Skip to comments.The Gold Standard, Printing Money and the Federal Reserve
Posted on 07/24/2011 12:40:22 PM PDT by Tolerance Sucks Rocks
The media is hyping and harping on the issue that the Federal Reserve will resort to PRINTING more money to feed another round of quantitative easing. This is a wholly incorrect fact. The Department of Treasury prints our "paper currency NOT the Federal Reserve. Quantitative easing is the Federal Reserve increasing bank reserves- thereby creating new money electronically- but, for a stated purpose of stimulating the economy and NOT for paying government debt. This is a salient point that the media mixes up, assuming and misinforming the public that QE is paying for increased government debts. QE serves a fundamental reason the Federal Reserve exists- LENDER OF LAST RESORT. There is no mystery or secret function in quantitative easing- it is an envisioned power of the Federal Reserve to shore up financial institutions or companies which hold debt during times of crisis in liquidity. In Quantitative Easing, government securities as well as commercial paper are NOT purchased directly, but rather on secondary markets- meaning, liquidity is being pumped into the private market and not by directly monetizing government debt nor with the intent to directly finance government debt.In the 2007-2009 QE policies, the Federal Reserve did not purchase direct government debt- but rather purchased mortgage backed securities and other asset-based securities, NOT government bonds.
These are SIGNIFICANT details to know and remember when caustically screaming about the Federal Reserve printing money to restore our financial soundness. Those making paranoid attacks on the QE policy of the Federal Reserve are obviously not reading the details of how and what was being purchased by the Federal Reserve in order to stabilize the banking system and restore credit and liquidity in credit markets. The 2007-2009 Quantitative Easing actions by the Federal Reserve DID NOT monetize government debt.
Second, let's be informed that the Federal Reserve hardly "demands" the Treasury Department to "print" money on demand. This is a very rare occurrence as a cursory glance at the operations of the Federal Reserve would easily illustrate to the public that the Fed's function in liquidity in our economy is NOT based on "printing" fiat currency. Liquidity- in the narrowest form- paper money and money supply overall (M1,M2,M3) is mainly controlled by the Fed via selling and buying notes, setting bank reserve requirements and interest rates. Therefore, increasing or decreasing the money 'supply' by intervening in private financial markets and NOT by demanding the Treasury to PRINT dollars is what QE policy is all about. Printing money can only be conducted by the Treasury Department which comes under the direction of the President of the United States, NOT the Federal Reserve.
Third, it's actually irrelevant to discuss printed paper money, since it represents a tiny portion of our money supply. The vast majority of our money supply is electronic- not paper money.
Fourth- our money is not worthless, it represents value- either assets or labor, so its not worthless- it's intrinsic value as a piece of paper is of course worthless- but for thousands of years we used shells, rocks, leafs, etc as money- so the negative hype, conspiracy rants, misinformed economic theories which attack the concept of paper currency" is grossly misplaced. Thinking that "money" needs to have an intrinsic value- such as gold or silver is to create even greater problems than based currencies would solve . Why don't we use diamonds or rare gems as money since they have "intrinsic" value?
Fifth- Based currency (money based on gold) has already been tried, and proven to be very unsuccessful. The United States experienced more depressions and recessions and banking crisis in our history under the gold standard than with fiat currency. Since going to a fiat currency- no major industrial country has experienced a depression (ala 1929).  Gold based currencies introduce several major problems, such as an inability to have an elastic money supply (in order to put in or take out money from the economy), gold hoarding, not enough gold to base a growing American or global economy, limits of total gold supply, foreign countries depleting Americas gold supply with trade deficits, a soaring price in gold based on almost limitless demand by todays global economy.
Sixth- inflation- a dynamic and growing economy needs "some" inflation. Inflation provides an outer elasticity to know whether we need to push growth or slow growth down. Push it- to provide more jobs and economic development- or slow it down in order to avoid bubbles, over-employment (which triggers very high inflation) etc... So, having 'some" inflation is a general indicator and insulator for the economy- perfectly normal- and absolutely necessary for a dynamic economic system. Deflation would be a MAJOR risk under a gold standard and is much harder to recover from- i.e. Japan has still not recovered from its deflation 10-15 years ago.
The Federal Reserve and fiat currency system has produced the highest standard of living for the highest percentage of Americans in its history- as well as reducing the percentage of people living under the poverty rate in America. That is proof in the pudding.
Would it help to point out that “printing money” is a metaphor?
Rubbish article. From the comments section:
The distinction between “printing” and “creating” money is unimportant. It doesn’t matter whether the money is printed on paper or issued electronically. The bottom line is that the money supply still increases, and in the long run that activity ends up destroying the value of each unit of currency. I couldn’t help but notice that you deliberately overlooked that fact in your article.
You wrote, “Federal Reserve did not purchase direct government debt- but rather purchased mortgage backed securities and other asset-based securities, NOT government bonds.” Actually, we don’t know that for a fact. We do know that they purchased mortgage-backed securities, otherwise known as “toxic assets” because if valued at their true value they would be worth far less than their face value. We also know that they purchased these securities by creating money out of thin air. But that doesn’t mean that the Fed hasn’t been purchasing direct government debt. To the contrary, the government has been running out of buyers for its debt. All the biggest buyers, including China, Japan, and Russia, have dramatically curtailed their purchases, and they will likely continue to do so.
Of course, the Fed is an opaque organization, so there is no way to know exactly what they’re doing. That’s one key reason why Cong. Ron Paul has called for a full, public audit of the Fed, and not the sham audit the government currently conducts.
Despite the fact that the Wall Street Reform and Consumer Protection Act of 2010 included only a watered-down version of Audit the Fed, we got a quick glimpse of Fed activities from the revelations that came out of that law. Yet, even that quick glimpse tells us that the Fed bailed out the leading European banks as well as banks in other countries via the discount window. This money was also created out of thin air, yet the Fed told us nothing about it before they were forced to do so. So how can you be sure that the Fed isn’t buying government debt? The honest answer is: you can’t.
You wrote, “Third, it’s actually irrelevant to discuss printed paper money, since it represents a tiny portion of our money supply. The vast majority of our money supply is electronic- not paper money.” You know perfectly well that the term “paper money” is euphemistically used to describe the entire money supply. Some of us refer to this as the “fiat” money supply, but we unjustly get shot down for using that term, too. So what term is acceptable to you, Mr. Luko? After all, if not for the fact that our money is based on paper, we would not be at a place where electronic money could be increased ad infinitem at the whim of the Fed.
You wrote, “Fourth- our money is not worthless, it represents value- either assets or labor, so its not worthless.” Then why does it keep losing value? Why is today’s dollar worth less than 4 cents compared to the 1913 dollar? If that’s not worthlessness, what is? Does it have to reach zero before you’ll admit it’s worthless? If so, you have a craven view of “worth”.
You wrote, “Based currency (money based on gold) has already been tried, and proven to be very unsuccessful.” No, that’s not true. Rather, the gold standard was undermined by the government in collusion with the banks by permitting more paper/electronic/fiat money to be created than was actually held in reserves. This inflation of the money supply is what led to all the troubles you described in that paragraph. Blaming gold for these developments is like blaming store owners for the fact that there are thieves that rob those stores.
You wrote, “Sixth- inflation- a dynamic and growing economy needs ‘some’ inflation.” This is a long held truism that has not a shred of evidence to support it, and I cannot help but notice that you continued that tradition by refusing to provide any evidence to support your wild claim. You simply stated that your truism is true, as if stating it proves it. Inflation, specifically monetary inflation, is nothing more than the stealing from the poor and the middle class by the rich, via destruction of the currency.
Lastly, I want to address your statement, “The Federal Reserve and fiat currency system has produced the highest standard of living for the highest percentage of Americans in its history- as well as reducing the percentage of people living under the poverty rate in America.”
This falsehood has been the rallying cry for decades, but it simply isn’t true. The quintessential point is the famous gap with the rich getting richer while the poor get poorer. This isn’t just a fancy political claim. It also happens to be true. Just because dollar amounts increase doesn’t mean that the poor are better off. To the contrary, the dollars buy far less than they used to.
The truth is that the poor should no longer be poor. Poverty should be eradicated by now, and it would have been if not for the fiat money system. The rat race should be over, but it doesn’t end because the middle class finds that their goals are always just out of reach, like a carrot dangling on a stick. Again, this is due to the fiat monetary system where the value of the unit of money keeps decreasing over time. This tendency for the dollar to always lose value over time is the greatest theft in the history of mankind.
True, but so what? If the Fed creates new money, it devalues the existing dollars, whether electronic or paper.
Large investment banks purchase the US Govt debt directly. The Fed purchases government treasuries from the large investment banks (at a loss to the government) withing a few days from their purchase. This is essentially the Fed purchasing the US Govt treasuries.
The Fed has been purchasing these treasuries to keep their interest rates down, which allows the federal government to grow too rapidly. If you subsidize any loan, the price of the security will go up. Just look at housing and college educations.
Thanks....I needed that.
I noticed that too. In fact, the author treats modest inflation as a good thing, without mentioning how it erodes savings and purchasing power, provided wages do not increase to match it.
On the other hand, some people say that inflation is not really occurring UNTIL wages start to increase as well.
From Benjie’s and Tiny Timmy Geithner’s fax machine directly into the wood chipper. How lame can they get? We have no idea how stupid these shills really are.
Thank you pookie18
Utter rot. America is living on it’s credit card because it is unable to pay for what it consumes. some how that little detail escapes the author’s notice but so much else did too, like the inability to make the payments on the debt.
And how has the Federal Reserve accomplished that? Why by ever stealing from the future, until the chickens come home to roost, as like now. In a century, we, and our progeny, are now snared in the chains of an unsustainable debt bomb created by the Federal Reserve and the phony money system developed to plunder a big piece of the productive activity in the country.
But so far, so good, eh?
Also, take this sentence from the article: Printing money can only be conducted by the Treasury Department which comes under the direction of the President of the United States, NOT the Federal Reserve. -- the federal government -- including the Treasury -- does not print fiat currency at all. What the Federal Government does is print up bonds; gives them to the private Federal Reserve Bank, and the Federal Reserve then chugs out fiat currency.
This clown criticizes the gold standard? A money standard that has given us balanced budgets and even a surplus? Thanks to fiat currency and the Marxist in the Whitehouse, we are on the verge of an economic tsunami. A Great Depression, coupled with massive Weimar Republic or Zimbabwe inflation.
That is the reason Glenn Beck urges people not only to buy gold, but canned foodstuff and maybe even freeze dried materials. We could be in for some very bad times.
As a final remark, if under a gold standard there is a panic, the government should leave things alone and the economy recovers. Government meddling helped turn the crash of 1929 into the Great Depression. When there was a big stock Market crash in the late eighties, then Pres. Ronald Reagan was smarter and commented very little on the crash and America suffered little damage from it. Pres. Reagan understood the economy as President Franklin Delano Roosevelt did not!
We had a balanced budget AND surplus (actual debt reduction) under President Eisenhower, well after the establishment of the Federal Reserve.
Thanks to fiat currency and the Marxist in the Whitehouse, we are on the verge of an economic tsunami.
We had debt and depressions prior to the establishment of the Federal Reserve. The ability to borrow money is independent of the existence of the Federal Reserve and "fiat currency". Spending - in particular, entitlements, nothing more than long-term payola by politicians to voters - is the source of our current fiscal nightmare and would not be assuaged in the least by a return to the gold standard.
The solution is to cut spending - not re-denominate the debt and value of what is spent (which is all a gold standard would do).
“The Federal Reserve and fiat currency system has produced the highest standard of living for the highest percentage of Americans in its history- as well as reducing the percentage of people living under the poverty rate in America. That is proof in the pudding.”
May you eat a large plate of dog turds before dying in a fire.
” When the panic of 1907 happened, J.P. Morgan quelled the panic in a single day. “
It was a good bit more than a single day. But the importance of the 1907 bailout was that JP Morgan became a driving force behind the National Monetary Commission that led to the creation of the Federal Reserve.
Morgan informed Congress that the US economy had become too large for a single bank to act as lender of last resort, and that the US needed a central banking system.
“We had a balanced budget AND surplus (actual debt reduction) under President Eisenhower, well after the establishment of the Federal Reserve.”
That occurred for only one year, 1956.
The chronic postwar increase in debt and foreign assistance led to the Triffin dilemma, the first sign that the gold linked dollar was in trouble. The first public sign of the problem was the abandonment of silver coinage in the early 60s.
Hmmm...one wonders why an entity with the constitutional power to coin dollars would want to borrow in excess of twelve trillion dollars.
If you had the power to coin money would you borrow money from a separate entity at interest?
Okay.... I did some checking and it was three weeks that it took J.P. Morgan to stop the 1907 panic. The Federal Reserve — founded in part because of fear of J.P Morgan — caused the 1929 crash with its easy credit and Hoover and Franklin Roosevelt prolonged the depression into the The Great Depression because of their meddling — Roosevelt especially was damaging to our economy.