The Gold Standard, Printing Money and the Federal Reserve

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 it’s 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 [1]. 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). [1] 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 America’s gold supply with trade deficits, a soaring price in gold based on almost limitless demand by today’s 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.

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.

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.

Actually, it was two years - 1956 and 1957. The national debt decreased each of those years (SOURCE: US Treasury Direct historical tables). In the last 160 years, Fillmore, Pierce, Harrison, Harding and Coolidge were the only Presidents, as far as I can tell, who reduced the national debt every single year of their terms (all were Whigs or Republicans save Pierce).

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.

Or maybe you should get an education instead of trying to play thread monitor, junior.

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.

“Collectivist”?

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.”

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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