The Gold Standard, Printing Money and the Federal Reserve

The media is hyping and harping on the issue that the Federal Reserve will resort to PRINTING more money to feed another round of “quantitative easing.” This is a wholly incorrect fact. The Department of Treasury prints our “paper currency” NOT the Federal Reserve. “Quantitative easing” is the Federal Reserve increasing bank reserves- thereby creating new money electronically- but, for a stated purpose of “stimulating” the economy and NOT for paying government debt. This is a salient point that the media mixes up, assuming and misinforming the public that QE is paying for increased government debts. QE serves a fundamental reason the Federal Reserve exists- LENDER OF LAST RESORT. There is no mystery or secret function in quantitative easing- it is an “envisioned” power of the Federal Reserve to shore up financial institutions or companies which hold debt during times of crisis in liquidity. In Quantitative Easing, government securities as well as commercial paper are NOT purchased directly, but rather on secondary markets- meaning, liquidity is being pumped into the private market and not by directly “monetizing government debt” nor with the intent to directly finance government debt.In the 2007-2009 QE policies, the Federal Reserve did not purchase direct government debt- but rather purchased mortgage backed securities and other asset-based securities, NOT government bonds.

These are SIGNIFICANT details to know and remember when caustically screaming about the Federal Reserve “printing money” to restore our financial soundness. Those making paranoid attacks on the QE policy of the Federal Reserve are obviously not reading the details of how and what was being purchased by the Federal Reserve in order to stabilize the banking system and restore credit and liquidity in credit markets. The 2007-2009 Quantitative Easing actions by the Federal Reserve DID NOT “monetize” government debt.

Second, let’s be informed that the Federal Reserve hardly “demands” the Treasury Department to “print” money on demand. This is a very rare occurrence as a cursory glance at the operations of the Federal Reserve would easily illustrate to the public that the Fed’s function in liquidity in our economy is NOT based on “printing” fiat currency. Liquidity- in the narrowest form- paper money and money supply overall (M1,M2,M3) is mainly controlled by the Fed via selling and buying notes, setting bank reserve requirements and interest rates. Therefore, increasing or decreasing the money ‘supply’ by intervening in private financial markets and NOT by demanding the Treasury to PRINT dollars is what QE policy is all about. Printing money can only be conducted by the Treasury Department which comes under the direction of the President of the United States, NOT the Federal Reserve.

Third, it’s actually irrelevant to discuss printed paper money, since it represents a tiny portion of our money supply. The vast majority of our money supply is electronic- not paper money.

Fourth- our money is not worthless, it represents value- either assets or labor, so it’s not worthless- it’s intrinsic value as a piece of paper is of course worthless- but for thousands of years we used shells, rocks, leafs, etc as money- so the negative hype, conspiracy rants, misinformed economic theories which attack the concept of “paper currency” is grossly misplaced. Thinking that “money” needs to have an intrinsic value- such as gold or silver is to create even greater problems than based currencies would solve [1]. Why don’t we use diamonds or rare gems as money since they have “intrinsic” value?

Fifth- Based currency (money based on gold) has already been tried, and proven to be very unsuccessful. The United States experienced more depressions and recessions and banking crisis in our history under the gold standard than with fiat currency. Since going to a fiat currency- no major industrial country has experienced a depression (ala 1929).  [1] Gold based currencies introduce several major problems, such as an inability to have an elastic money supply (in order to put in or take out money from the economy), gold hoarding, not enough gold to base a growing American or global economy, limits of total gold supply, foreign countries depleting America’s gold supply with trade deficits, a soaring price in gold based on almost limitless demand by today’s global economy.

Sixth- inflation- a dynamic and growing economy needs “some” inflation. Inflation provides an outer elasticity to know whether we need to push growth or slow growth down. Push it- to provide more jobs and economic development- or slow it down in order to avoid bubbles, over-employment (which triggers very high inflation) etc… So, having ‘some” inflation is a general indicator and insulator for the economy- perfectly normal- and absolutely necessary for a dynamic economic system. Deflation would be a MAJOR risk under a gold standard and is much harder to recover from- i.e. Japan has still not recovered from its deflation 10-15 years ago.

The Federal Reserve and fiat currency system has produced the highest standard of living for the highest percentage of Americans in its history- as well as reducing the percentage of people living under the poverty rate in America. That is “proof” in the pudding.

James Luko

Former United Nations Official, International Criminal Tribunal for the Former Yugoslavia, Deputy Head of Office- ICTY Office of the Prosecutor, Canadian Defense Department-Ottawa Canada, National Council for Soviet-East European Research- Washington DC

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