Goldtent TA Paradise

How the Fed “got away”

1. pedro_deleon says:

   August 20, 2024 - 1:27 pm at 1:27 pm

   (Starting) In World War I it was possible to “print money” in a more roundabout way. The government could sell a bond to the newly created Federal Reserve. The Federal Reserve would pay for it by creating a deposit account for the government, which the government could then draw upon to pay its expenses. If the government first sold the bond to the general public, the process of money creation would be even more roundabout. In the end the result would be much the same as if the government had simply printed greenbacks: the government would be paying for the war with newly created money. The experts gave little consideration to printing money. The reason may be that the gold standard was sacrosanct.

   https://eh.net/encyclopedia/u-s-economy-in-world-war-i/

2. pedro_deleon says:

   August 20, 2024 - 1:27 pm at 1:27 pm

   Before explaining how this process worked, it is necessary to know a few things about the Fed. The institution began operations in 1914 on the “real-bills” principle. Member banks could borrow cash from the Fed, but only by submitting “real bills” as collateral.
   These bills were short-term debt instruments that were created by commercial organizations to help fund their continuing operations. The bills were in turn backed by business inventories, the “real” in real bills. By discounting or lending cash to banks on real bills, the Fed could increase the money supply.

   ***The original Section 16 of the Federal Reserve Act required that all circulating notes issued by the central bank be backed 100% by real bills.***

   On top of this, an additional 40% gold reserve was to be held by the Fed. In those days, Federal Reserve notes—a liability of the Fed—were convertible into gold, and the 40% gold reserve added additional security. Thus, for each dollar liability it issued, the Fed held 140% assets in its vaults, or one dollar in real bills and 40¢ in gold on the asset side of its balance sheet.

   ***Thus, the real-bills doctrine as set out in the Federal Reserve Act significantly hemmed off the Fed’s balance sheet from serving as a bin for the accumulation of government debt and claims to government debt.***

   To help finance the war, which it had entered into in April 1917, the US government would have to open up the Fed’s balance sheet to the Treasury’s war debt.
   A major step was taken in June 1917 with the relaxation of the double requirement of 100% real bills and 40% gold for each dollar issued. A small change to Section 16 now meant that the 40% gold reserve could simultaneously substitute for 40% of the real-bills requirement.
   Rather than holding $1.40 in assets for each $1.00 issued ($1.00 real bills, 40¢ gold), the Fed now only needed to hold $1.00, comprised of 40¢ gold and 60¢ real bills. This freed up a significant amount of the Fed’s collateral for new issues of notes.
   An earlier step to harness the Fed for war-financing purposes was the 1916 addition of Section 13.8 to the Federal Reserve Act. This change allowed the Fed for the first time to make loans to member banks with government debt serving as collateral. But such collateral was not considered a real bill, and therefore was not eligible to contribute to the 100% “real” backing requirement for dollars issued.
   With the United States gearing up for the war, President Woodrow Wilson announced in April 1917 the first war-bond issues, or “Liberty-bond” drives. To help prop up the war-bond market, another change was made to the [Federal Reserve] Act to further pry open the Fed’s balance sheet to the acceptance of government debt. Section 13.8 loans were now permitted to serve along with real bills and gold as eligible backing assets for Federal Reserve notes.
   Thus, the 60% “real”-backing requirement could be satisfied not only by real bills, but also “nonreal” government debt. The Fed now faced no constraints in bringing government debt onto its balance sheet to expand the note issue.

   https://mises.org/mises-daily/how-fed-helped-pay-world-war-i

3. pedro_deleon says:

   August 20, 2024 - 1:28 pm at 1:28 pm

   excerpt
   “Credit policy has the potential to direct funds to particular sectors or particular private entities, either funds they would not otherwise have obtained or on terms they would not otherwise have obtained. The “currency problem” that the founders were seeking to solve was a monetary problem, not a credit problem”

   So the Federal Reserve Banks were given the authority to make loans backed by certain types of commercial paper or purchase certain types of such commercial paper. This is reflected in the third part of the preamble purpose of the Federal Reserve Act: “to afford a means of rediscounting commercial paper.” They called it “rediscounting,” because the initial loan was essentially the purchase of an obligation at discount, which reflected an implied interest rate, and the Fed was discounting it a second time.
   During World War I, the Reserve Banks were granted the power to hold Treasury securities, and thereafter they used purchases of Treasury securities in the open market to influence monetary conditions. Acquiring Treasury securities in the open market avoided the cumbersome collateral-posting procedure required under the national bank rules. It is important to note that the Fed creates money whether it buys Treasury securities, buys commercial paper or makes a loan. When a Reserve Bank acquires an asset, it credits the reserve account of the bank of the party from whom it acquires the asset. When a Reserve Bank makes a loan, it credits the reserve account of the party to whom it is making a loan. In either case, the new reserve account balances can be withdrawn by the bank, and Federal Reserve notes would be paid out, effectively converting the reserve balances into currency. In either case, the supply of currency plus reserves has increased. The key lesson here is that, for the purposes of the original goal of the Federal Reserve Act — that is, to solve the currency problem that the Fed was founded to solve and stem financial panics — it doesn’t matter whether the Fed lends or buys Treasury securities. Either one expands the supply of currency and reserves that people are clamoring for.
   This highlights an important distinction regarding central bank activities. Some actions change the total amount of currency and bank reserves in circulation. These are best referred to as “monetary policy.” Actions that change the composition of the central bank’s asset portfolio, but leave the amount of currency and bank reserves unchanged can be thought of as “credit policy,” since they involve intervening in credit markets by buying one instrument and selling another.13 Credit policy has the potential to direct funds to particular sectors or particular private entities, either funds they would not otherwise have obtained or on terms they would not otherwise have obtained. The “currency problem” that the founders were seeking to solve was a monetary problem, not a credit problem.

   https://www.richmondfed.org/press_room/speeches/jeffrey_m_lacker/2013/lacker_speech_20130829