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.
We are going back to the era of the continentals. That was the reason we went to a gold standard. It may have also been why the Constitution calls for gold and silver as a repayment for debts, but omitted the words emit bills of credit as contained in the inferior Articles of Confederation.
The reason we're in a big debt fiasco is because of entitlement spending - social spending. Every Federal dollar of revenue received right now, from all sources, just barely covers spending on Social Security, Medicare, Medicaid, and income security (unemployment, welfare, food stamps, subsidized housing). We run the rest of the Government - DOD, DHS, HUD, DOEs, FDA, DOA, FBI, CIA, etc. - on 100% borrowed money.
Having a gold standard, or eliminating the Fed would not stop the Government from borrowing - we have a VERY long history of national debt even when on the gold standard. The problem isn't how the debt is denominated (gold or faith-and-trust in the US); it's that Congress and the President can simply raise more debt by legislative action. And they've been doing so - and using it as payola to win political favor - for the better part of 100 years, with the last 50 really showing it the worst (starting with LBJ's buy of racial minorities in the 60s).
” The Federal Reserve caused the 1929 crash with its easy credit “
That assertion is not exactly established fact. The sole school that comes close to making the claim is the Austrian school which would argue that short term interest rates had been set too low throughout the 20s, a situation leading to malinvestment and an unsustainable boom.
Moreover there may not be a direct link between the stock market crash of 1929 and the Great Depression. Post hoc propter hoc reasoning leads us to think so but it may not be the case at all. The stock market collapse affected a small part of the American public and economy.
The much greater calamity resulted from the lesser known banking collapse that occurred between 1930 and 1933 when a full one third of American banks failed, shrinking the money supply by 30%. This monetary collapse was peculiar to America. European banks, nor Canadian banks for that matter, didn’t fail in large numbers. It’s something that Joseph Schumpeter targets as a significant factor causing the Great Depression, which was much worse in American than elsewhere.
Milton Friedman and Anna Schwartz don’t find the Fed responsible the 1929 crash but they do fault the Fed for failing to backstop the banking system and allowing the Depression to feed on itself. The Fed’s first chairman died one week before the stock market crash and the Fed was rudderless at a critical time. As a result no one was willing to make the decision to buy large quantities of paper from banks to provide them with liquidity.
Hoover and FDR’s meddling get a lot of attention but the government’s percentage of the GDP during their administrations was about half of what we have accepted as normal during the entire post WWII era. Their spending looked big to Americans of that time because it was bigger than what had gone before. But it’s surprisingly small compared to what the norm has been for over 60 years.
“Having a gold standard, or eliminating the Fed would not stop the Government from borrowing - we have a VERY long history of national debt even when on the gold standard. “
One aspect of Alexander Hamilton’s genius was in making the early United States solvent by converting its staggering debt into an asset, a funded public debt attractive to investors. By offering to pay interest on the debt in gold, American debt was quickly bid up reducing its interest rate and making the dollar ‘good as gold’. There was very little gold specie floating around America at the time, which many critics of the gold standard may find surprising.
The gold standard does make government borrowing more difficult, and that’s why Nixon chose to abrogate the Bretton Woods agreement. His alternative was to defend the dollar.
JFK, LBJ, and Nixon (and Ike for that matter) were all confronted with pressure on the dollar from excessive governmental spending and the dollar’s use as world reserve currency. JFK and LBJ weren’t willing to endure a recession nor reduce overseas spending and they allowed inflation to the point that minor coins were turned into pot metal.
LBJ made the situation much, much worse with his New Deal On Steroids Great Society spending and ramping up the Vietnam War. Nixon did nothing to reduce any of Johnson’s spending and in fact added many more programs that we suffer under to this day.
Tis practically a non sequiter. Hoover prolonged the collapse by encouraging businesses not to lay off workers (if memory serves me right). Along with Smoot Hawley and maybe other stuff. However, Roosevelt was worse because businesses were so terrified of him, they certainly weren't going to invest and spend their money hiring workers. The Messiah created a similiar situation today. The businesses back in those days thought Roosevelt might even nationalize their companies -- again, like The Messiah today. Pres. Obama is acting like Roosevelt in the economy by keeping it in a miserable state with the atmosphere of fear he is spreading throughout business. He learned nothing from Roosevelt's actions or maybe he wants to deliberately wreck the economy. And increased taxes by those experimenting fingers of the New Deal didn't help investment toward jobs either.
In postwar America the government’s percentage of GDP has ranged from around 18% to maybe 22%, with Obama taking it higher. By contrast the percentage of GDP spent by the Hoover and FDR administrations was maybe half of that. I’ve seen it listed as low as 6% of GDP to 12%.
Smoot Hawley has to be one of financial history’s great straw men. The US was a virtually self contained economy in 1929. International trade was less than 5% of the GDP. We were self sufficient in oil, coal, steel, foodstuffs, manufacturing, clothing. Other than coffee and bananas we had no essential imports. If Smoot Hawley had shut off all trade, which it certainly didn’t, the loss of 5% of GDP wasn’t going to result in the Great Depression.
I learned to watch the credit markets during the inflation of the 70s. Markets are sensitive to expansions and contractions of credit. A one or two percentage change in the supply of credit has a big impact. One of the more dramatic examples was Paul Volcker clamping down on the money supply at the beginning of the Reagan administration which put the US into a double dip recession. This recession ended with an explosion in August of ‘82 when Volcker reversed policy and poured money into the economy.
But nothing that went on in the 70s or since has come close to rivaling the 30% collapse of the American money supply that took place during the last three years of Hoover. It wouldn’t have mattered what Hoover had tried to do. This was a monetary tidal wave and he was pretty much irrelevant. It takes years to clear out the bad accounts and for the economy to right itself. It will take years for the damage created by the housing bubble to cease harming the economy. A bad President can get in the way and create other new problems, but Presidents have limited ability to move the economy.
I don't think you understood my point. It was more than this GDP stuff, but the government meddling itself.
You disagree that the Federal Reserve caused the 1929 crash; however, Conservative and Libertarian sources take issue with you. Maybe they're wrong and John Kenneth Galbraith is right about the 1929 crash. Maybe you should be on a different website.
“You disagree that the Federal Reserve caused the 1929 crash; however, Conservative and Libertarian sources take issue with you.”
I cited Milton Friedman and Anna Schwartz’ opinion from their Monetary History of the United States and Schumpeter’s writing on the Depression.
“Maybe you should be on a different website.”
Or maybe you should get an education instead of trying to play thread monitor, junior.
Joseph Schumpeter, Milton Friedman and Anna Schwartz could only sound like JK Galbraith to an ignoramus. Their conservative and libertarian credentials are well established.
I think that you're the one who is ignorant, my collectivist friend.
But... hey! Let's have fiat currency. Let us forget about the Constitution and where it says that only gold and silver can be used in payment of debts.
As we're turning into the Weimer Republic or Zimbabwe as regards as fiat currency supply, the Founding Fathers showed great wisdom in calling for a gold standard and not callint for the emission of bills of credit as the Article of Confederation called for.
You are without a doubt one of the dimmer bulbs that I’ve run across in a long time. Tell me what I posted that you think qualifies as “collectivist”, my ignorant and slanderous friend Bedpan12.
And I have no idea what you think your point is concerning fiat currencies and the gold standard, since I have long advocated a gold standard in my posts here at FR. But hey, if your posts conformed to facts and made sense then you wouldn’t be a dimwit, would you? So maybe you shouldn’t change.
Your posts are completely incoherent.
“Your posts are completely incoherent.”
Now that’s a fine example of irony, Bedpan12.
“Golly gee.... Is Milton Friedman (RIP) and his Chicago School for the gold standard, also?”
Golly gee whillikers, Bedpan, I wasn’t posting about Friedman’s views on the gold standard. Since the gold standard has no bearing on Friedman’s theory of the cause of the Great Depression there’s no reason I would have brought the subject up. I would have thought that a master of coherent thought would have spotted that little logical problem.
Since you evidently have nothing pertinent to say about Friedman’s theory, most likely because you haven’t the faintest idea what it is, I suppose it’s not surprising for you to want to change the subject to a favorite hobby horse of yours, no matter how irrelevant it is. It’s a pity for you that I think the gold standard is a good idea. It makes your straw man argument all the more foolish.
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