printing money, really printing money -- 01/25/16

Today's selection -- from America's Bank by Roger Lowenstein. In our most recent crisis, it was the Federal Reserve that flooded the system with new money, effectively injecting additional money into the system (aka "printing money") by buying securities from banks or from the U.S. government itself. Prior to the Federal Reserve, in periods such as after the Panic of 1907 or the Crash of 1929, this was done in a much more improvisational way:

"On Thursday, October 24, [1907], fright­ened [trust banks] pulled their loans to the stock market -- laying bare the domino -- like the fragility of American credit. Desperate stockbrokers of­fered to pay 125 percent interest on call loans (short-term loans that were callable at any time). With dozens of brokers on the verge of failure, the president of the New York Stock Exchange threatened to shutter the market. ...

"By then, a new crisis was erupting: New York City was running desperately short of cash. ... New York's [trust banks] lost a remark­able (and devastating) 48 percent of their deposits. Even worse, at the end of October the New York Clearing House was forced to take the drastic step of authorizing banks to settle accounts with one another via certificates -- paper substitutes for money -- rather than with cash. The Panic had now reached epic proportions. The Clearing House 'loan certificates' were backed by loans of the member banks. They were IOUs -- promises to pay cash when cash became available. They were a form of invented money.

Wall Street during the bank panic in October 1907

"With panic spreading, clearinghouses and bank associations in scores of other cities minted their own versions of clearinghouse money. Some were elaborately engraved to give the appearance of normal currency. The certificates were intended to be used only among banks, so that cash could be preserved for ordinary depositors. In a crude way, they added to the money supply -- later a function of the Federal Reserve. However, in more than a score of cities banks were forced to hand out loan certificates not just to their fellow banks, but to ordinary depositors.

"Many railroads, mining companies, and shopkeepers paid work­ers with bank checks instead of with cash; those that didn't had little choice but to suspend operations. In Birmingham, Alabama, banks distributed checks signed by their cashiers in denominations as small as one dollar to local employers -- who used this scrip to pay their workers. Retail establishments generally accepted such paper, since that was all that many customers had.

The San Francisco Clearing House Certificate of 1907-1908

"By mid-November, approximately half of the country's larger cit­ies were using loan certificates 'or other substitutes for legal money,' according to a survey conducted just after the Panic by Harvard's Professor Piatt Andrew. Loan certificates had been used in previous panics, but never so extensively. In some smaller towns where no clearinghouse existed, the local bankers improvised, setting up a tem­porary committee, as it were, on the front porch. Bankers tried to reassure the public, noting that certificates were backed by 'approved securities.' Some added piquant details. In Portland, Oregon, the clearinghouse boasted that banks had deposited notes secured by 'wheat, grain, canned fish, lumber . . . and other marketable prod­ucts.' Monetary exchange was reverting toward barter.

"Andrew estimated that $500 million of cash substitutes of one form or another were circulated nationwide. And in two-thirds of cities with populations above 25,000, banks suspended cash with­drawals 'to a greater or less degree.' For example, in Council Bluffs, Iowa, a limit was imposed of $10 per customer; in Atlanta, $50 per day and $100 per week. Banks in Providence, Rhode Island, adopted a convenient policy of 'discretion,' vetting withdrawals case by case. Although such actions had scant legal footing, officials not only looked the other way, in many states they encouraged banks, for their own protection, to curtail teller operations. Bank holidays were pro­claimed in a handful of states, with California's enduring until late December. Small wonder that Andrew termed it 'the most extensive and prolonged breakdown' of the credit system since the Civil War.

"Even though clearinghouse certificates provided a measure of relief, they were generally recognized only in their city of issue, which was a serious drawback. A New York banker lamented that 'drafts on Philadelphia, Boston and other banks sent for collection are being returned on the plea that momentarily it is impossible to remit New York exchange. Each city issuing its own Clearing House certificates ... builds a Chinese wall against other centres.' Through November and much of December, the United State[s] monetary system devolved toward the polyglot moneys of the early nineteenth century, when itinerant peddlers did business with different moneys state to state and territory to territory.

"Money, in fact, traded at a premium. Those who needed cash were forced to write checks for more than 100 percent of the desired sum."


Roger Lowenstein


America's Bank: The Epic Struggle to Create the Federal Reserve


Penguin Press


Copyright 2015 by Roger Lowenstein


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