The St Louis Fed is one of the state central banks of the USA, serving the state of Missouri. That might, to many, make it seem insignificant. To the economics data geek this central bank is invaluable. Its web site is an absolute treasure trove of data, especially when it comes to reliable statistics presented in usable formats.
I am mentioning this right now because the St Louis Fed lets its staff also think and say the unthinkable in central banking terms. An article by David Andolfatto published in the last few days is evidence of that. I am not saying the article is a perfect explanation of money and banking: there are very definitely points I do not agree with in it. It is, however, well worth reading.
Two nuggets:
Unlike personal debt, the national debt consists mainly of marketable securities issued by the U.S. Treasury as bonds. It is of some interest to note that the Treasury Department issued some of its securities in the form of small-denomination bills, called United States Notes, from 1862-1971 that are largely indistinguishable from the currency issued by the Federal Reserve today.
I was not aware of that. I think it is an enormously important point to note, not least in the context of my recent discussion on limiting the interest rate on debt, albeit that I am aware that this dates from the gold standard era.
More important is this:
To the extent that the national debt is held domestically, it constitutes domestic private sector wealth. The extent to which it constitutes net wealth can be debated, but there's not much doubt that at least some of it is viewed in this manner.4 The implication of this is that increasing the national debt makes individuals feel wealthier.
When this “wealth effect” is generated by a deficit-financed tax cut (or transfers) in a depression, it can help stimulate private spending, making everyone better off. When the economy is at or near full employment, however, such a policy is instead more likely to increase the price level, which can lead to a redistribution of wealth.
Together, these considerations suggest that we might want to look at the national debt from a different perspective. In particular, it seems more accurate to view the national debt less as form of debt and more as a form of money in circulation.
Investors value the securities making up the national debt in the same way individuals value money–as a medium of exchange and a safe store of wealth. The idea of having to pay back money already in circulation makes little sense, in this context. Of course, not having to worry about paying back the national debt does not mean there is nothing to be concerned about. But if the national debt is a form of money, wherein lies the concern?
The answer is not easy. The paper only hints at some of the answers. I am trying to think about more in my forthcoming paper on the UK national debt - which I sincerely hope will be out soon.
But this point is key:
If the national debt is a form of money, wherein lies the concern?
It's question that has to be constantly recalled.
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“The St. Louis Fed is one of the 12 Federal Reserve banks that–along with the Board of Governors in Washington, D.C.–make up the Federal Reserve System–the nation’s central bank.”
So not really a state central bank serving the State of Missouri. The US doesn’t have a central bank for each state.
OK, but based in St Louis, nonetheless, and the origin is clear
I accept I could have been clearer
Could you please explain what it is that you could have made clearer about the purpose and constitutional nature of the St Louis Fed, because I can’t see it in your response?
Its role as a constituent of the US Fed
Surely much the same as marching up to the BoE bearing your tenner with the ‘promise to pay’ from the Chief cashier in order to ‘redeem’ your £10.
Then proudly departing with your replacement £10 note…
It doesn’t make much sense and is surely similarly a hangover from the gold standard.
Rather like US securities were backed by gold but reserves were not.
I agree, the St. Louis Fed are good…. and I think the mandate to think comes from the top (Bullard).
It seems to be a statement of MMT without using the words MMT…. which maybe wise. Language can turn people off before they even read – indeed, there was an interesting article in the Guardian quoting Obama and others about the importance of thinking how others perceive the meaning of your words, not merely what we think they mean. We should always remember this.
I agree
The national debt is just money that has yet to be taxed out of circulation.
He said increasing the national debt makes the holders feel more wealthy….what makes me feel wealthy is when the value of those debt securities increases which is nothing to do with the size of the national debt but rather the yield?
You do realise the value if this debt rises when yield falls?
yes I understand the inverse relationship between price and yield. It’s just the statement that I cannot understand
“The implication of this is that increasing the national debt makes individuals feel wealthier.”
Is he talking about the amount of debt being held by households or the value of it. Because I would have thought the wealth effect would come from the latter
I think that all that is being played to is a very base notion: more is better
If my savings are £500 then I feel very precarious. I feel even more precarious if I have net debts. If my savings go up to £50,000 then things are transformed. I could manage for well over a year with no income, if I feel like treating my wife to a lavish holiday then I know I can without worrying about how to pay for it. Increasing the National Debt is simply increasing the savings of the private sector and / or removing their debt. If e.g. Biden were to clear the debts of US college graduates and add that to the National Debt there would be a dramatic effect on the 20/30 age group. The albatross would be taken from around their necks and you would see people no longer forced to live with their parents, feeling unable to start a family, etc etc. That does not have anything to do with whether or not you are getting a windfall capital gain on those savings.
The “rot” of the National Debt started in England in the 17th century for three essential reasons; Charles II didn’t understand currency creation, he repudiated a loan made from wealthy individuals, the country badly needed more currency (medium of exchange) because the one that they predominantly used silver based coinage kept disappearing abroad because melted down the bullion price was higher than the nominal value of the coinage.
So what did the English do? They brought in the equivalent of Amazon.co.uk to create paper bank notes which they gave to the government to spend in return for the government hypothecating tax revenue to give the company a steady return on its equity investment.
From this developed the market fundamentalists (Libertarians) belief in the equivalent of the Tooth Fairy approach, namely that a currency or a medium of exchange just “pops” into existence in a country. Of course this in contradiction and hypocrisy was always more grown-up in practice to be “let’s bring in a company to sort out our currency shortage problem”. Later when the Bank of England was nationalised it of course made little difference to most voters thinking, it still wasn’t the government creating the money it was a “government owned company” or a perceptually at arm’s length entity not part of constitutionality!
There is a further twist to the story. Because no constitutionality is involved in currency creation in the mindset of market fundamentalist Libertarians there must be no need for shared constitutionality in setting up trade deals, no sharing of sovereignty or regularity alignment hence a No-Deal Brexit is perfectly feasible, just bring in the Britannia-Rules-The-Waves company/party! Even further this Libertarian mentality extends to not understanding the need for global constitutionality of all countries to regulate the disfunctional “Barge Economics” of capitalism!
“The Constitutional Approach to Money: Monetary Design and the Production of the Modern World”
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2724108
“The Key to Value: The Debate over Commensurability in Neoclassical and Credit Approaches to Money”
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3556127
“GE: No Company’s Record Better Illustrates The Glories Of Corporate Globalization For The Well-Off, And The Misery For The Many”
https://archive.commondreams.org/view/051700-108.htm
It’s perfectly simple to me.
The St Louis Fed has chosen to be more clear about its role than the other constituent parts.
Good for them I say and lets seem more of this.
Let’s see some truth for once in the headwaters of the economy – it’s better than having an effing central bank Governor telling us that ‘We’re about to run out of money’ – don’t you think?
“Make Parody Great Again!”
Dictionary definition of “parody”:-
A genre with deliberate exaggeration for comic effect!
What is even more fascinating about this is that St Louis (Missouri is it?) is one of the ‘Fly-over’ states that those going East to West look down their noses at.
Is the worm turning? I hope so.
A fascinating wee bit of history there! Thanks Helen.
President Lincoln’s administration showed the way by printing greenback dollar bills in 1861 to pay soldiers fighting for the Union, most having gone without pay for 6 months. These were Treasury issued bills, there being no central bank at that time. The commercial banks at that time that produced all the nations plethora of bank bills and would only lend the govt(by buying govt bonds) at exorbitant interest. Lincoln was enraged at their excess. The greenbacks, depsite much opposition and suspicion, did what they were intended to do, they were accepted as currency and despite falls in value against gold they survived well enough to effectively pay for the war without having to raise taxes or borrow from the banks. The Confederacy did the same and issued it’s own Greyback dollar bills. That currency suffered severe devaluation for two reason ,firstly the South slowly lost ground to the North in the Civil War and secondly the Confederacy had to print more bills than would cover cover economic production, eventually it became worthless. During the war the values for the currencies went up and down against gold according to the way the war went, money’s value mirrored actual events of the war.
After the war the greenback was withdrawn and the state went back to borrowing deficits from the commercial banks and normal business was resumed,…in favour of the commercial banks of course. I always like to give this as a perfect historical example of how the state can step in and create money when the chips are down. And how we have always fought a battle between this and allowing commercial banks to create our money and make great profit at all our expense. We still are fighting this same battle.
Thanks
To be honest, I see the same thing Vince.
I abhor seeing any State cede its money production apparatus to the private sector because it just means the rich can hoard it for themselves.
The late David Graeber saw this in terms of long epochs of real money creation versus credit creation that went in cycles.
However, the markets seem to want to make sure that credit creation will stick around for longer – they have certainly been enabled to do that by austerity policies and pro-market thinking in politics – even though now after 2008 we know that it was criminality and stupidity in private market banking that caused it even after deregulation.
So this battle as you say to control the production of money (and the benefits of doing so in the nature of how it is issued) does as you suggest, exists in my view.
It’s probably the longest unknown war on the planet.
Pilgrim,
I heartily agree, it has amazed me how this issue shadows all major historic events, somewhere behind the headline story is always a tale of money creation and banks. Felix Martin does a very good job of it in his book ;”Money, the unauthorised biography”,
I’m sure you’d like it if you haven’t already read it.
“https://read.amazon.co.uk/kp/embed?linkCode=kpp&asin=B00F1W0DAO&tag=bing08-20&reshareId=C94T8JC9A3EV3J6N2JGD&reshareChannel=system
We have been slaves to the banks for far too long.
I read about Lincoln and the greenbacks a while ago and they
made a big thing about the interest rates the Europeans wanted to charge to fund the war. No change there.
Actually I had not realised that the US had continued with issuing demand notes until as late as 1971 either. So I did a little reading and it seems that because the US had no central bank, unlike in the UK and the rest of Europe, so the govt used various issues of notes to act as a kind of reserve money in various times of crisis when the banks failed or stopped lending.
https://en.wikipedia.org/wiki/Banknotes_of_the_United_States_dollar#:~:text=Current%20circulating%20banknotes%20of%20the%20United%20States%20,October%208%2C%202013%20%208%20more%20rows%20
.
The commercial banks were also increasingly regulated after the Civil War because of past history of bank systemic failures. . Efforts were made to stop commercial banks issuing their own notes and use nationally issues notes that were ultimately backed by the govt. This also went hand in hand with tougher reserve requirements and capital ratios and mandatory holdings levels of US govt issued treasury notes. However this false obsession with notes entirely failed in its goal as all the banks did was commence with cheque deposit accounts which easily circumvented the rule that they could no longer issue notes themselves. One estimate was that 90 % of all money in the US money supply was in the form of chequing accounts by 1890. Much the same as happened in the UK after the banks were forbidden to issue their own notes as far back as 1844.
Needless to say bank led booms and busts carried on in the US (as well as the UK)through the late 1800’s culminating in a huge US banking crash in 1907. This directly led to the establishment of the Fed central bank system in 1913. The aim being to copy the European models and stop bank crises. Of course we all know that failed too. All central banking has achieved thus far is to create even bigger booms and busts as banks are now not allowed to go bust, we thus get ever bigger financial crises. We need to change the remit of our central banks and make them start working for us all not just keep the risky banking sector in business in perpetuity. The subject of national debt and our current banking system is inextricably linked, we need to allow the state to dictate far more on the subject of money creation an stop pandering to the banking sector and their ilk telling us that MMT is doomed to wreck the economy. We listen to those with vested interests in maintaining the current system at our peril.
It’s well time we changed this awful system, hopefully you will be able to help facilitate that situation, good luck with your paper.
When the new governor of the Bank of England, Andrew Bailey, can publicly declare the government nearly ran out of money it’s high time anybody with a true understanding of fiat currency creation realises that a country deciding to have a central bank is equivalent to putting a fox in the hen coop in terms of the propaganda benefit to the wealthy!
https://www.thenational.scot/news/18547549.not-fooled—uks-money-not-nearly-run-out/
🙂
The principle of Glass-Steagall would be a good place to start. Then stiff regulation of banks. What we have is the regulatory make-do-and-mend of an obviously failed system. I am no longer sure that either the public, or even capitalism itself can afford private, independent, High Street ‘clearing’ banks; save perhaps in some form of modernised, mutual fund or similar model basis. Capitalism has not only managed to wreck the banks (a systemic product of Big Bang nobody wants to talk about), but destroyed some of our greatest financial institutions – often mutuals, like the TSB: a shadow of its former self.
Richard,
The cyclical nature of credit creation needs to be understood. Restricting credit puts up the price of money enabling the banks to make profits from creating money. In the end losses accumulate and can only be overwritten by repeating the cycle.
The problem at the moment is that the price of money is too low to make profits and the banks are swimming in a sea of losses. Losses that are increasing as Covid, Brexit and other disruptions to business as normal takes place.
https://www.investopedia.com/terms/c/credit-cycle.asp
There are two ways forward: acknowledge the losses and nationalise the banks or ” extend and pretend”.
The banks are not reporting losses for credit cycle reasons
Covid has been very good for them in fact
Helen,
Thanks. I actually know Scott Egner who wrote that article!
Christine Desan, (a Harvard Law Professor of all people!), has spent years studying the history of the evolution of English money and so ought to know her stuff. On page 37 of her paper “Creation Stories: Myths About the Origin of Money” she writes:-
“Making money” has been a profoundly important and deeply contested project over English history – and in countless other communities.”
https://dash.harvard.edu/bitstream/handle/1/11689088/Ch.%201%20%c2%ad%20Creation%20Stories-REVISED-SSRN.pdf?sequence=1&isAllowed=y
Money creation is the hidden “Magna Carta” struggle for the vast majority of British voters. They have simply not been taught it as though it’s not part of the evolution of democracy.
Money creation has failed to make it onto the history syllabus in schools despite the fact it’s a major and on-going “secret war” that affects the very core of their well-being!
“the Treasury Department issued some of its securities in the form of small-denomination bills, called United States Notes, from 1862-1971 that ”
They’re called Greenbacks.
Interestingly Congress never rescinded the authority to issue them so the US Treasury could just ask the BEP to run off a few Trillion.
The US Daily Treasury Statement makes clear that the “debt” is private sector savings.
https://fsapps.fiscal.treasury.gov/dts/files/20082600.pdf
See Table III-A.
Total Redemptions: $105,941,958 million.
So that’s $105T which is about 130% of the worlds GDP.
The US cannot have borrowed $105T, spent it and then magically repaid it in less than a year.
The point is… this must be money on deposit being paid back, being redeposited and paid back again.
It *cannot possibly* be money that has been borrowed and then spent.
There is literally not enough money in the world for that to be true.
I am not sure where ou argument begins and ends…
You might want to clarify it
When i started reading the blog I thought of my first £5 premium bond which is of course as good as cash. Or is it a perpetual lottery ticket? If it was made legally transferable then it becomes in essence an interest bearing small govn bond. So yes if I held more government debt ie transfered the non interest bearing asset of cash into interest bearing debt i would feel wealthier. My decrease in consumption is offset by a consumer spending government transfers. I am beginning to see why the UK government limits National Savings products. Imagine once more index linked £100 bills! Spoiler alert Greg’s sausage rolls went from 99p to £1.25 last week on a Birmingham service station. “Winter is coming”
Keynes once said,
“Whenever you save five shillings you put a man out of work for a day.”
Allowing for inflation that would be £16 today( thanks to this site)
https://www.in2013dollars.com/uk/inflation/1930?amount=0.25