The Weiner Component V,2 #34 – The Concept of Money: Part 2

One of a number of posters created by the Econ...

One of a number of posters created by the Economic Cooperation Administration to promote the Marshall Plan in Europe (Photo credit: Wikipedia)

Logo used on aid delivered to European countri...

Logo used on aid delivered to European countries during the Marshall Plan. (Photo credit: Wikipedia)

Marshall Plan

Marshall Plan (Photo credit: Wikipedia)

If one draws a horizontal line in United States history both before and after World War II one gets an interesting perspective.  Before the war the U.S. was a poor country still working its way out of the Great Depression with a large lower class, a small middle class, and a smaller upper class.  After the war the country still had a lower class but it was much smaller than it had been before the war, a large ever-growing middle class, and a smaller upper class.  What happened was an infusion of paper money during the Great Depression, World War II and afterwards which reconstituted the nation as it had never been before and turned it into a middle class country.

 

After the war there was also intensive government spending in the form of free education for veterans, the GI Bill.  Veterans were also funded who didn’t go to school, so they could start their own businesses and buy homes.  There was continued intensive government spending.  Also from 1948 this was added to, with the Marshall Plan or European Recovery Plan, for the next four years.  The European countries rebuilt their infrastructures with goods from the United States.

 

Where did all this money come from?  It came from the Federal Government printing presses.  What it did was unleash the productive capacities of the population.  Specifically it was the tool that allowed massive production of goods and services which freed the labor potential of the people within the country and helped create the new growing middle class.  The spending greatly increased the National Cash Flow throughout the nation and also brought in an immense increase, on all levels, of taxes.  We were by this process a much richer nation.

 

There had been rationing during the war.  Not much had been made available to the general public, most of the goods produced went overseas to the armies fighting the war.  Excess money had been put into war bonds; many of these were now cashed in.  There were new industries, like television; radio had existed before the war; now there were two major home entertainment entities.  Only military vehicles had been manufactured during the war.  As the automobile industry was converted to civilian use people bought new cars for the first time in years.  There were jobs or new businesses for the returning veterans.  It was a new era.

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To move to an earlier period: during the Civil War money had been gold and silver coins.  The Federal Government bought and minted all the gold that was mined in the United States.  Consequently the legal tender that existed in society at that time was both the gold and silver that could be mined and minted.  Since wars are expensive and their cost generally exceeds the amounts of money that exists or could be collected in taxes or minted, the government had an immediate need for more cash.  This problem was solved by issuing paper currency called greenbacks.  The reason they were called greenbacks was because one side was green and they were legally made into currency.  There was nothing behind these bills except the word of the U.S. Government.  From 1861 through part of 1862 they were Demand notes.  From 1862 through 1865 they were United States notes.  After the war the greenbacks were gradually retired, replaced by gold and silver coins.

 

Since more money had been needed to fight the Civil War the Federal Government had arbitrarily created it and spent it fighting the war.  Once the war was over the Government gradually withdrew and replaced that money with gold and silver coins.  It was actually a form of no interest borrowing.  But this process began the growth of the Industrial Revolution in the United States.  After the war we were a much richer country than we had been before it started.

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Toward the end of World War II from July 1 through July 22, 1944, the Bretton Woods Conference or the United Nations Monetary and Financial Conference met at Bretton Woods, New Hampshire.  It consisted of 730 delegates from 44 Allied nations.

 

The basic currency in the world then and during the post war period was the American dollar.  All the Allied currencies were pegged against the dollar, generally taking their value as a percentage of the dollar.   Bretton Woods established the rules for international trade that would continue from the end of World War II on.  After the Marshall Plan all these nations functioned on a higher plain than they had before the war.

 

It should be noted that none of these nations, with the exception of the United States initially had any gold.  All the currencies of all these nations were based upon the productive ability of each of the nations.  Their currencies values nationally and internationally were based upon their credit.

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In addition another thing to keep in mind has been and is population growth.  According to the U.S. Census Bureau on July 1, 1929, the year the Great Depression began the United States population consisted of 121.77 million people.  By 1933, when Franklin D. Roosevelt became President it had grown to 125.58 individuals.  By 1945, the end of World War II, it had reached 139.93.  By July 1, 1970, it was 205.05 million people.  By 1980, the year Ronald Reagan was elected President, the population was 227.22 million people.  By the year 2,000, when George W. Bush was elected to the presidency it was 282.16 million people.  By 2010 the population was 309.35 million people.  By July 1, 2017 the Census Bureau estimates the population in the United States to be 325.34 million people.  Also keep in mind that in every official census introduction there is an apology for the people who were somehow missed, that is, not counted.  The estimate in 2010, admitted by the Census Bureau, was that they had missed millions of homeless people throughout the country and the estimate was much closed to 350 million people.

 

While we are not considering the fact here the world population has also phenomenally increased.  It is estimated today to be somewhere above 7 ½ billion people.  It is also continuing to grow.

 

The overall count in the United States has tended to increase each year by about 2 ½ million.  This includes deaths, births, and immigration.  According to the Census Bureau there is one birth every 7 seconds; one death every 12 seconds; one international migrant every 32 seconds.  The net gain is one additional person every 12 seconds.  And this includes periods of peace and war.

 

In order for the country to function properly as the population grows there has to also be an increase in the amount of money available in the National Cash Flow otherwise the country would be facing a gradual growing deflation, seeing the amount of money available per person decreasing in amount and increasing in value.

 

The Federal Reserve controls the money supply.  It can increase or decrease the amount of money available in the general society by its open market operation and otherwise.  From 1987 to 2006 Alan Greenspan was Chairman of the Federal Reserve.  He had stated that it was not his job to deal with the money supply.

 

To be fair the powers of the Federal Reserve have evolved from its founding in 1915 to the present.  Certain powers have been granted to it by Congress over the years, other powers it has taken on.  Under Alan Greenspan it choose not to deal with the need for more money within the society.

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The banks, which operate for a profit, have the power to expand or contract the amount of currency available to the general public.  Probably beginning slowly sometime in the 1970s the banking houses gradually created a new type of hedge fund based upon the value of homes owned by people throughout the United States; they began using mortgages as investment securities.  In the 1980s, with the Reagan Administration supporting Free Markets or theories of pure capitalism, these hedge funds took off and the country underwent a binge of refinancing that would not explode until the Housing Crash of 2008.  Homeowners were encouraged to use their homes as bank accounts that they could freely spend. By doing this they caused the homes to shoot up in value while massively expanding the economy and the value of their homes.  In the process a housing bubble was created which gigantically inflated the values of the houses allowing many people to constantly refinance their homes during this period.  When the crash finally came in 2008 a large number of people were underwater on their homes; that is, they owed more on the mortgages than the properties were worth.

 

Many, if not most, of the banking houses began foreclosing on these properties until it was discovered that the banks didn’t own the mortgages on these houses, they merely serviced them.  They belonged to the hundreds of people who had shares in these Hedge Funds.  Actually they didn’t belong to anyone because numerous Hedge Funds, each consisting of hundreds of owners, actually owned the houses and there was virtually no way of discovering who held 50+ percent of an individual property.  Virtually all the banks paid hundreds of millions of dollars in fines for their illegal seizures and sales of these properties.  It should be noted that the banks solved their illegal behavior totally with fines; no one went to jail for these illegal acts by the banks.

 

It was an unbelievable mess that defied straightening out.  For a period of a little over two years the Federal Reserve, under Chairman Ben Bernanke, with the support of President Barack Obama, bought up 50 billion dollars’ worth of mortgages a month and also added 50 billion dollars a month directly to the National Cash Flow.  At the end of this period the new Chairperson, Janet Yellen ended the practice gradually over a period of months by systematically decreasing the amount of the monthly purchase until it reached zero.

 

If we ask what happened to all the mortgage pieces that the Federal Government purchased at this time?  Logistically the cost of matching up all the multitudinous pieces of mortgage paper would have been impossible.  And the government did not want to put any additional hardships upon these people.  The mortgage paper was destroyed.  Nobody whose paper the government held was foreclosed upon.  If a house was deserted because it was under water it would eventually be sold for back taxes.  If the people stayed in the house no one foreclosed upon them as long as they paid their property taxes.

 

The problem was that the Federal Government made no announcement about what it had done or was doing.  People found that they could live in their former home without making any further payments.  Many tended to generally spend the money they would have used toward their mortgages.  There was an increase in overall spending due to the generosity of the Federal Government.  People couldn’t sell their homes because they no longer owned them but they could continue to live in them as long as they paid their property taxes.  If they were elderly and eventually passed on the homes would eventually be sold for back taxes.  Some people who had cash and figured this out made a lot of money.

 

Were these funds the Federal Government spent added to the National Debt?  The probability is negative.  These funds were just added to the Cash Flow.  They supplied needed money to the economy and helped the country get out of what was called The Great Recession.  They also helped avoid a greater depression than that of 1929.

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The level of the National Debt today is over 19 trillion dollars and continuing to grow.  The Federal Government has added additional billions of dollars to the National Cash Flow which were not counted as part of the National Debt.  This was from the period of the Great Depression on, through World War II, the post war period, and particularly through the Obama Administration.  By and large the country has moved forward positively during all this going from being a lower class nation to a middle class one.

 

The basic problem that seems to exist is that the understanding of the general public, and seemingly most members of Congress and even a good percentage of the ruling administrations, still have an early Twentieth Century concept of money being an object of wealth rather than a tool that allows the society to operate.  Money defines an individual’s level of wealth but it is not viable until it is used.  This has and can cause confusion in national development.  A true understanding of money and of the true wealth of the nation throughout the country would make a significant positive difference.

The Weiner Component Vol.2 #6 – Part 2: The Federal Reserve

Description: Newspaper clipping USA, Woodrow W...

Description: Newspaper clipping USA, Woodrow Wilson signs creation of the Federal Reserve. Source: Date: 24 December 1913 (Photo credit: Wikipedia)

English: A map of the 12 districts of the Unit...

English: A map of the 12 districts of the United States Federal Reserve system. (Photo credit: Wikipedia)

The Federal Reserve System (Fed) was established in December of 1913 as the central banking system of the United States by the passage of the Federal Reserve Act. It came into existence largely in response to a series of financial panics, particularly the Panic of 1907. Its purpose was to establish a semi-independent agency that would control and regulate Monetary Policy within the United States. At that time it meant mainly being able to freely and quickly move currency around as needed in the country.

 

The Fed consists of twelve regional banks that cover the entire nation. They are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. Each of the twelve sections has its own Federal Reserve Bank, generally with at least one auxiliary bank. For example: California has the main Fed Bank located in San Francisco and an auxiliary one in Los Angeles. The Federal Reserve Banks are located throughout the United States, with the main branch in Washington, D.C. Each can also handle and make the other branches cognizant of any problems within its region.

 

The Fed was initially establish to devise and implement Monetary Policy. In 1913 this meant to control the supply of currency available throughout the nation. This was and still is its main function. But after 1913 the law establishing it was gradually expanded, generally as the need existed, expanding the definition of Monetary Policy, and giving the Fed numerous other responsibilities.

 

Today Monetary policy remains its primary function but today the Federal Reserve System’s mandate is also to promote economic growth, high levels of employment, stability of prices, to help preserve the stability of the dollar, and to moderate long-term interest rates. We can say that the Fed’s mission is, in addition to regulating Monetary Policy, to foster a sound banking system and a healthy economy throughout the nation. That in order to accomplish this the Fed serves as the banker’s bank, the government’s bank, the regulator of financial institutions, and as the nation’s money manager. We can also say that all of this is the current definition of Monetary Policy.

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The problem here is that economics is not an exact science and that the regulators of the Fed have to continually read and interpret what’s happening in the economy. The different Federal Reserve members do not always agree upon what should be done. The agency is run by consensus with the Fed Chair being in charge.

 

In 1908 Congress enacted the Alrich-Vreeland Act which established the National Monetary Commission to study banking and currency reform. The Bill set up two commissions, one to study the American monetary system in depth and the other to study the European Central Banking system and to report on them. Thereafter Congress took two years to come up with the Federal Reserve Bill. It was passed late in 2013 and signed by President Woodrow Wilson the same day it passed Congress. The Bill was constructed largely by bankers as a necessary reform of the U.S. financial system.. It set up a fairly independent entity, The Federal Reserve.

 

In its initial period it was opposed by agrarian interests. They stated that it favored the mercantile class over the farmers. It has long since passed beyond this period of discontent within the United States. While it is still at times opposed by many Republicans largely for being too independent it has stood the test of time as a necessary entity of the U.S. Federal Government.

 

Interestingly the Republicans who still oppose it feel that it should be under rigid control of the Congress. But Congress is afraid to mess with it. An error on their part could bring about a massive depression. And that would bring about a voter rebellion at the next election.

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As was pointed out even though the Fed has control of the money supply that aspect of the Fed’s power is fairly limited. They cannot always control completely or even handle all the factors that are affecting the economy. It is a very difficult process to predict what is occurring within the nation, virtually from day to day, and to make exact changes that can or will always affect it in a positive fashion.

 

Also Congress, by its actions can strongly affect the economy by, among other things, its spending policies. This is called Fiscal Policy, where Congress can increase or decrease the amount of money it spends upon various programs like decreasing aid to the poor in Affordable Health Care or perceptibly increasing military spending. Decreasing aid programs to the needy takes large amounts of spending out of the overall economy while increased spending on the military will substantially increase the amounts of money that go to the upper class. This can make for a redistribution of income from the poor to the upper class.

 

All these changes, plus others that have not been mentioned, become reasons for differences in the economic flow. They become factors that the Fed has to consider in mapping out its policy. And they are dynamic changes that all always going on. This means that the Fed is in a constant state of studying the economy and continually fine-tuning what is happening in the country. It is a constant process and the changes can take months to come about or not come about. It takes a steady hand to deal with this process.

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The United States Government probably is the largest spender in the world. It has a checking account with the Fed through the U.S. Treasury Department. All revenue generated by Federal taxes, licenses, etc. and all outgoing government payments are handled through this account. In addition the Fed sells and redeems government securities such as savings bonds and Treasury bills, notes, and bonds. It does this to raise money, or to limit the amount of money in the National Cash Flow, and otherwise adjust the economy.

 

The factor that deals with this is the overall rate of inflation in the country. If it starts going up the Fed has to reduce the amount of money in the National Cash Flow. There is too much money chasing too few goods and services, forcing prices up as more and more people bid for the same products and/or services. At this point the Fed sells more bonds and Treasury Bills than it redeems. It does this by raising the interest rate it pays for the money. If, on the other hand, there is not enough money in the National Cash Flow then the Fed will increase the amount by buying back more bonds and Treasury bills than it sells. Or for that matter the Fed can just add money to the National Cash Flow making more cash available for everyone as it did for over two years under the Obama administration.

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The Fed also issues all coins and paper currency. The U.S. Treasury prints and mints the cash and the Fed distributes it to its financial institutions. This includes replacing worn-out and torn bills. In fact if one visits and takes a tour of one of the Federal Reserve Banks, they get a little package a shredded old money as a souvenir.

 

The Federal Reserve Board also has regulatory and supervisory responsibilities that include monitoring banks that are members of the system and the international banking facilities in the U.S., the banking activities of member banks and the U.S. activities of foreign owned banks. In addition the Fed helps to ensure that banks act in the public’s interest by helping to develop federal laws governing consumer credit. Such laws as The Truth in Lending Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, and the Truth in Savings Act are examples of this. The Fed is supposed to be the policeman for banking activities for the U.S. and abroad.

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The Chairperson of the Federal Reserve heads this bank. Currently Janet Yellen is the Chairwoman. She has held this position since 2014 when she was appointed by President Barack Obama. The term of this office is four years. President Trump has stated that he will replace her when her term expires in 2018.

 

Chairperson Yellen tends to be overly cautious in her approach. She gradually ended the policy of the Fed contributing money to the National Cash Flow and has been overly cautious in terms of raising the interest rate that the Fed charges it member banks, bring about two quarter of a percent raised while threatening three further quarter of a percent increases. The Fed has gone from a 0% charge to banks borrowing money from it to one half of one percent which it is at present. This has kept interest rate that the banks charge low but has gotten their depositors a rate of one tenth of one percent interest on the money they have deposited into the banks. Consequently the Commercial and Saving Banks are practically getting free money from their depositors, and feeing their depositors for everything thing they do for them, and while charging a lower interest than they used to still making millions in interest. It would seem that the banks are not operating in the interest of their depositors.