite as high as those in effect in the private sector or at the Federal Reserve Bank of New York, which like the 11 other regional Federal Reserve banks, technically is a private corporation free to set pay as it wishes, according to a board spokesman." (Emphasis added.)

It is appropriate that this revelation would appear in the pages of the Post. After all, it was none other than the Post's founder, financier and Wall Street money wizard, Eugene Meyer, who was one of the early members of the Federal Reserve System's board of governors.

'The Fed isn't afraid to admit in the pages of a friendly newspaper like the Post that it's really a private entity," says Vince Ryan, chairman of the Board of Policy of Liberty Lobby, the populist institution that is spearheading the fight on Capitol Hill to audit the Fed.

"After all," said Ryan, 'The Post is a reliable voice that primarily functions as an 'in-house' journal for the Washington Establishment.

Ryan encourages citizens to continue in their efforts to convince members of Congress to sign on as cosponsors of current legislation which would mandate regular congressionally supervised audits of the Fed as well as other reforms that would bring the Fed under the control of Congress and the American people.

Fed Sets Own Budget

The Federal Reserve System sets its own budget. Congress has absolutely no control over the manner in which the privately owned financial monopoly spends its money.

(Cynics might say that's all well and good in the best spirit of free enterprise. But on the other hand, it might be noted that there's no spirit of free enterprise as far as the Fed is concerned. The Fed represents monopoly finance capitalism at its worst.)

According to a classified report prepared for the Joint Economic Committee of Congress in 1984, the Fed earned more than $16.5 billion, but it kept $1 billion for its own expenses.

'The Fed each year spends over $1 billion of the taxpayers' money with no guidance or direction from any elected body," said the report.

It concludes that the Fed is a branch of government and, as such, should be brought into the congressional appropriations process, that its spending should be determined by the elected representatives of the taxpayers whose money it is appropriating--or misappropriating as the case may be.

Here the report echoes the myth promulgated by the Fed itself; that the megabankers' monopoly is a government agency. Instead, a federal court has ruled that the Fed is, as many Americans now know full well, a privately owned, privately controlled money system.

In any event, if the Fed were, in fact, a government agency, which it so clearly is not, that is all the more reason why it should be audited, particularly its monetary policies, and why its budget should be subject to congressional oversight.

If Congress had any guts, it would do something about it!

Control of Money
spells People Control

The Federal Reserve regulates America's federally chartered banks and controls the nation's flow of money. Its executives are a seven-member board of governors and presidents of the 12 Federal Reserve Banks. About every six weeks, the governors meet with the president of the New York Fed and presidents of four other regional banks, who serve one-year rotating terms, to determine the nation's monetary policy.

The Federal Reserve Board regulates the U.S. money supply by:

Changing the "discount rate," the interest rate at which banks can borrow from the Federal Reserve. Ordering banks to hold larger money reserves, thereby restricting money supply to the public. Ordering banks to sell government securities, which drains the banks' available lending reserves. Buying government securities from banks, thereby increasing the banks' lending reserve.

Two Measures Recommended to Bring Banks Into Line

While serving in Congress, then-Rep. Jerry Voorhis recommended two measures that could be adopted that would bring the Federal Reserve System into line and make it accountable to Congress and the American people.

According to Voorhis: 'The Federal Reserve banks should become the property of the American people, and they should be operated as one central bank of issue under a specific mandate passed by the Congress. Their sole purpose should be to serve the general welfare of all the American people, their agriculture, commerce and industry, by providing at all times a dollar of steady, stable and constant buying power."

Voorhis said that his proposal--that Congress buy the Fed from its private owners--rested on what he called "two utterly unassailable principles of justice and good government:

'That the power of original creation of money is an inalienable right of government and cannot be delegated away to any private agencies without violating the fundamental sovereignty of a nation.

"And that whatever profit or advantages come about from the original creation of any volume of the medium of exchange--whether by coinage or printing of money or by expansion of credit--should always accrue to the people generally and never to any privileged or selected group of them."

Voorhis said that adoption of the measures he proposed would result in the following:

The Fed could be required to maintain a low-interest rate policy, and the intolerable interest drain on the resources of agriculture, industry and individuals could be eased. Prices would come down sharply as a result. And employment, particularly in the home construction industry, would revive. What's more, he said, farming would be more profitable and less costly to conduct as a business enterprise.

Voorhis believed, additionally, that the Fed could be required to do the job it was originally conceived to do: accommodate he American economy through a proper monetary supply geared to economic growth, without an increase in the national debt.

"A property audited Fed," said Voorhis, "could be compelled to pay back the nations' treasury not part but all of the income the Fed derives by creating the nation's money. And as is the case for all other government agencies, the Fed's necessary expenses would be provided by congressional appropriation."

Furthermore, when the economy was in recession, the Fed could be required to purchase non-interest-bearing U.S. bonds to increase the money supply, thereby cutting what Voorhis called "the nefarious knot" that ties America's money supply to the never-ending increase In the national debt.

Voorhis also said that under a reformed money system (as proposed in his legislation), a government-controlled Fed could be required to institute selective credit regulations and, if more action were needed, to raise reserve requirements in the commercial banks.

According to Voorhis, "A privately owned central bank of issue [such as the Fed] is as bad or worse than no central bank at all."


Bank Exempt From Audit

The banking committee of the American Institute of Certified Public Accountants (AICPA) has put together a 198-page book of requirements and guidelines for its member CPAs to use for auditing banks.

But the biggest and most powerful banking monopoly in the United States--the Federal Reserve System--goes unaudited by Congress.

The highest standards of the accounting profession are totally abandoned. The Fed--which controls America's monetary policies--is permitted--by law--to operate in secret, free from outside interference or oversight of any kind.

Even Congress--representing the American taxpayers--is denied oversight of the Fed, particularly as far as its monetary policies are concerned. (See accompanying stories.)

And when the Fed is audited, it's strictly an "in-house" audit. The Fed reports to the public only what the Fed wants the public to know.

What is most amazing about the Fed's independence is made all the more striking when one considers the way in which the AICPA describes the Fed: "The Federal Reserve System serves as a bank for banks."

Yet this "bank for banks" goes unaudited.

Here, according to the AICPA, are just "some of the more important functions" of this "bank for banks" that goes unaudited.

The power to:

Act as fiscal agent, legal depository and custodian of funds for the U.S. government. Regulate the money supply.

Hold legal reserves of banks and other depository institutions. Provide wire transfers of funds.

Facilitate clearance and collection of checks.

Examine and supervise state-chartered member banks.

Examine and supervise bank holding companies and non-banking affiliates. Collect and interpret economic data regarding credit.

And what's more, each bank that participates in the Federal Reserve System (and that's virtually every bank in the United States) is required by law to maintain a percentage of its deposits in reserve with the Federal Reserve bank in the bank's district.

In short, the Fed maintains a strangle-hold on the banking and money system in this country. Every business, bank and taxpayer in this country is subject to professional auditing--except for the bankers' bank. The Fed goes unaudited.

Rockefeller Allies Battled

Proposed Audit

In 1973, then- Federal Reserve Board Chairman
Arthur Bums launched a lobby campaign against
a proposed audit of the Fed.

One major effort to audit the Federal Reserve System was thwarted by the global corporate empire of the Rockefeller family and the Rockefeller-influenced Business Roundtable, a major lobbying institution that came to the Fed's aid.

David Rockefeller--then and now--was titular head of the Rockefeller family's international money machine and served not only as chairman of the board of the Chase Manhattan Bank, but also as a director of the New York branch of the Federal Reserve and as a member of the Business Roundtable's 40-member policy committee.

It was in 1973 that then-Rep. Wright Patman (D-Texas) sponsored legislation (similar to current legislation being offered in the House and the Senate) that would have required the Fed to submit to regular audits by the congressional General Accounting Office.

Patman soon discovered that a barrage of telegrams opposing his legislation began to inundate Congress. "We just couldn't understand why some of those companies were bothering about a bill that was so far out of their bailiwick," said Patman, nothing that top officials of firms like American Metal Climax Inc., Caterpillar Tractor Corp. and Crown Zellerbach Corp. opposed his bill to audit the Fed.

After some investigation, Patman found that the powerful Business Roundtable--one of Capitol Hill's well-heeled "super lobbies"--had launched a campaign to undermine his bill and that the aforementioned companies or their parent corporations were members of the organization.

Patman also determined that it was none other than Federal Reserve Board Chairman Arthur Burns who had urged at least one influential New York financier to start the lobbying effort against the legislation.

[Not surprisingly Bums shared, with David Rockefeller and other major leaders of the Business Roundtable, membership in the Rockefeller-funded and Rockefeller-controlled Council on Foreign Relations, an internationally oriented think tank and pressure group that promotes policies beneficial to the powerful interests which created and control it.]

The Texas populist looked into the background of the Business Roundtable and found major links with the Federal Reserve. Patman discovered that the Business Roundtable, at that time, listed as its members 20 percent of the directors of the Federal Reserve System's 12 district banks.

He found that 23 of the 108 directors of the Fed's banks had connections with the organization.

According to Patman: "This pressure group has managed to put officers and directors of its member corporations all through the system. In many instances, the Business Roundtable and the Federal Reserve are one and the same--honey-combed with interlocking personnel."

Patman's bill was shot down in 1973, but he continued to press for a congressional audit of the Fed. Said Patman, "The newspapers continue to be filled with stories about problem banks, severe regulatory problems, and the Congress sits here and twiddles its thumbs.

"We don't even have the most basic information about what the Fed does, and that is because the lobbyists continue to prevail on these audit proposals."

The late law-maker would be pleased by the ongoing drive to audit the Fed which is supported by Liberty Lobby, the Washington-based populist institution, and backed by a growing grassroots government across the country. We need to continue the fight. After all, there are more of us than them. We must be better organized. We can win if everyone will get involved.

A Bill for Making the Twelve Federal Reserve Banks
the Property of the American People

Be it enacted, that (a) the Secretary of the Treasury of the United States is hereby authorized and directed forthwith to purchase the capital stock of the 12 Federal Reserve banks, and branches and agencies thereof, and to pay to the owners thereof the par value of such stock at the date of purchase; and (b) All member banks of the Federal Reserve System are hereby required and directed to deliver forthwith to the Treasurer of the United States, by the execution and delivery of such documents as may be prescribed by the Secretary of the Treasury, all the stock of said Federal Reserve banks owned or controlled by then, together with all claims of any kind or nature and to the capital assets of the said Federal Reserve banks, it being the intention of this act to vest in the Government of the United States the absolute, complete, and unconditional ownership of the said Federal Reserve banks.

A Bill to Provide Funds for the Prosecution of the War and
to Relieve the American People of Unnecessary Interest Burden

Be it enacted by the Senate and the House of Representatives of the United States of America in Congress assembled, that the Secretary of the Treasury is hereby authorized and directed to issue non-interest-bearing certificates of indebtedness of the United States and the Board of Governors of the Federal System shall purchase for the Federal Reserve banks such certificates under the following terms and conditions.

(1) The amount of such certificates issued in each fiscal year shall be equal to the difference between total disbursements of the United States and the sum of (a) tax revenues and (b) the proceeds derived from sales of War Bonds to individuals.

(2) The Federal Reserve banks shall make payment for such certificates in the same manner as they have paid for interest-bearing obligations of the United States, namely, by entering upon their books reserve-bank credit in favor of the United States in amounts equal to the face value of the certificates purchased.

(3) Such certificates shall be evidence of a non-interest-bearing debt of the United States to the Federal Reserve banks and such debt shall be liquidated out of any surplus of revenues over expenditures of the United States Government which may arise in future years.

SEC. 2. No interest-bearing obligations of the United States shall be sold to any bank or financial institution except for cash.

This Bill Has Never Been Passed
But It Should Have Been

Don't Let Fed Friend Fool You: Fed Isn't Being Audited

Exclusive to the SPOTLIGHT

By Michael Collins Piper

Don't let defenders of the Fed fool you: The monetary policies of the baker-controlled Federal Reserve System are not currently subject to an audit by Congress.

In fact, there is an existing law which specifically prohibits the General Accounting Office (GAO)--the investigative arm of Congress--from auditing the Federal Reserve Board, the Federal Agency Council, the Federal Open Market Committee or Federal Reserve banks and their branches.

This law--Public Law 95-320, passed, in 1978--would be overturned if Congress enacted legislation that would require a GAO audit of the Fed.

EXEMPT from GAO Audit

Amazingly, as acknowledged by the Senate Committee on Governmental Affairs in 1978, the Fed and its affiliated agencies were, at that time--as indeed they are today--"the only exemptions to audit by the GAO," despite the fact that, "they are empowered to carry out functions crucial to our system of government and to our nation's economy."

FOREIGNER- connections cannot be investigated

According to PL 95-320, any audit of the Fed cannot include a review of its transactions with: foreign central banks; foreign governments; or non-private international financing organizations (e.g., the International Monetary Fund).

Also prohibited are audits of deliberations, decisions and actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit and interest on deposits.

Additionally, the law prohibits an audit of the Fed's Open Market operations (the very heart of the Fed, wherein the Fed creates money to buy government securities).

And as an added protection for the behind-the scenes power brokers at the Fed (and their career sponsors in the international banking community which controls the Fed), PL 95-320 prohibits an audit of "those portions of oral, written, telegraphic or telephone discussions and communications among or between members of the board of governors and officers and employees of the Federal Reserve System" which deal with the secretive areas prohibited from audit under the law, as outlined above.

In short, nothing to do with any phase of monetary policy as carried out by the Fed is subject to audit.

Defenders Board Fed say that the Federal Reserve Board must be able to "independently" conduct the nation's monetary policy, free from "political interference.

But while the independence of the Fed has long been used as a device to shield the Fed from congressional investigation, it is clear that an audit of the Fed's operations would not truly interfere with the Fed's current operations. What would be endangered, from the Fed's standpoint, thought, would be its ability to continue to function as it has.

Crane is convinced that if the Fed's operations come to light--under the auspices of a GAO audit--the American people will be so outraged at the way that the Fed conducts business, they'll demand an abolition of the Fed altogether.

One of Crane's former colleagues, ex-Rep. Ron Paul (R-Texas), summarized it best when he, too, called for an audit of the Fed. "I think," said Paul, 'It is time that the Congress and the American people found out exactly what the Fed is up to.

"Is there any Insider dealing based on the decisions the Fed makes in its secret meetings?" "What is the relationship between the Fed and foreign governments and international banks?"

"The sooner we find out, the better off we will be. The system deserves no more blind faith and support from the American people."

The Fed must be Completely Abolished - We Must Continue the Fight

Famous Critics of the Fed

Sen. BARRY GOLDWATER (R-Ariz): "Most Americans have no real understanding of the operation of the international moneylenders. The bankers want it that way. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and through its board of governors manipulates the credit of the United States."

WILLIAM JENNINGS BRYAN, Democratic Presidential candidate, 1886, 1890 and 1908: "The Federal Reserve Bank, which should have been the farmer's greatest protection, has become his greatest foe. The deflation of the farmer was a crime deliberately committed. In my long political career, the one thing I genuinely regret is my part in getting the banking and currency legislation enacted into law."

Rep. CHARLES A. LINDBERGH Sr. (R-Minn.): "The Federal Reserve Act establishes the most gigantic trust on Earth. When the president signs the bill, the invisible government by the monetary power will be legalized. The worst legislative crime of the ages is perpetrated by this bill. The party bosses have again operated and prevented the people from getting the benefits of their own government."

Rep. LOUIS T. McFADDEN (R-Pa): "We have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve banks. The Federal Reserve Board has cheated the government of the United States out of enough money to pay the national debt."

Sen. ROBERT M. LaFOLLETTE (R-Wis.): "The Federal Reserve is a scheme backed by powerful financial and business interests to secure stronger control upon the capital and credit of our country. It will work out great loss and harm

to the American people. By supporting passage of the Federal Reserve Act, President Woodrow Wilson has turned the money power over to the unrestrained fury of the Big Banking interests."

VINCENT J. RYAN, chairman of the Board of Policy of Liberty Lobby: "As long as the American people remain ignorant of the true origins and the real purpose of the fraudulent, phoney-money Federal Reserve System, they will never totally understand how the big banks and the special interests control this nation. An audit of the Fed is a first step toward the ultimate goal of returning the control of America's money system back to the hands of the people's elected representatives."

Rep. JOHN R. RARICK (D-La.): "Congress has abdicated Its responsibility. In 1913 the power to coin and regulate money was conferred on the Federal Reserve - a private banking monopoly - the experience of which should by now have proven the error of Congress and the wisdom of the Founding Fathers in placing money under the control of Congress and thereby, the people."

Rep. RON PAUL (R-Texas): "It would be nice to know how the Fed spends the $1 billion per year that are not returned to the United States Treasury. I have seen their marble palace uptown and heard about their caches of cash out in Virginia. But as Important as these things are, it is far more important that the Congress and the American people be provided with the results of an investigation of the essential operations of the Fed."

Washington State Sen. JACK METCALF (R): "Like most Americans, I believed the Federal Reserve was a part of the federal government. It is not. It is a federally chartered private banking corporation, which has by law - not by the

Constitution, but by law (i.e., statute-Ed.) - been given the power to control and issue the 'money' used in the United States. It does seem incredible, but the Federal Reserve has never been subject to an independent audit."

Chairman HENRY GONZALES (D-Texas) is continuing the fight for the Federal Reserve Audit.

Social Security Shown to be
Largest Economic Fiasco in History

Total Trust Fund Deficit Added Up for the First Time: $18 Trillion


By JAMES HENRY Feature Writer

FT. WORTH - Are you counting on Social Security to "get you through"? If so, you can stop counting. It's broke, and there is no way to fix it.

That's the word from here, where government watchdog Dr. Gary North blew the whistle today on the oft-repaired federal retirement and disability program. Catching the administration establishment by surprise, his announcement seems sure to shock the public and anger officials, who have worked hard through the years to convey the idea that the Social Security and Medicare trust funds carry a large surplus.

"Not so," says North, the prolific author of over thirty books. 'The various funds, including military and civil service pensions, have been systematically looted by every President since Lyndon Johnson in 1965. In fact, by law the Social Security Administration now is bound to turn over all unspent funds to the United States Treasury's general fund in exchange for a series of nearly worthless, non-negotiable IOUs from the Treasury Department. Treasury immediately spends these funds. So instead of a fat surplus, there is now a fat deficit that dwarfs any deficit in world history."

In the weeks and months ahead, two main scandals now appear likely to rock the Washington scene. First is the long-running cover-up of the fund's plight, which has created near total ignorance of the situation even at the highest levels of government. The second is the sheer size of the deficit, which has never been revealed until today.

The Cover Up: Even Dukakis was Fooled

Few United States representatives and senators are aware that the Social Security "surplus" is actually a gigantic future liability. Their staff, whose jobs depend on being familiar with the nuts and bolts of government, are usually better informed.

One former staffer, economist Louis Gasper, now relates a not-so-amusing story from his days with the Senate Finance Committee. A certain senator, it seems, could never fathom his staffers' casual references to the Social Security deficit. "Why do you keep trying to call a surplus a deficit?" he demanded over and over. "It's a surplus!" Repeated explanations never pierced the distinguished gentleman's intellect.

During the 1988 presidential debates, Gov. Michael Dukakis accused V.P. George Bush of plotting to raid the Social Security trust fund in order to pay government bills. The obvious implication of this is that even Dukakis didn't know the "raid" takes place every year.

The Hidden Numbers Game

How is it possible to conceal such a vast problem from the citizens of an open country?

The answer lies in party rivalry. Democrats regard Social Security as the "crown jewel" of their social legislation. If it were attacked, their jewel would dim. And they would find it harder to launch more big ticket programs.

And Republicans, as keepers of the administrative flame, do not wish to admit that the pillaging of America's retirement fund took place on their watch.

Consequently, the true numbers have never been added up clearly for mass publication. In fact, out of the thousands of federal publications issued each year, there are only three places where the Social Security fund gets reported as a debt, not an asset:

Table 6D of the United States Treasury's Monthly Treasury Statement of Receipts and Outlays. Winter Treasury Bulletin. The 1989 edition covers fiscal 1988. Liabilities are on page 165.

Statement of Liabilities and Other Financial Commitments of the United States Government. This is the fullest, most accurate report. By law, it must be published yearly; but to ensure that it remains virtually unread, it is now even typeset. In the past, it has been produced on a typewriter, then photostatted down to an illegible size and printed with no explanation of how to interpret it!

Although it is delivered to the entire Congress, probably only twenty or thirty people in Washington are really conversant with this report. Yet even here the numbers are not tallied. Each year it restates the startling disclaimer, "Because the various annuity programs have been computed on different actuarial bases and at varying valuation dates, a total has not been computed."

And therein lies the uniqueness of North's clarification of the total fund picture. Although he admits that his summing-up of the disparate figures may cause enough distortion to upset purists, he states flatly, with grim humor, "It's close enough for government work."

$18,000,000,000,000.00, Give or Take a Trillion

North claims to have added the numbers with all the fairness he can muster. The result is slightly over $18 trillion in future obligations: $15 + trillion for Social Security plus $3 trillion for the Civil Service Retirement program, Medicare/Medicaid, and the various military retirement programs.

This counts the official $2.8 trillion federal debt but nonetheless $8 trillion non-federal (state, etc.) debt of the huge personal and corporate debt figures.

Clearly, we have come a long way since 1965, when Lyndon Johnson made the decision to mix Social Security with the general fund in order to keep the Vietnam war and Great Society expenses from sending his budget deeply into the -, red.

These numbers are, of course, a far cry from any commonly discussed numbers in the media. As of today, the most loudly discussed fiscal figure in Washington is the $14 billion that Congress is desperately struggling to cut from the budget in order to meet the Gramm-Rudman-Hollings limits.

Hollings: "I Want a Divorce"

In the light of North's newly released book, Social Security: The Coming Implosion, the Gramm-Rudman-Hollings limits are also shown to be hollow at best, fraudulent at worst. Senator Hollings' recent reaction to the perversion of the landmark law that bears his name is "I want a divorce!" In other words, he now decries the bookkeeping rules that allow budget limits to be evaded simply by mixing in the Social Security surplus with the general fund deficit.

As the Late Sen. Everett Dirksen Might Have Said, NA Trillion
Here, A Trillion There - Pretty Soon You're Talking
About Big Money"

He is not alone in his regrets. United States Comptroller General Charles A. Bowsher has said, 'The rosy projections are not real numbers any more. The situation with the deficit is much worse than is being portrayed. We are adding $1 trillion every five years to the total deficit, and are digging a huge hold that will be very hard to get out of." (Ed. note: Since Bowsher spoke these words, the situation has deteriorated. We are adding $1 trillion every three and one-half years.)

Mr. Bowsher is also head of the Government Accounting Office, which is the closest thing we have to a watchdog agency for expenditures. It does not bite, of course, but now and then it growls a little. In an hour-long interview with The New York Times, Bowsher scoffed at the Bush administration promise to hold the deficit to under $100 billion in fiscal 1990. The true figure, he says, will be around $263 billion. The difference? Mostly the annual "loan" from Social Security. "Everyone knows the numbers are fudged and that they never reflect reality," he said.

The secret of Bowsher's courage: his appointment as the head of GAO has a decade to run. He can't be fired.

After the Cover-Up: The Scandal

Every year, statisticians tally up the official Gramm-Rudman deficit estimate to the penny.

But every year, statisticians secretly pre-shrink that estimate by the billions Social Security lends to the Treasury Department. In other words, Social Security is now an income-producing branch of the government.

The Social Security fund gets left with a vast future obligation and no real assets to pay it off. Most people would call that a "debt," but the government and the media prefer to call it a "surplus."

At the same time, Treasury's IOUs (actually non-negotiable, interest-bearing bonds) never add a cent to the official national debt.

It's the bureaucrat's version of cold fusion, the perfect money machine. The Congressional pork barrel gets filled from the general fund, the general fund gets fed by Social Security, and Social Security gets fed by the taxpayers, who think they're building up a retirement fund for themselves when it's actually going down the Washington drain at hurricane speed.

What we have here, it is now clear, is the world's largest chain letter. Or the world's largest Ponzi scheme. Or the world's largest felony. Certainly if any corporation head were to siphon off the pension fund to pay current bills, he would go to jail. But in Washington, they don't go to jail; instead, they give themselves salary raises for a job well done.

Will this massive fiasco be the next major scandal? Not unless grandma and granddad stop getting their checks or Congress has to raise the FICA taxes again. But the latter could happen very soon if a recession strikes.

In any Ponzi scheme, the early investors get paid by funds from later investors, and the sham becomes harder and harder to disguise. In the Social Security scheme, Jimmy Carter had to raise the Social Security tax in 1977 when Social Security began to run in the red. He promised this would keep the monster quiet till the end of the century. But just six years later, it had to be fed again. Another "emergency" tax increase came in 1983. The widely anticipated next recession could easily shrink Social Security income to the point where the Social Security tax needs to be raised again. Fortunately for the administration, the public has less resistance to Social Security hikes than regular tax rate hikes simply because it doesn't view "Social Security contributions" as a tax.

Ordinarily, American voters are docile. They believe what the media and the government tells them. But some members of Congress are now beginning to admit the fraud. North says: "They want another tax hike. By moving Social Security off-budget, they may get it."

Can the System Live?

Everyone agrees that the alleged Social Security nest egg will need to be disbursed when the baby boom generation starts to retire in a few years. There is a huge lump in the worker pool that is working its way toward retirement like a pig going through a boa constrictor.

If we reach that point, what then? According to North, there are technically six options, but they boil down to two: default and massive inflation. And of course, massive inflation would be just an indirect form of default.

Even before inflation/default, however, the Social Security tax will have to be raised again. Economist Aldana Robbins has published a study based on the government's middle-of-the-road scenario not their pessimistic scenario). She estimates that total Social Security taxes (employee's plus employers') will have to hit 45% to keep the system going. That is on top of federal and state taxes.

Outlandish? No. consider the railroad retirement system's pension fund. This older system (born in 1934) presages the problems soon to hit Social Security. After repeated Congressional bailouts and rate hikes, it now collects 36.1 of every railroad payroll dollar. And it's still going under. The American Association of Railroads now estimates it will need a hike to the 50% level. So Robbins' 45% may be quite reasonable.

Unfortunately, says North, the system won't last till 2010, when the boomers start retiring. "Recessions are a fact of life," he states. "And when they hit, government income drops like a rock while its expenses soar. Right now - at the tail end of a long boom - we're running a true deficit of $250 billion a year. So in the coming recession, that will likely jump to over $500 billion. And if the recession collapses into a depression, count on yearly deficits over a trillion."

Naturally, neither American nor foreign investors would buy bonds from any government with a trillion dollar yearly deficit. Far more likely would be a rush to gold and ultra-safe staple commodities. The government would thus be left with no way to pay its enormous bills, and a taxpayers' "revolt" would be the most likely scenario.

Now that this matter is out in the open, what will the authorities in the Capital say? Probably as little as possible. ^ As usual, investors and taxpayers are on their own. North foresees "millions of older people reviving the ancient custom of moving in with the kids after retirement."

He promises to present an ongoing series of defensive strategies for investors in his monthly newsletter, Remnant Review.

Excerpt From A 1976 Congressional Hearing

Senator Wm. Proxmire:

" .. there are 37 million people, is that right, that get Social Security benefits?"

Social Security Commissioner James Cardwell: "Today between 32 and 34 million."

Proxmire: "I am a little high; 32 to 34 million people. Almost all of them, or many of them, are voters. In my state, I figure there are 600,000 voters that receive Social Security. Can you imagine a senator or congressman under those circumstances saying, 'We are going to repudiate that high a proportion of the electorate?' No.

"Furthermore, we have the capacity under the Constitution, the Congress does, to coin money, as well as to regulate the value thereof. And therefore we have the power to provide that money. And we are going to do it. It may not be worth anything when the recipient gets it, but he is going to get his benefits paid."


"I tend to agree."

There Is No Law Requiring Withholding Funds from One's Wages or Salary. In Fact, There is No Law Requiring Anyone to have a Social Security Number.

If You Have a Number...

Do You Always Have to Give It? . . Excerpts From the Privacy Act:

Title 5 of the United States Code Annotated 552(a) is known as the Privacy Act. Because of it, courts have ruled in part: "Right of privacy is a personal right designed to protect persons from unwanted disclosure of personal information ..." CNA Financial Corporation v. Local 743, D.C., III., 1981, 515 F. Supp. 942, Ill.

The District Court in Delaware held that the Privacy Act:

"... was enacted for [the] purpose of curtailing the expanding use of social security numbers ... and to eliminate the threat to individual privacy and confidentiality of information posed by common numerical identifiers." Doyle v. Wilson, D.C. Del., 1982, 529 F. Supp. 1343.

In the strongly worded Guideline and Regulations for Maintenance of Privacy and Protection of Records on Individuals it is stated:

"(a)(1) It shall be unlawful ... to deny to any individual any right, benefit, or privilege provided by law because of such individual's refusal to disclose his social security account number."

Should any person, business or government agency decide to deny you any right, benefit or privilege when you ref u; to reveal your social security number, you can FILE SUIT.

"(A) ... actual damages sustained by the individual as a result of the refusal or failure, but in no case shall a person entitled to recovery receive less than the sum of $1,000; and (B) the costs of the action together with reasonable attorney fees as determined by the courts."

You may recover the award from the GOVERNMENT AGENCY, BUSINESS OR INDIVIDUAL who denies you the right, benefit or privilege; however, the courts have allowed some latitude to an individual who "innocently". insists upon the social security number. Here's how the court puts it:

"... assuming that plaintiff's refusal to disclose his social security number was a clearly established right, where defendants could not as reasonable person have been aware of that right and could not have recognized that any effort to compel disclosure of number or to deny plaintiff his refund violated federal law, damages against defendants were barred. .." Doyle v. Wilson, D.C., Del., 1982, 529 F. Supp 1343.

It becomes clear that the individual(s) must be able to show that they could not have been aware of the Privacy Act and could not have possibly realized that their actions were in violation of federal law in order to escape the $1000 penalty.

Should you be denied a right, benefit or privilege when you decline to provide your social security number, you may file suit. Take someone with you when you assert your rights under the Privacy Act. They will witness the incident and testify (if necessary) to the facts. When you refuse to give your social security number, simply present this flyer to the person who demands your number. Point out that an individual may be personally required to pay the $1,000 he is aware of the Privacy

Act and refuses to honor it. In most cases, they will no longer insist you give the number once they are informed of the Privacy act.

Here's What Well Known People are Saying
About the Social Security Trust Fund:


"The whole point about the Social Security Trust Fund is, there is no trust and no fund." (Congressional Record, April 24, 1991)


'There are no reserves. They have all been embezzled. They have all been spent." (October 9, 1990) DAVID BRINKLEY, ABC News.

"The [Social Security] Trust Fund consists, increasingly, of IOUs sent over by Congress, which keeps spending the money." (In an interview with President Bush, August 1992)

JOHN STOSSEL, ABC correspondent:

"There's no money in the trust fund, just IOUs." (On ABC News' 20/20, October 16, 1992) DORCAS HARDY, former Commissioner of Social Security:

"There are no trust funds, just a bunch of IOUs ... The Treasury siphons off the money to pay for current government operations, and, in exchange, it gives Social Security an IOU. When the IOU comes due, there will be no money in the Treasury to pay it off ..." (At a recent conference of the Cato Institute)

DAVID WESSEL, of The Wall Street Journal:

"It's akin to a father putting money into an old cigar box for his young daughter's college education at the beginning of every week, taking it out at the end of the week to pay the light bills, and replacing the cash with his IOUs."


"We've got to put some discipline into the system as opposed to just spending our children's money [and] spending the Social Security Trust Fund money." (Appearing at a national town meeting sponsored by ABC News)


"The Social Security Trust Fund must be kept secure, health, and solvent, free from raiding by Congress or the White House to pay for pet projects." (In a letter to USA, Inc.)

ROBERT J. MYERS, former Deputy Commissioner and Chief Actuary of the Social Security System:

"The raid on the Social Security Trust Fund may be the greatest, most elaborate scheme to corrupt the integrity of the system."

A. HAEWORTH ROBERTSON, former Social Security Chief Actuary, wrote:

"Present trust funds and probably future trust funds, are mere window dressing and have no economic reality."

The late SENATOR JOHN HEINZ (R-PA) called the raid on the Trust Fund "embezzlement."

STEVE ROBINSON, an economist at the House Republican Study Committee:

"Contrary to popular belief, the Social Security Trust Fund is nothing more than an accounting device ... the government currently spends all the taxes it collects, including the Surplus Social Security payroll taxes."

Congressional Research Service's report for Congress:

"... Perhaps the biggest misconception is that the Social Security Trust Funds represent actual resources to be used for future benefit payments, rather than what is in reality a promise by the government to take steps necessary to secure resources from the economy at that time." (January 24, 1991)

STEVE MUFSON of The Washington Post:

"... there are no assets - no stock or bond certificates - in the Social Security Trust Fund; only the government's commitment to make good on the benefits it has promised future retirees ... the federal government can essentially 'default' on part of the debt owed to the Social Security Trust Fund by cutting back on benefits paid to future retirees ... One senior Bush administration official views this as inevitable." (September 29, 1992)

BRUCE SCHOBEL, former Actuary of the Social Security Reform Commission, and former Senior Advisor for Policy at the Social Security Administration:

'There is one major problem with the trustees' projection of a 40-year margin of safety, however. There will be no money in those trust funds when it is time to draw them down. The money has already been spent on other government programs." (Policy Review, Fall 1992. In an article entitled "Sooner Than You Think: The Coming Bankruptcy of Social Security.")

Printed as a public service by the American Conservative Union
P.O. Box 96473, Washington, D.C. 20090-6473

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