So yesterday the Senate passed a COVID-19 “stimulus” package worth a couple of trillion dollars to get through the conomic catastrophe facing America in the form of bankruptcies, unemployment, medical costs, mortgage foreclousres etc.
Last week 3.2 million Americans filed for unemployment insurance – four times the largest number ever filing in a single month prior. We’re going to send money to everyone; individuals, corporations, airlines, cruise companies, small businesses, hospitals et al.
So where exactly does all this money come from you ask? Well maybe you didn’t ask (don’t look a gift horse in the mouth!) but one might wonder – Did the government have all of this money just laying around?
Well of course not! It is, how shall we say, “digital” money.
Ever look at the paper green backs in your wallet? While I personally never use cash money anymore, you will note if you look at your paper money that it says it is a “Federal Reserve Note.” A note – like an IOU type note.
When I received my social security allowance each month I receive a “credit” to my account from the government. I can use the credit to (a) obtain cash in the form of a Federal Reserve Note or I can electronically transfer the credit to others to pay my bills.
Those of us who will receive something from the latest Senate stimulus package will receive a digital bank credit or a check, which can be turned into “cash” or deposited as a credit to your accounts.
So where does this money come from which simply appears as if by magic? I mean it hasn’t just been laying around unused.
It is created out of thin air by the Federal Reserve. Digital money. It has value, not in itself, but as an exchange to buy goods, services, and assorted shit and as a way to pay your bills by transferring the credit you have received. It is what you accept in payment for your work or when you sell your house.
There is nothing else of value attached to money.
It wasn’s always so. Any of you youngsters ever hear the term “gold standard?”
Gold had been used as the “currency” of choice throughout history. The earliest known use was in 600 B.C. in Lydia, present-day Turkey. Gold was part of a naturally occurring compound known as electrum, which the Lydians used to make coins. By 560 B.C., the Lydians had figured out how to separate the gold from the silver, and so created the first truly gold coin. The first king to use gold for coins was Croesus. His name lives on in the phrase “rich as Croesus.”
In those days, the value of the coin was based solely on the value of the metal within. The country with the most gold had the most wealth. So, Spain, Portugal, and England sent Columbus and other explorers to the New World to find more gold so they could be wealthier than each other.
In 1861, Treasury Secretary Salmon Chase printed the first U.S. paper currency. The Gold Standard Act of 1900 established gold as the only metal to be used for redeeming paper currency. It set the value of gold at $20.67 an ounce. Anyone anywhere holding American dollars could walk into their bank, pluck $20.67 on the counter and receive an ounce of gold. American paper money were not “FederalReserve Notes” – they were “Gold Certificates.”
European countries had wanted to standardize transactions in the booming world trade market. They adopted the gold standard by the 1870s. It guaranteed that each government would redeem any amount of their paper money for its value in gold. That meant transactions no longer had to be done with heavy gold bullion or coin shipments. It also increased the trust needed for successful global trade. Paper currency now had its issuing government’s guarantee of value tied to something real.
During World War 1 governments went off of the gold standard and simply printed money to finance the war. After the war the victors went back on a modified gold standard, except for Germany which printed money in order to pay reparations. It was soon consumed by hyper-inflation making its paper money worthless.
Comes the Great Depression and the mother of all bank runs the gold standard again teeters and has to be abandoned. Depositors seeking safety withdrew their money from banks causing failures and immediately demanded gold which they then hoarded.
On March 6, 1933, the newly-elected President Franklin D. Roosevelt closed the banks, responding to a run on the gold reserves at the Federal Reserve Bank of New York. By the time banks re-opened on March 13, they had turned in all their gold to the Federal Reserve. The populace could no longer redeem dollars for gold. Furthermore, no one could export gold.
On April 20, 1933 FDR ordered all Americans to turn in their gold in exchange for dollars to prohibit the hoarding of gold and the redemption of gold by other countries. This created the gold reserves at Fort Knox. The United States soon held the world’s largest supply of gold. But no individual could any longer demand a fixed amount of gold for his dollars.
The Gold Reserve Act of 1934 allowed the government and everyone else to pay debts in dollars, not gold. It authorized FDR to devalue the gold dollar certificates by 40%. He did this by increasing the price of gold, which had been $20.67 per ounce for 100 years, to $35 per ounce. The government’s gold reserves increased in value from $4.033 billion to $7.348 billion. This effectively devalued the dollar by 60%.
Actually it was almost inevitable; England had abandoned the gold standard earlier as holders of currency demanded the promised gold. If it could happen in England then all knew it could happen anywhere.
The 1944 Bretton Woods Agreement set the exchange value for all currencies in terms of gold. It obligated member countries to convert foreign official government holdings of their currencies into gold at fixed par values. The dollar was fixed at $35 and since we had by far the most gold in the world, foreign currencies were simply fixed against the dollar. Each country was expected to maintain its currency within a fixed range against the dollar. If its currency rose against the dollar, it would print money. If it fell, it would buy back its currency held by foreign governments.
It all worked pretty well for a time. The dollar was the world currency. Then came Vietnam and the oil crisis. Producers of oil, mainly Saudi Arabia and the Soviet Union were amassing dollars from their oil sales and the holders became concerned that the U.S. could not honor its promise to redeem the dollars for gold at $35 per ounce.
The run was on and Richard Nixon was forced to abandon the gold standard all together. We would not redeem foreign held dollars for gold. Thus came the free market trading of currencies and the ability of the Fed and the government to create money out of thin air.
Does the Fed have a balance sheet? Sure it does. It is published weekly.
“Taking a look at the balance sheet of the Federal Reserve, or for that matter, any central bank, is like seeing the eighth wonder of the world. Unlike any other business enterprise, the Fed can expand its balance sheet by printing as many dollar bills as it wants. It’s like creating winds merely by waving your hands.”
More on the magical Fed balance sheet in a future post perhaps as the checks arrive.
So next time some Republican asks you exactly how Bernie going to pay for that Medicare for All socialist dream, answer that he will find the money in the same place we just found two trillion dollars for CORVID-19 stimulus.