After all, the productivity of the American economy is the biggest obstacle to inflation in our country. Confidence in the dollar as a store of value and as a central part of the financial system has also reached a threatening scale. From 1940 to 1942 I was a member of the research department of the Federal Reserve Bank of New York.
As a child of the Depression in the 1960s, I continued to worry much more about underproduction and employment than about overprosperity and inflation. But our expectations about the future are largely determined by memories of what happened in the recent past.
THE MONEY PROBLEM
With the growing complexity in the market and in the methods of production, we find that the nature of money is changing. We can also find frequent examples of the opposite situation - the inflationary spiral, where the money supply exceeds the supply of goods. Regulation of the supply of money is thus not only a matter of financiers and bankers: it is intimately connected with our prosperity and with our social tranquility.
Our analysis of it now begins at the heart of the process — the links that exist between the quantity of money and the levels of business activity and prices. Since the goal of managing our national money supply is to keep spending more or less in line with the amount of goods and services produced, we must now turn our attention from the way people use money to the process leading to its creation lead. of the money we actually use.
THE CREATION OF MONEY
When we look back at the past, we see great fluctuations in the amount of money in the United States. The government makes payments in currency for most soldiers, sailors and airmen. We also found and emphasized the simple truth that the total money supply in the country—the number of dollars in the form of currency, currency, and checking accounts—is independent of the rate at which we spend it.
First, an increase in the supply of money can only come from an increase in the amount of dollars in currency. So a Government surplus or deficit as such has no effect on the total amount of money in the economy, only on its distribution and spending rate. As we are about to see, it is through this process of lending and investing that the banker functions as a midwife in the monetary process.
In each of these cases, therefore, its financing only results in a transfer of money, not an increase in the quantity of money. With the stroke of the bookkeeping machine, the total purchasing power in the economy has clearly increased. Thus, the supply of money in the economy also increased in our country when the commercial bank appeared.
Treasury bonds deposited with the bank and the bank's check deposited in his account, that additional balance was as available to him to spend as every other dollar he had in his account or that all other depositors in the country had in their had an account. bills. The savings bank is just like any other depositor in the system, and the savings bank system lost cash. Then when we borrowed money from a savings bank or when a savings bank bought certain securities that we sold, we would be willing to take the proceeds in the form.
What we want is either foreign exchange or an increase in our checking account, because only then can we transfer the proceeds - that is, spend the money - for whatever purpose prompted us to borrow or liquidate an asset in the first place. . But if money is to circulate so that its customers can deposit in the first place, the banking system must take out loans and buy securities.
THE CONTROL OF MONEY
They hoped that the Federal Reserve System would prevent such disasters from happening again. The structure of the Federal Reserve System is an outstanding example of American political genius, that is clear. This means that the largest part of members' cash is kept in the form of deposits with Federal Reserve banks.
These are the mechanics of the relationship between Federal Reserve Banks and member banks. If the function of the Federal Reserve System can be summed up succinctly, it is to prevent. Then, instead of paying checks, Federal Reserve Banks receive checks from buyers.
Rather, the Federal Reserve reduces the balance on its books to the credit of the bank on which the check was drawn. Open market purchases and sales of Treasury securities by the Federal Reserve Banks took place between them. However, while an increase in member banks' borrowings from the Federal Reserve indicates that banks are
First, where do the Federal Reserve Banks get the currency they provide to member banks. The trick with Federal Reserve notes is that the Federal Reserve banks don't lose money when they pay out that currency to member banks. In short, they are a non-payable obligation issued by the Federal Reserve Bank.
When the amount of currency outstanding increases, the reserves of the member banks at the Federal Reserve Banks decrease. But while the member banks lose reserves when they pay out money, the Federal Reserve Banks do not.
GOLD
Indeed, in previous years, the reserve requirement for the gold certificate was applied to both Federal Reserve notes and the deposit liabilities of Federal Reserve Banks (mainly the reserve balances of member banks). Furthermore, applying the gold certificate reserve only to Federal Reserve notes was not an effective way to curb the money supply. How gold actually moves in and out of the Treasury and how gold certificates find their way to Federal Reserve banks.
In fact, Americans are prohibited from owning gold outside the national borders of the United States. The gold comes in the form of small stones, about the same length and width, but only half the height of the usual building stone. The term "central bank" is a generic term that applies to the institution in any country that performs the general functions of the Federal Reserve System in the United States.
As in the case of any other purchase - of wheat or cement or missiles - the government pays for the gold by issuing a check on one of the Federal Reserve Banks. It is simply deposited for safekeeping in the vaults of the Federal Reserve Bank of New York, a vast mass of an almost Florentine palace. When the foreign government receives the gold, it issues a check on its bank account to the order of the US Treasury. The Treasury Department again deposits this check with one of the Federal Reserve Banks.
As a result, the Treasury balance on the Federal Reserve's books will fall to where it was before the gold sale, and the Reserve Banks' gold certificate holdings will be smaller. However, if the funds are drawn into gold, the Treasury's purchase of gold would result in the disappearance of a deposit in the United States. Spending abroad to maintain our military facilities is being kept to a minimum, even if we have to pay more for some of the necessary supplies by purchasing them at home in the United States.
THEORY IN PRACTICE
In the years before World War II, the American economy was characterized by widespread unemployment of both men and machines. The result was a mountainous increase in commercial bank reserves, from $7 billion at the end of 1937 to $14 billion three years later. This shows that there was an increase in the reserve requirement, as a result of the increase in deposits in the second level banks.
First, some of the growth in bank lending and investment did come in response to a huge inflow of fresh reserves: investment increased by about $6 billion from late 1937 to late 1940 when banks were forced to employ some of these idle assets, but it shows to depression. In addition, bank deposits increased by the same amount just from the inflow of gold alone, because those who sold gold in the US know that interest rates reflect the interaction of money demand and money supply. .
As the amounts of money in the checking accounts of individuals and businesses continued to grow, those who owned these useless dollars tried to find them work. Despite the avalanche of reserves that the gold rush brought to the banks, the banks were willing to lend and invest only a fraction, and were content to let billions of cash untapped without yielding anything. Whatever the shortcomings of the measures designed to overcome the economic and human disasters of the 1930s, there were some elements of luck in the position we found ourselves in when we entered the war at the end of 1941.
Moreover, the Government takes a considerable part of the country's total production, to support and equip the men on the battlefield. In addition, the war must be financed; like any other spender in the economy, the government needs to find the money to pay for the things it wants to buy. The techniques used to raise the money to pay for the war can greatly affect the distribution of that burden among different elements in the population, but they can do nothing to reduce it.
