The Money Revolution E-Book

Richard Duncan

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 605

Veröffentlichungsjahr: 2022

Beschreibung

Learn how the United States can stop and reverse its relative economic decline in this fascinating analysis of American Money, Credit and Capital In The Money Revolution: How to Finance the Next American Century, economist and bestselling author Richard Duncan lays out a farsighted strategy to maximize the United States unmatched financial and technological potential. In compelling fashion, the author shows that the United States can and should invest in the industries and technologies of the future on an unprecedented scale in order to ignite a new technological revolution that would cement the country's geopolitical preeminence, greatly enhance human wellbeing, and create unimaginable wealth. In this book, you will find: * An important new history of the Federal Reserve that details the transformation of the country's central bank from the passive lender of last resort created by its founders in 1913 into the world's most powerful economic institution today. * A fascinating discussion of the evolution of money and monetary policy in the United States over the past century. * An examination of the role that credit has played in generating economic growth, especially since Dollars ceased to be backed by Gold five decades ago. * A detailed description of the country's capital structure and its dangerous deficiencies. * An urgent call-to-action for the United States to begin a multi-trillion-dollar investment program targeting industries of the future. The Money Revolution: How to Finance the Next American Century is a page-turning read ideal for anyone interested in the future of the United States. Its gripping thesis offers anyone with a personal or professional interest in America's economy, financial system, or geopolitical position in the world an engrossing intellectual journey.

Leseprobe

The Money Revolution

How to Finance the Next American Century

RICHARD DUNCAN

Copyright © 2022 Richard Duncan.

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Library of Congress Cataloging-in-Publication Data

Names: Duncan, Richard, 1960- author.

Title: The money revolution : how to finance the next American century / Richard Duncan.

Description: Hoboken, NJ : Wiley, [2022] | Includes bibliographical references and index.

Identifiers: LCCN 2021043246 (print) | LCCN 2021043247 (ebook) | ISBN 9781119856269 (cloth) | ISBN 9781119856276 (adobe pdf) | ISBN 9781119856283 (epub)

Subjects: LCSH: Finance—United States. | Technological innovations—Economic aspects—United States. | Investments—United States. | Monetary policy—United States. | Money—United States. | United States—Economic policy. | United States. Federal Reserve Board.

Classification: LCC HG181 .D85 2022 (print) | LCC HG181 (ebook) | DDC 332.10973—dc23/eng/20211014

LC record available at https://lccn.loc.gov/2021043246

LC ebook record available at https://lccn.loc.gov/2021043247

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Introduction

Over the last century, wars, depressions, political ambition, regulatory mistakes, greed, and geopolitical competition have entirely transformed the monetary system of the United States. They have transformed the very nature of money itself. A momentous and irreversible turning point occurred five decades ago when dollars ceased to be backed by gold. Afterwards, a worldwide credit bubble took shape that fundamentally changed the structure of the global economy and the rules that govern how it functions.

That bubble and the global civilization it has created will not survive if left to market forces. Therefore, we have two choices. We can allow the bubble to implode and hope to live through the ensuing cataclysm, which could be far worse than the one that shook the world from 1930 to 1945, following the collapse of an earlier and smaller credit bubble. Alternatively, we can learn how to effectively manage our new economic system to ensure that it prospers rather than disintegrates.

A dangerous pessimism, based on a misunderstanding of how the economy works today, is becoming entrenched in the minds of far too many Americans. Proponents of the Austrian School of Economics preach that due to the United States' egregious transgressions in abandoning sound money and balanced budgets, a harsh day of reckoning inevitably awaits us in the near future, with many arguing, perversely, that since our economic Judgement Day cannot be prevented, the sooner it arrives, the better.

While it is certainly true that the US economy would collapse into a new great depression if the policies advocated by the Austrian economists were implemented, it is absolutely not true that the doom they foretell is either imminent or inevitable.

This book rejects that pessimistic and debilitating philosophy and argues instead that the new economic environment we find ourselves in today presents us with previously unimaginable opportunities to grow and prosper by investing in the industries of the future on an unprecedented scale. It explains that our economic system has been profoundly altered by the evolution of money and the proliferation of credit over the last century; that, in fact, a Money Revolution has occurred.

Once the nature of our current economic system is properly understood, the correct path forward becomes clear. If we adopt that path our economic future will be bright. This book explains how our economy works now and the opportunities it presents us.

The Money Revolution is divided into three parts. Part One, Money, describes the evolution of money and monetary policy in the United States from the establishment of the Federal Reserve System in 1913 to the eve of the financial crisis of 2008. It also discusses the events that forced the US monetary system to evolve. These seven chapters provide a history of the Federal Reserve System and explain everything necessary to understand how the Fed conducts monetary policy in the twenty-first century. They also demonstrate the colossal power the US central bank has at its disposal.

Part Two, Credit, shows that as the nature of money changed, it brought about a transformation of the economic system as well. It describes the astonishing proliferation of credit in the United States during the five decades since dollars ceased to be backed by gold. It discusses the impact that very rapid credit growth has had on the US economy and shows that economic growth is now dependent on credit growth. It also demonstrates that there are effectively no longer any limits as to how much money the United States government can borrow. Moreover, it shows that if credit fails to expand, the economy will collapse into a depression. Next, it describes the Fed's successful policy response to the financial crisis of 2008 and its current efforts to support the economy through the COVID-19 pandemic. It ends with a survey of the causes of inflation over the last century.

Part Three, The Future, draws on the lessons that can be derived from the history of the Money Revolution detailed in Parts One and Two; and calls for the United States to carry out a multitrillion-dollar investment program over the next 10 years. It begins by explaining why such a large-scale investment program is possible. It then shows that it is also urgently required, since the current level of investment in the United States is dangerously inadequate. It then discusses how this investment program could be structured and the industries it should target. Next, it explains how it could be financed at no cost whatsoever to US taxpayers. Finally, it describes the extraordinary benefits that an investment program of this nature would be sure to deliver.

A Money Revolution has occurred and rewritten all the rules of finance and economics. It presents the United States the opportunity to invest in new industries and technologies on a scale large enough to open up the possibility of curing all the diseases, radically expanding life expectancy, developing limitless clean energy, rehabilitating the environment, and solving many of the other most intractable challenges confronting humanity – not generations from now, but in our own lifetime.

The objective of The Money Revolution: How to Finance the Next American Century is to persuade the American public and US policymakers that the United States must seize this opportunity. If we do, it is certain that the first American Century will not be the last.

PART IMoney

Introduction

Part One of this book presents a history of the Federal Reserve System that details the role the Fed has played in The Money Revolution.

Chapter 1 begins by relating why the Federal Reserve System was created, how it was intended to function, and the constraints originally placed upon it. From there, it explains the Fed's role in distributing the currency and, much more importantly, how the Fed creates money by extending Federal Reserve Credit. The chapter deciphers the arcane jargon that is normally used to discuss monetary policy. It concludes with a simple explanation of the tools and techniques the Fed employs to control credit availability within the United States.

The rest of Part One tells the history of the Federal Reserve System and US monetary policy by analyzing changes in the Fed's balance sheet over six consecutive periods between 1914 and 2007. The changing composition of the Fed's assets and liabilities reveals how the institution evolved from being the relatively passive lender of last resort established by the Federal Reserve Act of 1913 to becoming the US government's most powerful economic policy tool today.

Changes on the liabilities side of the Fed's balance sheet show how the Fed creates Federal Reserve Credit, also known as base money or high-powered money. Changes in the types of assets held by the Fed show how the Fed uses the money it creates. By tracing the changes in the Fed's assets and liabilities over 93 years, Chapters 2–7 disclose how the Fed devised new techniques to conduct monetary policy as circumstances changed, frequently in response to crises.

Part One of The Money Revolution describes the indispensable role the Fed played in financing the United States' war effort in World War I and World War II. It examines the Fed's failure to prevent the Great Depression. It traces the gradual reduction and, then, total elimination of the role of gold in the US monetary system. It also considers the political developments that led to the Fed financing an increasing share of the government's budget deficits beginning in the 1960s and then to the breakdown of the Bretton Woods international monetary system in 1971. Finally, it looks at the evolution of monetary policy during the years after dollars ceased to be backed by gold, when the Fed became free to create as much money as it pleased.

Part One conveys a comprehensive understanding of how the Fed operates and the tools at its disposal today. It also sets the stage for Part Two, which describes the profound impact that the transformation of money had on credit and, consequently, on the way the entire economic system functions.

CHAPTER 1The Power of the Fed

Attention should be called, first of all, to the fact that the Federal Reserve Act did not establish a central bank.

The 1921 Annual Report of the Federal Reserve Board1

The Power to Create Credit

Today, the Fed is one of the world's most powerful institutions. Its power derives from its ability to create limitless amounts of credit. There is no more precise way to demonstrate how the Fed exercises its power than by tracing the evolution of the assets and liabilities on its balance sheet.

Changes on the liabilities side of the Fed's balance sheet show how the Fed creates Federal Reserve Credit, also known as base money or high-powered money. Changes in the types of assets held by the Fed show how it uses the money it creates. This book details the changes in the Fed's assets and liabilities over its 107-year history in order to show how the Fed devised new techniques to conduct monetary policy as circumstances changed, frequently in response to crises; and to show how the Fed's powers became exponentially greater in the process.

This chapter lays out all the basic information the reader will require to understand what the Fed does and how it does it. It explains why the Federal Reserve System was created, how it was intended to function, and the constraints originally placed upon it. It describes the two principal responsibilities assigned to the Fed by the Federal Reserve Act of 1913, distributing the currency and providing short-term loans to commercial banks in times of financial stress. This chapter also explains the five items that have dominated the Fed's balance sheet from its creation up until now and discusses how those items are affected as the Fed carries out its responsibilities. The chapter concludes with a discussion of the tools the Fed deploys to conduct monetary policy.

This information is essential for understanding how the Fed wields its power to control the US economy and to create or destroy wealth today.

The rest of Part One narrates how the Fed made use of its powers, sometimes effectively and sometimes not, during the wars and the economic and political upheavals between 1914 and 2007. Subsequent chapters in Part Two describe the extraordinary force the Fed brought to bear to prevent the financial crisis of 2008 and the pandemic that began in 2020 from hurling the United States into a new Great Depression.

In the Beginning

To stop a banking panic, a central bank should lend freely against sound collateral at high interest rates. So Walter Bagehot famously counseled in 1873 in Lombard Street,2 his much-admired book on money markets.

The United States, however, did not have a central bank during most of the nineteenth century. It had not had one since President Andrew Jackson refused to renew the charter of the Second Bank of the United States in 1836.

After the Second Bank of The United States closed, the US suffered through a series of banking panics, many of which inflicted considerable damage on the US economy.

Banking panics generally follow a particular pattern. In the lead up to the crisis, credit growth accelerates and generates an economic boom. Asset prices rise. Investor confidence becomes ebullient. Businesses misjudge future prospects and make poor investment decisions. Production outstrips effective demand. Prices begin to fall. Profits turn to losses. A respected company defaults on its debt obligations. Fears spread that more defaults will follow. Creditors not only cease to make new loans, but also call in their existing lines of credit. Unable to obtain financing for even essential working capital, otherwise sound businesses begin to fail. Panic spreads. Unemployment rises, investment plunges and losses mount. Debt defaults become widespread. A number of banks go under. The downward spiral intensifies, wiping out all those with insufficient capital to withstand the slump.

The Panic of 1907 was especially severe. The damage it wrought was harsh enough to persuade many of the country's most influential bankers, businessmen, and politicians to push for the establishment of a new central bank that could step in to provide credit to sound borrowers during a credit crunch, thereby sparing the economy the unnecessary damage inflicted by excessive credit liquidation during a full-fledged panic.

After much debate, Congress passed the Federal Reserve Act, establishing the Federal Reserve System. The Act was signed into law by President Woodrow Wilson on December 23, 1913.

The Federal Reserve Act of 1913 begins with these words:

An Act To provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.3

Notice it is not an act to provide for the establishment of a central bank, but instead “an Act to provide for the establishment of Federal Reserve Banks.” Rather than creating one central bank headquartered in Washington or New York, the Federal Reserve Act specified that the Federal Reserve System would be comprised of 12 Federal Reserve Banks that were to be set up in major financial centers all around the country. In part, the sheer size of the United States made this decentralized structure advisable. Business conditions varied from one region to another. Therefore, it was thought desirable to have numerous Reserve Banks located around the country where they could better assess local business conditions and credit requirements at close proximity.

However, the decentralized structure of the Federal Reserve System also reflected the still widespread public opposition to the establishment of a central bank in the United States. Those who believed the United States needed a lender of last resort had to compromise with those who feared the concentration of power that would accrue to one central bank. That compromise took the form of a decentralized Federal Reserve System made up of 12 regional Federal Reserve Banks spread across 12 Federal Reserve Districts plus a seven-member Federal Reserve Board, based in Washington, that would oversee the entire system.

The members of the first Federal Reserve Board took the oath of office on August 10, 1914. The 12 Federal Reserve Banks opened their doors for business on November 16, 1914.

The Fed's Balance Sheet: Two Snapshots

The Federal Reserve System's first consolidated balance sheet was published on November 20, 1914. It is presented in Table 1.1.4

Table 1.1 shows that the Federal Reserve System began operations with total assets and total liabilities of $247 million.

To understand the composition of the Fed's first balance sheet some background information is required.

TABLE 1.1 Simplified Balance Sheet of the Federal Reserve System November 20, 1914

Source: Data from “The Federal Reserve System’s Weekly Balance Sheet Since 1914” and accompanying spreadsheet. Johns Hopkins University, SAE/No.115/July 2018. See Bibliography.

The Fed's First Balance Sheet (Simplified)

US$ Millions

20-Nov-14

ASSETS

247

Gold

205

Other legal tender

36

Foreign financial assets

0

Bills discounted

6

US government Securities

0

Other or unspecified assets

0

LIABILITIES

247

Foreign liabilities

0

Federal Reserve Notes

1

Member bank deposits, i.e., Bank Reserves

228

Owed to banks, other than banks' reserve deposits

0

Owed to government

0

Net worth

18

Other liabilities

0

Long before the Federal Reserve System was established, all banks had been required by law to hold a certain portion of their customers' deposits on hand5 as liquidity reserves in order to ensure that they would have enough cash readily available to give their customers their money back whenever their customers decided to withdraw their deposits. The National Bank Act established reserve requirements at the national level in 1863.6

When the Federal Reserve System was established, all National Banks were required to become members. State banks and trust companies were given the option to become members. The banks that joined the Federal Reserve System became known as member banks. By the end of 1917, the Fed estimated that the membership of the Federal Reserve System represented about 75% of the total commercial banking assets of the country.7

All member banks were required to set up reserve accounts at the Federal Reserve Banks in their regions. They were also required to transfer part of their reserves into those new accounts when they became members and the rest by the end of 1917. Finally, they were required, at all times, to hold enough reserves relative to the size of their customers' deposits to meet the mandatory ratio of reserves to deposits, the required reserve ratio, set by the Fed.8,9,10

The Federal Reserve System's total assets of $247 million on November 20, 2014, were comprised of $205 million of gold, $36 million of other legal tender and $6 million of bills discounted. It had obtained most of those assets when the member banks transferred their reserves, amounting to $228 million, into their reserve accounts at the Federal Reserve Banks. It received a further $18 billion from the member banks in the form of paid-in capital when the member banks joined the Federal Reserve System.

Both the reserves and the paid-in capital of the member banks were recorded on the liabilities side of the Fed's balance sheet. As of November 20, 1914, only $1 million of Federal Reserve Notes had been issued by the Federal Reserve Banks. They were the Federal Reserve System's only other liability.

During the years since 1914, the Federal Reserve System has grown to a size that its founders could never have imagined. Chart 1.1 shows that its assets have grown from $247 million in 1914 to $8.1 trillion in mid-2021, having expanded by $3.9 trillion or by 94% just since the end of 2019.

This book will show that as the Federal Reserve System grew its assets, it played an important role in shaping the history of the United States and the world.

Table 1.2 updates Table 1.1 by adding a column for June 30, 2021. It provides a snapshot of how the size and composition of the Fed's assets and liabilities have evolved over 107 years.

Throughout its long history, the balance sheet of the Federal Reserve has been dominated by five major components, of which three have been assets and two have been liabilities. The significant assets have been gold, loans (originally classified as bills discounted), and US government securities. The significant liabilities have been Federal Reserve Notes and Bank Reserves (originally classified as member banks' deposits).

CHART 1.1 The Fed's Total Assets, 1914 to June 30, 2021

Source: Data from the Federal Reserve’s Annual Reports

Between November 1914 and June 2021, on the asset side of the balance sheet, the Federal Reserve System's gold holding increased from $205 million to $11 billion; loans (originally bills discounted) grew from $6 million to $163 billion; and government securities holdings (including GSE securities) soared from $0 to $7.5 trillion.

On the liabilities side, Federal Reserve Notes grew from $1 million to $2.1 trillion, while Bank Reserves (originally member bank deposits) surged from $228 million to $3.5 trillion.

Chapters 2–7 tell the story of the extraordinary transformation of the Federal Reserve System and its balance sheet between 1914 and 2007. The financial crisis of 2008 and the Federal Reserve's policy response to that crisis are taken up in Part Two, as is the Fed's policy response to counter the economic consequences of the COVID-19 pandemic during 2020 and 2021.

TABLE 1.2 Simplified Balance Sheet of the Federal Reserve Board, November 20, 1914, and June 30, 2021

The data for 2014 is from “The Federal Reserve System’s Weekly Balance Sheet Since 1914” and accompanying spreadsheet. Johns Hopkins University, SAE/No.115/July 2018. See Bibliography.

Simplified Balance Sheet

US$ Millions

20-Nov-14

June 30, 2021

ASSETS

247

Assets

8,078,544

Gold

205

Gold

11,037

Other legal tender

36

n.a.

-

Foreign financial assets

0

n.a.

-

Bills discounted

6

Loans (including LLCs)

163,004

US government securities

0

US Govt. Securities (incl. GSEs)

7,505,369

Other or unspecified assets

0

Other assets

399,134

LIABILITIES

247

Liabilities

8,038,940

Foreign liabilities

0

Foreign liabilities

5,255

Federal Reserve Notes

1

Federal Reserve Notes

2,134,139

Member bank deposits

228

Bank Reserves

3,511,630

Owed to banks, other than banks' reserve deposits

0

n.a.

-

Owed to government

0

Owed to federal government

851,929

Net worth

18

Net worth

39,604

Other liabilities

0

Other liabilities

1,535,987

The data for 2021 is from the Fed’s “Factors Affecting Reserve Balances” H.4.1 Report

By tracing the evolution of the major items in the Fed's balance sheet from its foundation until the present, these chapters will show exactly how the Federal Reserve has carried out monetary policy throughout its existence. Therefore, no further discussion of the Fed's balance sheet is required here. However, those who seek a more detailed introduction to the Fed's major assets and liabilities will find it in Appendix One of this chapter.

The following sections consider how the Fed carries out the principal responsibilities assigned to it by the Federal Reserve Act of 1913, as well as the constraints that that act placed upon the Fed.

Furnishing an Elastic Currency

Before the Federal Reserve System was established, United States Notes were the principal form of currency in circulation in the United States. They were issued directly by the Treasury Department.

The Federal Reserve Act authorized the Federal Reserve System to furnish a new form of legal tender, Federal Reserve Notes. It also charged the Federal Reserve System with the responsibility of increasing the supply of Federal Reserve Notes when public demand for currency increased and for retiring Federal Reserve Notes when public demand for currency waned. This is what the Federal Reserve Act meant by “to furnish an elastic currency.”

This is how the process worked originally and how it still works to this day.

Whenever any individual wishes to hold more cash (Federal Reserve Notes), they withdraw it from their account at a commercial bank. Should that commercial bank find it is running low on cash and it is a member of the Federal Reserve System, it approaches its regional Federal Reserve Bank and requests more. Federal Reserve Notes are paid out by a Federal Reserve Bank to the member bank on request. In exchange for the Federal Reserve Notes, the Federal Reserve Bank debits that member bank's reserve account at the Fed. If the commercial bank is not a member bank, it must obtain the Federal Reserve Notes it requires from a member bank.

The impact of that transaction on the Federal Reserve Bank's balance sheet is as follows. On the liabilities side of its balance sheet, Federal Reserve Notes (or currency in circulation) increase and the reserves of the member bank contract by the same amount, leaving the size of the Federal Reserve Bank's total liabilities unchanged. The asset side of the Federal Reserve Bank's balance sheet is not affected.

Occasionally, the public wishes to hold less currency. When that happens, individuals deposit the unwanted cash back into their accounts at the commercial banks. If those banks find they have more cash than they require, they return it to their regional Federal Reserve Banks (directly if they are member banks and indirectly through member banks if they are not). When the Federal Reserve Banks receive the cash, they credit that sum of money into those member banks' reserve accounts at the Federal Reserve Banks, thus increasing those Federal Reserve Banks' deposit liabilities. However, those Federal Reserve Banks' liabilities for Federal Reserve Notes decrease by an equal amount. The net result is that there is no change in the size of the Federal Reserve Banks' total liabilities or total assets.

And what about the Federal Reserve Banks themselves? How do they obtain Federal Reserve Notes when public demand for currency increases? Whenever any Federal Reserve Bank wishes to obtain additional Federal Reserve Notes it does so from its Federal Reserve agent, a representative of the government. The Treasury Department then has the Federal Reserve Notes printed by its Bureau of Engraving and Printing.

The Federal Reserve Bank obtaining the Federal Reserve Notes must pledge with the Federal Reserve agent an amount of collateral at least equal to the value of the notes issued. Initially, this collateral had to consist of gold, United States Government securities, and eligible short-term paper discounted or purchased by the Federal Reserve Bank. Today, all assets of the Federal Reserve Banks are eligible as collateral for Federal Reserve Notes.11

If a Federal Reserve Bank finds it has more Federal Reserve Notes than it requires, it simply returns them to its Federal Reserve agent and reclaims its collateral.

In this way, the amount of currency in circulation (Federal Reserve Notes) expands when the public wishes to hold more cash and contracts when the public wishes to hold less cash. The Federal Reserve Banks do not take the initiative in deciding when to increase or decrease the number of Federal Reserve Notes in circulation. They merely act passively in response to fluctuations in the public's demand to hold cash.

To simplify matters, going forward, no further reference will be made to the 12 Federal Reserve Banks individually. Instead, they will be grouped together and discussed on a consolidated basis. Henceforth, this book will generally refer to them collectively as the Federal Reserve System, the Federal Reserve or, more often, simply as “the Fed,” for short. The Fed's balance sheet will always be presented on a consolidated basis.

Providing Credit

Distributing the country's currency is an important job. However, the main reason the Federal Reserve System was created was to prevent banking panics. To do this, it was given the authority to provide credit, Federal Reserve Credit, to individual banks and, thereby, to the banking system as a whole whenever credit conditions began to tighten too abruptly.