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Bank Created Money, Monetary Sovereignty, and the Federal Deficit
- 1. Bank-created money, Monetary Sovereignty, and the Federal Deficit Toward a New Paradigm in the Government-Spending Debate Ashton S. Phillips, JD
- 2. This is what Fiscal Panic looks like. Debt-ceiling crises Credit Downgrade Simpson-Bowles Commission Sequester (Budget Control Act of 2011) Recovery Act expiring (including cuts to Food Stamps) Government Shutdown New Budget Talks
- 3. THE NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND REFORM “America cannot be great if we go broke” “We have a patriotic duty to keep the promise of America to give our children and grandchildren a better life.” “Ever since the economic downturn, families across the country have huddled around kitchen tables, making tough choices about what they hold most dear and what they can learn to live without. They expect and deserve their leaders to do the same. The American people are counting on us to put politics aside, pull together not pull apart, and agree on a plan to live within our means and make America strong for the long haul.” “the most significant threat to our national security is our debt.” Proposes: capping revenue at 21% of GDP by 2022 (within 10 years) and capping spending at 21% of GDP (“eventually”) http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/doc uments/TheMomentofTruth12_1_2010.pdf ;
- 4. People believe this and are scared
- 5. 61% worry a “great deal”
- 6. But, as a matter of Constitutional law, Congress can “print” its way out of debt. The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States; To borrow money on the credit of the United States; To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures; To make all laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers vested by this Constitution in the government of the United States, or in any department or officer thereof.
- 7. Julian v. Greenwald (1884) “[C]ongress has the power to issue the obligations of the United States in such form, and to impress upon them such qualities as currency for the purchase of merchandise and the payment of debts, as accord with the usage of sovereign governments. The Legal Tender Cases, 110 U.S. 421, 447- 48, 4 S. Ct. 122, 129-30, 28 L. Ed. 204 (1884)
- 8. Congress has done this before
- 12. Congress is printing money to pay (some of) its bills now Sacajawea Dollar Fed doesn’t like this
- 14. But, but, but: inflation! Maybe, but Inflation is not necessarily a bad thing. The current inflation rate (1.6%) is well below targets
- 15. Moreover… Inflation depends on how the created money is spent MV=QP (Quantity Theory of Money)
- 16. And, other entities are creating money now Federal Reserve Private commercial banks
- 17. Congress has delegated its sovereign power to print money to the Federal Reserve 1913 – Federal Reserve Act Section 16:“Federal Reserve notes, to be issued at the discretion of the Federal Reserve Board for the purpose of making advances to Federal Reserve Banks through the Federal Reserve Agents as hereinafter set forth and for no other purposes, are hereby authorized. The said notes shall be obligations of the United States and shall be receivable by all national and member banks and for all taxes, customs, and other public dues.” FOMC Courts won’t touch this (exercise “equitable discretion” to decline to hear case, even when Court finds standing and actual controversy)
- 18. Quantitative Easing More than $3 trillion so far $85 billion per month since December 2012 – December 2013 “The one certain outcome of QE is that those with assets benefit relative to those without,” John Kay, Quantitative easing and the curious case of the leaky bucket, The Financial Times, July 9, 2013.
- 19. The Fed’s “expanding balance sheet” $4,500,000.00 $4,000,000.00 $3,500,000.00 $3,000,000.00 $2,500,000.00 $2,000,000.00 $1,500,000.00 $1,000,000.00 $500,000.00 $0.00 Total Assets
- 20. Why is Fed Allowed to print money? Originally: to prevent bank runs by functioning as lender of last resort Now: “to maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” 12 U.S.C. § 225a
- 21. Private banks also create money with blessing of Federal Reserve
- 23. Current Reserve Rates 0% for banks with “net transaction accounts” of less than $13.3 million, 3% for banks with up to $89 million, and 10% for banks with net transaction accounts in excess of $89 million.
- 24. How much money are private banks creating through this process? Private banks create over 80% of money supply ($11.103 trillion out of $14.831 trillion) Monetary Base($3.728 trillion) M2 ($11.103 trillion)
- 25. By comparison, the Fiscal Numbers are: Federal Deficit: $1.086 trillion (fiscal year 2012) Total receipts: $2.450 trillion Total outlays: $3.537 trillion Total 2012 expenditures on food and nutrition assistance programs (including SNAP and WIC): $ 0.106 trillion www.omb.gov (historical tables)
- 26. So what? Simpson-Bowles is wrong: America cannot “go broke” We need a new paradigm that recognizes the relationship between fiscal and monetary policy. Congress should evaluate the policy value and inflationary effect of all money creation as weighed against policy cost of status quo.
Editor's Notes
- First, Thank you to the organizers (I am honored to be here and to be asked to participate in this panel). Second, I need to make clear at the outset of my remarks that I am here speaking in my personal capacity and not as a representative of the Department of Labor. That said, my interest in this topic is informed by my experience at the Department of Labor, including both my experience prosecuting the perpetrators of various financial frauds affecting employees and as an individual whose livelihood is directly affected by the current fiscal panic in Washington. Specifically, the thoughts/research I plan to share with you today stem from work I began in 2011 during the first debt-ceiling crisis, when I became increasingly frustrated by the ignorance (or deceit) of lawmakers fear-mongering over the federal debt. Then, as now, I felt compelled to object to the misinformation peddled by politicians and largely repeated by the media that suggest that the federal deficit is a meaningful problem and that the only way to cure the federal deficit is to decrease federal spending or increase federal revenue. I am particularly excited to participate in this conference because it is not just a conference about political solutions to the debt-crisis, but a conference by and for lawyers addressing the solutions to the current debt-crisis. Money (at least modern money) is a creature of law. Yet, money is not typically discussed as such in law schools or legal academic circles. It is certainly not addressed as such in the media or popular press. Instead, money is treated as the exclusive purview of economists, who appear to be doing their best to obscure the legal nature of money, in favor of a economic modeling and quantitative analysis. Of course, none of those models would mean much if the government did not have the power to declare certain items (be they coins, federal reserve notes, or electronic entries in a bank’s computer) money. Indeed, there are many law school courses where money could be discussed. For example, money is certainly a form of property, but I know of no property course that discusses the law of money. This is a shame because the development of the property law of money is enormously interesting, including the battles waged between banks and depositors over whether (title, bailments, trusts). Money in the contemporary society is also a matter of constitutional law, yet I know of no Constitutional law course that covers the quite fascinating development of the Courts’ interpretation of the Constitutions’ monetary provisions from restrictive to plenary. (appointments clause, even takings clause).] As a result of this failure of both law schools to teach the law of money, most lawyers are woefully ignorant about the nature of modern money. By contrast, every lawyer I know is well steeped in the law of real property with its arcane defeasible fees and rules against perpituities. This is not an idle/academic criticism. Because most Congressmembers (not to mention most lobbyists) are lawyers, the ignorance among lawyers of the law and policy of money enable the present senslessness regarding the federal debt. Given this, I thought my time here would be most valuably spent going over some of the basic principles of modern money, with a particular focus on how these principles apply to the present “Fiscal Panic” we are all living through. I do this in large part because I believe that anyone that understands these basic principles must agree that the present discourse (outside Central Bank commentators) is fundamentally flawed. This might that serious, but given the degree of fiscal panic we are now experiencing, the ignorance is now causing serious harm (to the poor and the economy).
- Debt-ceiling crises (Explain history and purpose/function of debt-ceiling – to give Treasury more authority, not less) Credit Downgrade (Date, reasoning of Rating agency) Simpson-Bowles Commission (to be discussed in more detail later, created to investigate and propose a bipartisan fiscal policy) Sequester (Budget Control Act of 2011; quantify cuts – $1.5 trillion in total) In 2013 alone, automatic sequestration forced a total of $85.3 billion in cuts from federal spending. Unless Congress intervenes, the Budget Control Act of 2011 will ensure another chunk of cuts every year until $1.5 trillion is cut from the annual federal budget. http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/20/the-sequester-absolutely-everything-you-could-possibly-need-to-know-in-one-faq/ These cuts included: • $42.7 billion in defense cuts (a 7.7 percent cut). • $26.1 billion in domestic discretionary cuts (a 5.1 percent cut). • $11.1 billion in Medicare cuts (a 2 percent cut). • $5.4 billion in other mandatory cuts (a 5.2 percent cut). Widely panned as poor policy during economic recovery: In fact, Fed Chairman nominee Janet Yellen testified yesterday: “reductions in fiscal spending have made it harder for the Fed to get the economy moving.” Recovery Act expiring (including cuts to Food Stamps)(spent total of $803.1 billion; most recent victim Food Stamps expansion, allowed to expire to save $5 billion in 2014) Government Shutdown (16 days, technically over Affordable Care Act, but tied up obviously with debt-ceiling) New Budget Talks (House Budget proposes 39 billion cut to Food Stamps; Senate Budget proposes 4.5 billion cut).
- When asked why these drastic cuts to federal spending are necessary, politicians invoke misleading an loaded truisms, that preclude the public from understanding the real policy implications of fiscal and monetary policy. Joint Commission on Fiscal Responsibility Report, http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf ; see also, e.g., House Budget, appendix on economic benefits of deficit reduction at http://budget.house.gov/uploadedfiles/appendix_ii-_economic_benefits_of_deficit_reduction.pdf; http://budget.house.gov/fy2014/factsandsummary.htm; cf. http://www.cbo.gov/sites/default/files/cbofiles/attachments/44602-LTBO_Testimony.pdf (Testimony of CBO Director on 2013 Longterm Budget Outlook). Some have suggested that this kind of moralizing over public debt stems from Protestant religious tradition and its characterization of personal debt as sinful. http://www.bbc.co.uk/news/magazine-18789154 (noting that European countries with majority Protestant populations also tend to be those countries most in favor of austerity measures); see also, David Graeber, Debt: The First 5,000 Years 59 (2012)(noting that in all Indo-European languages, words for “debt” are synonymous with those for “sin” or “guilt”).
- First time since 2009 that unemployment fell out of the top two slots.
- We know that there is a fiscal panic out there, but what most people don’t appreciate is that Congress is vested with the constitutional power to print money. Article I, Section 8, Clauses 1, 2, 5, and 18 N: continued objection to view that this is constitutional. Legal Tender cases and monetary sovereignty (Quote and also Quote dissent). (“moral certainty” that the Founders meant to forbid paper money)
- “[C]ongress has the power to issue the obligations of the United States in such form, and to impress upon them such qualities as currency for the purchase of merchandise and the payment of debts, as accord with the usage of sovereign governments. The power, as incident to the power of borrowing money, and issuing bills or notes of the government for money borrowed, of impressing upon those bills or notes the quality of being a legal tender for the payment of private debts, was a power universally understood to belong to sovereignty, in Europe and America, at the time of the framing and adopting of the constitution of the United States.” The Legal Tender Cases, 110 U.S. 421, 447-48, 4 S. Ct. 122, 129-30, 28 L. Ed. 204 (1884) The Court was right: Greece and Detroit
- Greenbacks After outbreak of Civil War, banks wanted to charge U.S. 24-36% on loans. So, Lincoln decided to issue fiat paper money to finance war. On February 25, 1862, Congress passed the first Legal Tender Act, which authorized the printing of $150 million in Treasury notes by 1863, the Second Legal Tender Act,[11] enacted July 11, 1862, a Joint Resolution of Congress,[12] and the Third Legal Tender Act,[13] enacted March 3, 1863, had expanded the limit to $450,000,000, the option to exchange the notes for United States bonds at par had been revoked, and notes of $1 and $2 denominations had been introduced as the appearance of fiat currency had driven even silver coinage out of circulation
- Even then, people were uncomfortable with the prospect of the government printing money. See cartoon. “These are the greediest fellows I ever saw. With all my exertions I can’t satisfy their pocket, though I keep the Mill going day and night.” Samuel P. Chase (Lincoln’s treasury Secretary, later justice of the supreme court). “Give me more Greenbacks”. Give me more Greenbacks, compound interest. Justice Fields, writing in dissent in The Legal Tender cases took the logic of the majority opinion to its necessary conclusion, arguing (aptly enough for this Article, albeit in apparent horror): if the majority is right, then there is no sense in paying “interest on the millions of dollars of bonds now due, when Congress can in one day make the money to pay the principal.” “From the decision of the court I see only evil likely to follow. There have been times within the memory of all of us when the legal-tender notes of the United States were not exchangeable for more than one-half of their nominal value. The possibility of such depreciation will always attend paper money. This inborn infirmity no mere legislative declaration can cure. If congress has the power to make the notes a legal tender and to pass as money or its equivalent, why should not a sufficient amount be issued to pay the bonds of the United States as they nature? Why pay interest on the millions of dollars of bonds now due when congress can in one day make the money to pay **142 the principal? And why should there be any restraint upon unlimited appropriations by the government for all imaginary schemes of public improvement, if the printing-press can furnish the money that is needed for them?” Not everyone hated them though. While these greenbacks were initially justified as a necessary evil to finance the war, they became a politically popular and lasting part of United States currency. In response to efforts to retire the greenbacks from circulation following the end of the Civil War, a national political party calling itself the Greenback Party (or sometimes the Greenback Labor Party) formed. This Party, comprised mostly of farmers who believed they would benefit from inflation and increased government spending, argued that the greenback issue should be expanded rather than retired because it was the sole and sacred role of the government, not private banks, to issue money. In the election of 1878, the Party received more than a million votes and elected fourteen congressmen. Although it was not successful in convincing Congress to prohibit bank created money and replace it with greenbacks, the Party has been credited with at least convincing Congress and ”hard money” advocates to abandon their efforts to retire the existing issue of greenbacks.3736 W. New Eng. L. Rev. 221, 232-33 In 1866, with the immediate need for war financing subsided, Congress began retiring greenbacks from circulation. It halted the retirement in 1868 in response to political pressure, especially from farmers who - not necessarily incorrectly - blamed concurrent deflation and the related increase in the real cost of their debt burdens on the retirement of the paper money. In 1871 and 1872, the Treasury reversed course authorizing a few million increase in the issue of greenbacks. In 1874, Congress authorized the greenback circulation at a permanent total of $400 million. Ulysses S. Grant vetoed the measure stating: “I am not a believer in any artificial method of making paper money equal to coin, when the coin is not owned or held ready to redeem the promises to pay.” Id. at 96.
- This compromise lasted. To this day, Congress continues to authorize the Treasury to maintain a permanent issue of $300 million in non-interest bearing, inconvertible U.S. Treasury Notes (i.e., greenbacks) the same volume authorized in 1878.38 These United States *234 Notes are still in circulation and are still legal tender, redeemable at par for any Federal Reserve Note.39 As of December 2012, the U.S. Treasury calculated that $239 million in United States Notes, or greenbacks, were in circulation.40 Looks like a regular Federal Reserve Note, right? See small print at the top though “United States Note”. These United States notes are still in circulation and are still legal tender, redeemable at par for any federal reserve note.
- Compare…
- Congress also continues to authorize the U.S. Treasury to issue coin, in various quantities and denominations.41 One such coinage statute,42 authorizing the Treasury to create platinum coins in any denomination, gave rise to the recent “$3 Trillion Coin” proposals. *235 These proposals, which were endorsed by various commentators, including New York Times columnist and Nobel Prize-winning economist, Paul Krugman, suggested that rather than defaulting on federal obligations, the Treasury could and should coin a trillion dollar platinum coin to pay the government's expenses in the event Congress refused to increase the statutory debt-ceiling.43 While coinage of such a high denomination coin would be highly unusual, especially in the absence of clear Congressional direction to produce trillion-dollar platinum coins, it is not unusual for Congress to enjoy some seigniorage revenue from the Treasury's manufacture and sale of coin.44 Here is how it works: Congress authorizes the Treasury to mint coins in various quantities and denominations. The U.S. Mint then sells these coins to the Federal Reserve if directed by statute (otherwise it sells the coins to the public), which credits the Treasury's account at the Federal Reserve with money equal to the nominal or face value of the coin.45 The difference between the cost of producing these coins and the face value of the coins (i.e., the “seigniorage”) is profit for the government.46 Since 2007, for example, the government has received more than $680 million in seigniorage profits as a result of its “gold” dollar program. As part of that program, Congress directed the Treasury to mint 2.4 billion “dollar coins,” which cost taxpayers about $720 million to produce. By selling $1.4 billion of these dollar coins to the public at face value, the government has made about $680 million in profit. Id. (also discussing the Federal Reserve's resistance to purchasing these dollar coins). “A Government Accountability Office study out this spring says that switching to a dollar coin "would provide a net benefit to the government" of about $5.5 billion over 30 years. But it's not because coins are cheaper. The report says the government would not recover the cost of switching from bills to coins over that period. Instead, the benefit to the government would come only from the profit it makes by manufacturing each coin for 30 cents and selling it to the public for a dollar. When this profit, known as seigniorage, is factored out, switching to the dollar coin would actually cost taxpayers money over three decades, according to a Federal Reserve analysis of the GAO's figures. The cost works out to $3.4 billion. The Fed's Louise Roseman wrote to the GAO that seigniorage should not be considered in an analysis of whether the switch would benefit the larger U.S. economy.” http://www.npr.org/2011/06/28/137394348/-1-billion-that-nobody-wants
- Yes, inflation. BUT: Since loans are fixed in nominal terms, falling wages and prices increase the burden of paying them. And once people expect prices to keep falling, they put off buying things, weakening the economy further. There is a real danger that this may happen in southern Europe. Greece’s consumer prices are now falling, as are Spain’s if you exclude the effect of one-off tax increases. [Note the greenback party and other mostly agrarian reformers advocating for the use of federal paper money with hopes that such a process would drive down cost of loans and cause inflation (making farmers existing debt smaller in real terms)] To the extent inflation proceeds at a rate higher than expected, it benefits debtors (in money) to the detriment of debt-holders. Those who hold assets with real value are unaffected (e.g. people holding their retirement in the form of real property or stocks). Bondholders screwed. Debtors relieved. However In America the headline rate in September 2013 was 1.2%, down from 2% in July—and the core rate, as defined by the Federal Reserve, has stubbornly stayed at 1.2%, close to its low point. There were inklings this week that some at the Fed want even looser monetary policy.
- inflation occurs only when the government (or the central bank or any other authority delegated to power to issue legal tender) prints more money than the growth rate of the economy Infrastructure spending, Asset bubbles Put differently, inflation happens when the economy has more money “chasing” the same amount of goods, services, etc. If created money is used to create more goods or services (hire unemployed, build solar energy plants, educate more doctors, etc.), inflation should not result (2) quantity theory of money. Even Milton Friedman (a famous “monetarist” and proponent of the view that *any* increase in the money supply would cause inflation, agreed that increasing the quantity of money (generally) caused inflation). And Congress is not the only entity currently empowered by LAW to create money. MV=QP (Quantity Theory of Money) M is the nominal quantity of money. V is the velocity of money in final expenditures; P is the general price level; and Q is an index of the real value of final expenditures; This equation expresses the widely accepted statement cited. If the quantity of the real value of the economy (Q) increases, which would occur for example if new mineral deposits were discovered in Alaska or if new ports are built with capacity to accommodate more and larger cargo ships, and the nominal quantity of money in the economy (M) increases in exact proportion to the increase in the real value of the economy (Q), the general price levels in the economy (P) should remain the same. If the quantity of money (M) is increased, but due to the way the created money is spent, there is no increase in the real value of the economy (Q), price levels (P) will rise.
- the economy is already flooded with “created” money, just not money directly created by Congress
- 1913 (Cite statute whereby Federal Reserve is empowered to print money (discounting section?)) 1913 Act also stated They shall be redeemable in gold on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or in gold or lawful money at any Federal Reserve Bank.” AND “application [for Fedreal Reserve notes] shall be accompanied with a tender to the Federal Reserve Agent of collateral in an amount equal to the sum of the Federal Reserve notes thus applied for…. The collateral security thus offered shall be notes and bills, acceptable for rediscount [by the Federal Reserve bank applying for the notes] under the provisions of section 13 of this Act.” Power was almost meaningless in 1913 however because of gold standard (supported by Bretton Woods accords/fixed exchange rates) Originally, Fed required to maintain a 40 percent reserve in gold against notes actually in circulation and a 35 percent reserve, also in gold, against deposits with it. In addition, they were required to keep a reserve with the Treasury of the United States equal to not less than 5 percent of notes outstanding, but this reserve could be counted as part of the 40 percent requirement. Moore, The Federal Reserve System. FOMC (created in 1930’s to make the power more accountable to Congress)(primarily trading in government securities to create “elastic supply of money”) (Explain) Courts won’t touch this (exercise “equitable discretion” to decline to hear case, even when Court finds standing and actual controversy) Even though the Constitution vests the power to create legal tender money exclusively in Congress, the Federal Reserve's money creation is considered legal (or at least non-justiciable) because courts treat the Federal Reserve Act as a delegation of Congress's sovereign monetary power to the Federal Reserve. For example, in Milam v. United States, the Ninth Circuit affirmed the legitimacy of Federal Reserve Notes as legal tender because “[t]he power so precisely described in [Greenman] has been delegated to the Federal Reserve System under the provisions of 12 U.S.C. § 411.”58 Similarly, in Walton v. Keim, the Colorado Court of Appeals dismissed a taxpayer's protest suit challenging the legitimacy of Federal Reserve Notes, explaining that “Congress has exercised [its power to declare things other than gold or silver legal tender for all debts] by delegation to the federal reserve system.” Therefore, “[f]ederal reserve notes are legal tender for all debts, including taxes.”59Some have challenged this delegation of sovereign powers to a quasi-private entity as a violation of the Appointments Clause of the Constitution,60 given that (1) many of the voting members of the Federal Open Markets Committee are not appointed by the President with the advice and consent of the Senate and (2) anyone with the discretionary power to create legal tender must be an “Officer of the United States.” Although these challenges appear at least colorable, none have succeeded, with most being dismissed on political question or standing grounds. 36 W. New Eng. L. Rev. 221, 239
- FOMC has embarked on whole new world of money creation (not just effecting money supply by buying and selling short term government treasuries anymore). Since December 2008, the Fed has “eased” into existence a quantity of $3 trillion through various programs, (more than three times the amount spent on the Recovery Act during the same period.) These programs include: QE 1, which lasted from November 2008 to November 2010 and through which the Fed spent $600 billion in created money to purchase agency mortgage-backed securities from struggling financial firms, QE 2, whereby the Fed credited member banks reserve accounts with $75 billion per month in unilaterally invented money between November 2010 and June 2011, and now QE 3, whereby since December 2012 the Fed is spending into existence $85 billion a month with no end in sight. Mark Gertler and Peter Karadi, QE 1 vs. 2 vs. 3... A Framework for Analyzing Large Scale Asset Purchases as a Monetary Policy Tool (March 2012) available at: http://www.federalreserve.gov/Events/conferences/2012/cbc/confpaper1/confpaper1.pdf ; http://www.federalreserve.gov/monetarypolicy/bst_crisisresponse.htm (describing these measures in more detail). Keep in mind: Congress just cut food stamps to save $5 billion a year. Kay’s comment: point is, no one knows if quantitative easing will even work to stimulate the economy; many believe that QE is a poor tool for such task because it is necesssarily focuses on certain classes of assets, such as MBS, and therefore creates bubbles and distorts asset prices without necessarily adding liquidity or any kind of stimulus to the economy. John Kay is Professor of Economics at LSE and frequent editorial contributor to Financial Times.
- Since the beginning of the financial market turmoil in August 2007, the Federal Reserve's balance sheet has grown in size and has changed in composition. Total assets of the Federal Reserve have increased significantly from $869 billion on August 8, 2007, to well over $2 trillion. Now, the total assets are in excess of 3.8 trillion. The increase in the size of the Federal Reserve's balance sheet has been accompanied by changes in the composition of the assets held over time. The level of securities held outright declined at the end of 2007 into 2008 as the Federal Reserve sold Treasury securities to accommodate the increase in credit extended through liquidity facilities. The level of securities holdings has risen significantly since 2009, principally reflecting purchases of Treasury, agency, and agency-guaranteed mortgage-backed securities under the large scale asset purchase programs announce http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htmd by the FOMC. The various liquidity facilities wound down significantly over the course of 2009. The Fed’s “balance sheet” expanded from 925.10 trillion dollars in January 2008 to 3,504.10 trillion in July 2013. http://www.federalreserve.gov/monetarypolicy/mpr-20130717-part2-accessible.htm#fig47 Source: Federal Reserve Board, Statistical Release H.4.1, "Factors Affecting Reserve Balances," www.federalreserve.gov/releases/h41/. The balance sheet is one way of tracking how much money the Fed has printed into the economy over time. As a balance sheet, the Feds assets and liabilities must always match. When the Fed creates currency out of nothing and spends or loans it out, it “credits” the liabilities side of the balance sheet (Federal Reserve Notes in Circulation or Deposits of Depository Institutions when they created cash is deposited in the member banks’ reserve accounts with the Fed). At the same time, it “debits” the asset side of the balance sheet with an entry representing whatever it used the created money for (for example, treasury securities or mortgage-backed securities). Thus, if the Fed creates $100 billion to buy U.S. Treasury bills from the public, the balance sheet will “expand” by $100 billion. Specifically, the Fed will credit the liabilities side of the balance sheet with $100 billion (if it used physical cash to make the purchase, it would credit the Federal Reserve Notes in Circulation “account”; if it used newly created electronic money to purchase the securities, it would credit the deposits of depository institutions account). At the same time, the Fed would debit Treasury Securities account on the assets side of the balance sheet with $100 million dollars. By contrast, if the Fed simply sold Treasury securities it already owned to owners of mortgage-backed securities in exchange for those MBS, without creating any new money, the sums of two of the asset accounts would change in value, but the overall entry for assets would not change and the balance sheet would not “expand” or “contract.”
- Again: its initial power was significantly restrained as compared to present power. /It wasn’t really to begin with (due to gold conversion limitation). Moreover, it’s initial power to create money was to support the Fed’s role as the lender of last resort for banks (to prevent bank runs). (but is this really necessary in the post FDIC era?) Overtime, its mission changed though. Now, it creates money (without the limiting affect of a gold standard) to: § 225a. Maintenance of long run growth of monetary and credit aggregates Currentness The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates 12 U.S.C.A. § 225a (West)
- Banks have engaged in this practice of creating effective money for centuries. Initially, before private banks had the power to create legal tender, banks created effective money or currency by printing and lending out bank notes nominally convertible to legal tender (usually specie, i.e. gold or silver). This process expanded the money supply because the banks created bank notes with nominal values well in excess of their stores of specie. As such, the banks did not actually have enough specie to redeem all of their outstanding notes at any given time. In the United States, this practice became less frequent, at least at the State level, when Congress placed a punitive tax on State-chartered Bank notes during the civil war in an ultimately unsuccessful effort to increase demand for the Treasury’s Greenbacks. Adapting to this restriction, banks switched to checkable demand deposit accounts (checking accounts) as a means of keeping the game (or more politely “money multiplying”) going. As in the bank note scenario, banks did not maintain sufficient “reserves” to pay out all of their deposit accounts at anyone time, retaining just a fraction (sometimes determined by itself, sometimes set by a State, and now controlled by the FED): thus, fractional reserve banking.
- How many have heard of this? The money multiplier? M=1/R (multiple that money supply will expand (M) for a certain reserve rate (R). Note: this isn’t how it really works, because banks can choose not to lend out as much as they are allowed to. Banks have engaged in this practice of creating effective money for centuries. Initially, before private banks had the power to create legal tender, banks created effective money or currency by printing and lending out bank notes nominally convertible to legal tender (usually specie, i.e. gold or silver). This process expanded the money supply because the banks created bank notes with nominal values well in excess of their stores of specie. As such, the banks did not actually have enough specie to redeem all of their outstanding notes at any given time. In the United States, this practice became less frequent, at least at the State level, when Congress placed a punitive tax on State-chartered Bank notes during the civil war in an ultimately unsuccessful effort to increase demand for the Treasury’s Greenbacks. Adapting to this restriction, banks switched to checkable demand deposit accounts (checking accounts) as a means of keeping the game (or more politely “money multiplying”) going.
- Three rates depending on banks “net transaction accounts” (demand deposits and other accounts with less than 7 day hold on withdrawal). http://www.federalreserve.gov/monetarypolicy/reservereq.htm Id. Although the Federal Reserve retains the power to set the reserve rate for banks with net transaction accounts above the low-reserve tranche, the qualifying net account balances for the first two reserve rates (i.e. reserve requirement exemption and low-reserve tranche) are currently set by statute and increase automatically each year. Last time Fed changed reserve rate was 1990 (from 12% to 10%). The Garn-St Germain Act of 1982 exempted the first $2 million of reservable liabilities from reserve requirements. This "exemption amount" is adjusted each year according to a formula specified by the act. The amount of net transaction accounts subject to a reserve requirement ratio of 3 percent was set under the Monetary Control Act of 1980 at $25 million. This "low-reserve tranche" is also adjusted (upwards) each year. As discussed in more detail infra, the reserve rate is probably better understood as a powerful tool for syphoning privately-created money out of the economy rather than an effective means of syphoning or adding money to the money supply. This is because banks are permitted to keep reserves in excess of the reserve rate. Thus, if the Fed’s goal is to increase the money supply, lowering the reserve rate will not always work. If the goal is to decrease the money supply, increasing the reserve rate above bank’s current reserves will always work. This phenomenon is sometimes referred to as the “pushing a string” problem.
- As of February 2014, the Federal Reserve reported that the broad money supply (known as “M-2”), which includes deposits in checking and savings accounts, equaled $11.103 trillion.65 For the same month, the monetary base, which consists of all currency physically held by the public and bank reserves, was $3.728 trillion.66 Thus, as of February 2014, private banks were responsible for transforming $3.833 trillion in monetary base into $11.088 trillion in money supply. Private banks create this money through fractional-reserve banking and a process referred to, somewhat euphemistically, as the “money-multiplier” effect.67 36 W. New Eng. L. Rev. 221, 241-42 As of September 2013, the Federal Reserve reports that the broad money supply (M-2) at $10.77 trillion. For the same month, the monetary base was $2.929 trillion. Thus, as of September 2013, private banks have created $10.77 trillion in money or money substitutes out of $2.929 trillion in monetary base through the process of fractional-reserve banking. Monetary Base = (1) seasonally adjusted, break-adjusted total reserves plus (2) the seasonally adjusted currency component of the money stock plus (3), for all quarterly reporters on the "Report of Transaction Accounts, Other Deposits and Vault Cash" and for all those weekly reporters whose vault cash exceeds their required reserves, the seasonally adjusted, break-adjusted difference between current vault cash and the amount applied to satisfy current reserve requirements.” “M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions. Seasonally adjusted M1 is constructed by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.” “M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000), less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market mutual funds, less IRA and Keogh balances at money market mutual funds. Seasonally adjusted M2 is constructed by summing savings deposits, small-denomination time deposits, and retail money funds, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.” http://www.federalreserve.gov/releases/h3/current/h3.htm#a121-53b9045f5 “The seasonally adjusted, break-adjusted monetary base consists of (1) seasonally adjusted, break-adjusted total reserves plus (2) the seasonally adjusted currency component of the money stock plus (3), for all quarterly reporters on the "Report of Transaction Accounts, Other Deposits and Vault Cash" and for all those weekly reporters whose vault cash exceeds their required reserves, the seasonally adjusted, break-adjusted difference between current vault cash and the amount applied to satisfy current reserve requirements.”
- SNAP (formerly Food stamps)(including Puerto Rico) Child nutrition and special milk programs Supplemental feeding programs (WIC and CSFP) Commodity donations and other
- We do not need wholesale reform. Given Constitution, the way the statutes are written, Congress could just adjust Treasury’s authority to issue U.S. Notes. If this caused inflation, Fed would be required to respond by either increasing reserve rates (thus limiting banks ability to create money) or by reducing its own issue of money (or destroying it). Either way, people should not worry about federal deficit. They should only to extent they are worried about illegitimate profits of middle men and public confusion. Reasonable minds can differ about what Congress should do in the face of the fiscal panic (and increasing federal debt) given the information presented here today. In my view, for example, Congress should consider issuing Treasury notes to pay for certain essential programs, including food stamps, to the extent there is political aversion to debt. The Fed would be required under the status quo to restrict the volume of money it creates to the extent that the U.S. money creation threatened inflation. Not historically unprecedented (greenbacks), not even materially different from seigniorage received from coinage now). To the extent money creation is called for to stimulate the economy, Congress is in a better position to determine how that money should be spent (democracy) and in a better position to target spending to that purpose (Congress can spend on anything; Fed cannot – just creates asset bubbles). If we decrease money printed by Fed and Banks, Congress can create money to pay for deficit without increasing inflation rate. (i.e. food stamps) There are costs to this approach by way of retracted private credit markets and increasing interest rates. The point is that Congress should be weighing those costs against the costs of the status quo (cutting safety net programs or issuing increasingly large volumes of interest-bearing debt) – not chiding America that we must learn to make ‘tough decisions” (i.e. cut benefit programs) like the proverbial family around the kitchen table to ensure that America will still be great for our children. So, Congress is ultimately faced with policy question: not how do we eliminate the federal deficit? But who should exercise power to print money? And who should benefit from this power?