Armstrong Economics Blog/Banking Crisis
Re-Posted May 2, 2017 by Martin Armstrong
QUESTION: Why do you support the fed in what you call elastic money and not a gold standard?
ANSWER: As usual, you listen to the nonsense about how the Fed is owned by the banks and is responsible for probably everything evil from creating wars to probably killing JFK. The entire use of “elastic money” was not invented by the government or the Fed. It began in 1853 with a little known group to try to help in the middle of a crash for what you are advocating is precisely what Europe has done – impose austerity.
The Panic of 1873 saw the government make a small gesture to try to calm the panic. They did the same thing as Quantitative Easing back then – Yes, not even that is new. The US Treasury injected cash by purchasing government bonds. It did NOTHING to help the economy. Why? When confidence crashes, people HOARD money and will not spend it if they fear the future. The cash they injected was hoarded by the banks just as it has been post-2007. Quantitative Easing in this manner NEVER produces inflation nor does it stimulate the economy.
The banks got together to create their own “Elastic Money” using the New York Clearing House. Failing to increase the money supply meant that the value of money in purchasing power rises and all assets decline. This is the hallmark of EVERY recession or depression. During the Panic of 1873, the national banks of New York pooled their cash and collateral into a common fund, and placed this in the hands of a trust committee at the New York Clearing House, which had been founded on October 4th, 1853. The New York Clearing House then issued loan certificates that were receivable at the Clearing-house against this collateral. These certificates were absorbed like cash and could be used to pay off debt balances. Ten million dollars’ worth of these certificates were issued at first, but the sum subsequently doubled. This Clearinghouse paper served its purpose admirably.
By October 3rd, 1873 confidence had been returned and $1,000,000 of these certificates was called in to be canceled. The next day, another $1,500,000 more of these certificates were recalled. In the end, not much of this issue was outstanding very long. The Clearing-house scheme was successfully applied also in Boston, Philadelphia, Pittsburgh and other cities, but not in Chicago.
This was the birth of “Elastic Money” that makes sense. This prevents wholesale liquidation of assets to get cash in short supply. The problem is neither the Fed nor the concept of Elastic Money. The Fed was originally established in 1913 to act like the New York Clearing House but for all assets outside of Wall Street. Then came World War I the next year in 1914 and Congress ordered the Fed to buy only US government bonds. They never returned the structure of the Fed to what it was originally designed to do.
Hence, today we have Quantitative Easing when central banks buy government paper attempting to stimulate as they tried and failed every time previously. The difference was that the New York Clearing House Certificates were good among security dealers. They were not expanding the money supply nor could they be used for groceries at home.
The certificates were redeemed and those from 1873 are non-existent today because they were used among institutions. If you want to blame anybody or anything – blame the right person or group. What you are doing is blaming a murder on the person who manufactured a gun rather than the person who pulled the trigger. Blame Congress! Not the Fed!
We need a central bank and elastic money is an excellent tool. However, I would issue it in a two-tier manner. The normal tier is money commonly used. The second is the elastic money, but this automatically should expire in 6 years. Therefore, it will be redeemed as was the case in 1873.
*PS If anyone has such a New York Clearing House Certificate from 1873, I would be a buyer.