Posts tagged ‘U.S. Treasury’

05/21/2012

Currency: No Return to Gold Standard

During the Republican debates, Congressman Ron Paul went off the deep end as to the currency, advocating a return to the “gold standard.” As Newt Gingrich suggested forming a commission to look into bringing it back, Herman Cain argued the nation needed to focus on the “sound money” virtues of gold and silver.

None of these Republicans however could possibly have been serious about the currency. While there are potential problems in the uncontrolled printing of money, based on nothing more than a faith in the strength of the Federal Reserve, returning to gold or silver to back up the currency, is certainly no answer.

The principle problem with gold and silver is their quantities are finite, and as the population grows faster than the metal supply, money becomes scarce, adversely affecting economic expansion.

During the Presidency of Andrew Jackson, the population grew at a rate far greater than the available precious metal supply, causing many to advocate paper money. Jackson, however, was hostile to the idea, and insisted on remaining with gold and silver. When he ordered federal agents to accept only gold or silver for the sale of public lands, banks were already down to only 1 gold dollar in reserve, for every 10 paper dollars, and his 1836 decree triggered an inflationary spike in prices and interest rates, and caused the value of the dollar to drop.

The inadequate supply of currency arose again when President Lincoln had to circulate paper Greenbacks to pay for the Civil War. Since the Treasury had been selling gold to anyone who wanted to buy it, by the time Grant took office in 1869, the money supply was depleted. When Congress proposed a bill to add a paper currency, Grant vetoed it, triggering the Panic of 1873. The Greenback Party (1874-89) emerged to push for a paper currency.

While President Hayes continued to allow the exchange of gold coins for the paper Greenbacks issued during the Civil War, he wanted more silver and paper money, but there was not enough gold to back it up, so he vetoed a bill that would have required the Treasury to coin certain quantities of silver each month.

The mint finally started increasing the supply of silver coins, under the Silver Act of 1893, signed into law by President Harrison. As the price for silver fell, currency manipulators quickly exchanged it for gold, and drained our gold reserves.

A Special Session of Congress was called to repeal the Silver Act as soon as President Cleveland took office in 1893, but he refused to abandon the gold standard, and gold reserves continued falling, leading to the Financial Panic of 1893, and a farm depression.

When William Jennings Bryant proposed the free coinage of silver, President William McKinley again played it safe by defending the gold standard. He signed the Gold Standard Act of 1900, strictly limiting paper money redemption to gold.

It was not until 1934, during the Great Depression, and the administration of Franklin Roosevelt, when we finally moved off the gold standard, by replacing it with the full faith and credit of the Federal Reserve Bank. The final nail in the gold standard coffin came in 1971, when Republican Richard Nixon completely cancelled the right to convert dollars to gold.

The gold standard is dead. It died 78 years ago. While there is a risk of printing too much paper money at the Federal Reserve, the solution is not to return to gold, the answer is to intelligently monitor the quantity of paper currency printed, and insure that the value of the Dollar is not diminished in the process.

05/17/2012

Banking: How the System Evolved

With the Crash of 2008 and the melt down of our big financial institutions, questions have arisen as to how U.S. Banking evolved into what it is today.

While the Constitution did not expressly delegate the power to establish a federal bank, it clearly authorized Congress to coin money and to regulate its value. The Congress was also given the authority to make all laws “necessary and proper” to carry out those functions. In addition to a mint, George Washington opened the First Bank of the U.S. in 1791, which continued for 20 years, until their charter expired in 1811 due to non-renewal.

After the War of 1812, converting state bank notes into gold and silver became such a problem, Congress and James Madison were prompted into creating a 2nd Bank of the United States, in 1816. Andrew Jackson criticized it, saying it concentrated funds in the east, and limited local western banks from lending to farmers.

When Jackson became President, he was presented with a bill in 1832 to extend the charter of the 2nd U.S. Bank, but he vetoed it, arguing it was unconstitutional. He directed his Treasury Secretary to move all federal funds from the U.S. Bank into state banks, but his Treasury Secretary and his successor both refused, before the third in line finally carried out Jackson’s order.

As Jackson left office in 1837, newly-elected Martin Van Buren inherited the nation’s first serious depression. The crash came 36 days after he was sworn-in, as nearly every bank in the country closed. Van Buren tried to create a more stable system in 1840 by moving all federal funds from private banks into a U.S. Treasury.

As soon as President Tyler took over in 1841, he quickly reversed Van Buren’s policy, and vetoed two bills sponsored by Sen. Henry Clay to revive the U.S. Bank. President Polk, who followed Tyler in 1845, returned to Van Buren’s policy of keeping federal funds in the U.S. Treasury.

Before the Civil War, President Buchanan presided over an economic panic that witnessed the failure of several banks, and the volatility later continued, with additional panics under Grant in 1873, and Cleveland in 1893.

President Wilson signed the Federal Reserve Act in 1913, which created a new more stable system, by establishing 12 Federal Reserve Banks, charged with regulating the money supply, making loans to private banks, and by monitoring their reserves.

As President Franklin Roosevelt inherited the Great Depression, depositors started withdrawing their money from banks in 1933, triggering a panic that caused 5,000 of them to go out of business, the day before he was inaugurated. The new President promptly closed all banks, declared a Bank Holiday, and signed an Emergency Banking Act (1933) that established the Federal Deposit Insurance Corporation (FDIC) to make deposits safe by providing insurance for them. Congress also passed the Glass-Stiegel Act (1933) to take banks out of stock market speculation.

Ronald Reagan ushered in a new era of right-wing deregulation, during which he pushed the repeal of financial sector rules. As the conservatives beat the dumb louder and louder, they pressured moderates like Bill Clinton to repeal of the depression-era Glass-Stiegel Act. For eight years under George W. Bush, his minions looked the other way, as speculators took over the financial sector, and led us into the Crash of 2008.

To correct the problems caused by deregulation, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, as a first step in re-regulating the financial sector. That is how we got to where we are, but we are not there yet, and we have a ways to go to fully stabilize the system.