#AceDebtNews says the simple act of creating wealth has long been disputed in the world of borrowing and lending ,many economists have argued over who is right or wrong about the next federal reserve move, or what should be done to balance the economy. Though one blatant thing stands out above all else, and that is without money or the use of the wealth ,we could not survive!
Or could we?
Unless people spend money!
Over many years of providing “Other Peoples Money” , that l simple shall term as “OPM” for this post, the simple fact was, as more people borrowed to get richer, they actually got poorer, Oh not in the pocket but simply in their heart!
The richer they got ,the more they wanted and the More they wanted, the worst the economy became!
It was just like that drug called “OPIUM” and they could not stop!
The Great Financial Crisis of 1914:
What Can We Learn from Aldrich-Vreeland Emergency Currency?
William L. Silber*
At the outbreak of World War I, the biggest gold outflow in a generation posed a double-barrelled threat to American finance: An internal drain of currency from the banking system and an external drain of gold to Europe. The Federal Reserve System, newly authorized by Congress on December 23, 1913, remained on the sidelines during the summer of 1914, a victim of political and administrative delays. The absence of an operational central bank encouraged Treasury Secretary William G. McAdoo to improvise the modern principle of aiming an independent weapon at each policy target. He employed a form of capital controls to deal with the external threat, shutting the New York Stock Exchange (NYSE) for more than four months to prevent Europeans from selling their American securities and demanding gold in return. And he invoked the emergency currency provisions of the Aldrich-Vreeland Act to deal with the internal threat, allowing banks to issue national bank notes, an important form of currency in pre-Federal Reserve days, without the normal requirement that the currency be secured by U.S. Government bonds.
So how did we get into this situation in the first place ,well everything has to have a beginning and will l am sorry to say have an end, but not an end in this case anyone will expect.
According to Friedman and Schwartz (1963, p.196), by November 1914 “the country had recovered from … the declaration of war in Europe, thanks in no small part to the availability of Aldrich-Vreeland emergency currency.” Friedman and Schwartz (1963, p. 172) also suggest that emergency currency “would have been equally effective on the occasion of the next threat of an inter-convertibility [sic] crisis which arose in late 1930.”
This paper tests Friedman and Schwartz’s conjecture about the power of Aldrich-Vreeland emergency currency and draws lessons for monetary policy. Proof of the potency of the Aldrich-Vreeland Act, passed in 1908 to avoid a replay of the Panic of 1907, comes from a little-known experiment conducted by William McAdoo in1913. Friedman and Schwartz’s suggestion that the1930 banking crisis might have been nipped in the bud with an operational Aldrich-Vreeland Act gains credibility from a key characteristic of crisis control under the Act: liquidity flowed automatically to where it was needed most.
It was him that recommended that the Federal Reserve adopt the principles of the Aldrich-Vreeland Act in its administration of the discount window. This will help preserve the integrity of the banking system, especially under wartime conditions with impaired communications.
I. What happened in 1914?
Foreigners owned more than $4 billion U.S. rail-road stocks and bonds at the outbreak of the Great War, with $3 billion of that in British hands. These securities were liquid assets and could be sold quickly on the NYSE. Under the gold standard, foreign investors could then use their cash proceeds to acquire the precious metal from the American banking system. Fear that the United States would abandon the gold standard pushed the value of the dollar to unprecedented depths on world markets. The magnitude of the problem forced America to defend itself: At the outbreak of the war, reserves at New York banks would have been cut in half if the British sold only five percent of their holdings (see Noyes, 1916, p.94). People knew that the banks had tried to conserve reserves in 1907 by suspending the convertibility of deposits into currency. In 1914, the bankers worried that the gold outflow to Europe would “inspire fear” and trigger an added rush into cash before suspensions took effect. Without an operational Federal Reserve System, the currency shortage would spawn bank runs like “those experienced in the fall of 1907” — only worse.
The crisis began on July 27, 1914. The sale of dollars for pounds sterling in the foreign exchange market, and the increase in the exchange rate to $4.92 per pound, four cents above the gold export point, provoked gold shipments. On July 31, 1914, after the price of sterling failed to decline in response to record gold exports, Treasury Secretary McAdoo asked the NYSE to close. If foreigners could not sell their U.S. stocks, they could not raise dollars and demand gold in exchange. McAdoo had rejected the direct approach, suspending the gold standard, as too costly to American credibility. The NYSE remained shut through December 12, 1914, mitigating sales of American securities by foreigners and hampering their demand for gold.
But the threat of a run on America’s bank reserves did not disappear. American debts denominated in British pounds matured during this period, and U.S. borrowers would need sterling or gold to meet their obligations. Moreover, precautionary withdrawals of currency from the banks threatened to exacerbate the loss in reserves from the gold outflow. Under the National Banking laws then in existence, commercial banks could create additional currency only by depositing U.S. Government bonds with the Office of the Comptroller of the Currency in the U.S. Treasury. The Treasury’s Bureau of Engraving and Printing would then ship newly printed national bank notes to the banks to meet depositor withdrawals. In the summer of 1914, national bank notes outstanding had already reached its maximum based on the outstanding supply of government securities.
Beginning August 4, 1914, after McAdoo invoked the Aldrich-Vreeland Act, banks could create currency, either by depositing municipal bonds directly with the Office of the Comptroller of the Currency or by depositing other securities or commercial paper with a local group of banks that had formed a National Currency Association under the Act. Thus a bank facing a sudden withdrawal of currency could create national bank notes to meet the demand, thanks to the emergency currency provisions of the “Aldrich-Vreeland Act”.
McAdoo recognized the potential danger of his policies – closing the stock exchange left the capital markets without a rudder and flooding the country with emergency currency tempted inflation. McAdoo’s recipe for smothering the crisis included an exit strategy. He organized the Bureau of War Risk Insurance on September 3, 1914 to promote exports of cotton and wheat to Europe. Exports would generate gold inflows in payment for American goods, which could then settle foreign obligations. McAdoo’s policies prevented a panic. Banks never suspended their promise to convert deposits into currency and the U.S. Treasury never left the gold standard during the summer and fall of 1914. On November 11, 1914, less than four months after the onset of the crisis, and four days before the opening of the Federal Reserve Banks, the exchange rate of the dollar relative to the pound sterling fell below the gold export point, and gold exports ceased.
The threat to the American financial system disappeared!
Friedman and Schwartz (1963, p.196) are reasonably accurate in saying “by November 1914 the country had recovered from the immediate shock of the declaration of war in Europe,” but with so many components to McAdoo’s plan, perhaps they overreached when adding, “thanks in no small part to the availability of Aldrich-Vreeland emergency currency.”
The contrast between 1914 and 1907 supports Friedman and Schwartz’s interpretation. The growth in emergency currency between August 1, 1914 and its peak at the end of October 1914, produced a seven percent increase in the monetary base. The money supply grew at an annual rate of 9.8 percent over the same period. By way of contrast, in 1907 the public’s obsession with currency beginning the week of October 22, 1907, when the “Knickerbocker Trust Company” suspended payments, triggered a decline in the money supply at an annual rate of 11.6 percent during the final three months of the year. Additional evidence of the power of Aldrich-Vreeland emergency currency comes from a little-known experiment that McAdoo conducted a year before the European war erupted.
II. The Lesson of 1913:
McAdoo flirted with Aldrich-Vreeland currency during the spring of 1913. The newly elected “President, Woodrow Wilson”, had proposed tariff reduction legislation that provoked considerable opposition in the business community. Wilson pushed for prompt passage of the “Federal Reserve Act”, in part because he expected that the new currency system could supply easy money during the first few months of reduced protection from foreign competition. When Wilson suspected that Republican Senators wanted to block currency revision to precipitate a financial panic and blame the Administration’s new tariff policies, he turned to McAdoo. In the evening of June 11, 1913, McAdoo announced (Washington Post, June 12, 1913) that “he would not hesitate to issue emergency currency to any banks making application and qualifying under the [Aldrich-Vreeland] Act.” When McAdoo was asked whether any applications had been made he simply said: “No.” The press noted that: “The only explanation obtainable as to Mr. McAdoo’s purpose…is that it is intended to give assurance…that the Wilson Administration will do its utmost to overcome any financial embarrassment that may come.”
Would Aldrich-Vreeland currency succeed in calming the business community?
Opponents of the original legislation had argued that, instead of preventing a panic, the provision of emergency currency might backfire and provoke one. The then Comptroller of the Currency, William Ridgely, said (Comptroller of the Currency, 1907, p.74): “The issue of so-called emergency notes…would at once be a confession of weakness and a danger signal that no bank would dare make until in desperate condition.” Perhaps that is why no emergency currency had ever been requested since the Aldrich-Vreeland Act had been passed in May 1908. How did the business world respond to McAdoo’s June 11, 1913 invitation?
McAdoo released his statement invoking the Aldrich-Vreeland Act on the evening of June 11, after the stock market had closed. Thus, if McAdoo’s announcement had a material impact, for better or worse, it should have been reflected in stock price movements on June 12. The return of more than 2.5 percent in the index of railroad stocks (currently called the Dow Jones Transportation Average), and over 3 percent in the index of industrial stocks (currently called the Dow Jones Industrial Average), on June 12, 1913, are the largest statistically significant positive daily price movements during the first six months of 1913. Wall Street’s vote of confidence on June 12, 1913 demonstrated the potential power of the Aldrich-Vreeland Act. The record during the summer of 1914 confirmed it.
III. Liquidity in Wartime:
An important characteristic of the Aldrich-Vreeland Act was that once the Treasury Secretary declared a financial crisis under the Act, a bank could decide the timing and magnitude of securities to deposit as collateral for additional currency. Thus high-powered money expanded endogenously to meet a shortage of liquidity. According to Sprague (1915, p.517) this feature of the Aldrich-Vreeland Act accounted for its success: “For the first time since the establishment of the national banking system the banks exercising the powers conferred upon them by the Aldrich Vreeland Act of 1908 were able to issue bank notes freely in coping with a crisis.”
Direct aid to individual banks needing liquidity may be the best way to combat a panic under wartime conditions. Interruptions in communications facilities, caused by total war or by terrorist attacks, can precipitate liquidity shortages at specific financial institutions. McAndrews and Potter (2002, p.72) cite the importance of the Federal Reserve’s lending at the discount window to individual banks as the key to mitigating the financial consequences of the terrorist attacks of September 11, 2001. Open market operations, the preferred method of injecting funds in the modern banking system, may not have accomplished its objective. Impaired funds transfer prevented some banks that needed cash from borrowing it in the inter-bank market.
In 1914, the threat of an external drain of gold forced McAdoo to close the NYSE. Call loans secured by stock exchange collateral, which normally would have been the primary source of liquidity to an individual bank, disappeared. Under the Aldrich-Vreeland Act banks turned their assets into emergency national bank notes. Like Federal Reserve lending at the discount window during the September 11, 2001 crisis, Aldrich-Vreeland currency provided a universally accepted domestic medium of exchange directly to the banks needing it.
The two key characteristics of currency creation under the Aldrich-Vreeland Act — (1) direct aid to an individual bank, and (2) at the discretion of the bank — support Friedman and Schwartz’s (1963, p. 172) conjecture that emergency currency “would have been equally effective on …the next threat of an inter-convertibility [sic] crisis which arose in late 1930.” During the Great Depression the Federal Reserve knew of Bagehot’s principle of lending freely to stem an internal drain of currency, but did not implement it consistently (see Meltzer [2003, p.282]). The Aldrich-Vreeland Act would have eliminated discretionary delays, by allowing banks under liquidity pressure to exchange assets for currency automatically, had the Act not expired by Congressional design on June 30, 1915 (as part of the Federal Reserve Act of December 23, 1913). Although banks that were members of the Federal Reserve System could initiate a demand for reserves at the discount window in 1930, the Federal Reserve banks exercised considerable discretion (see Chandler, 1971, pp. 225-239).
Open market operations suffered from discretionary delays plus the potential for reserves to accumulate in banks that did not need funds. Unwarranted mistrust of otherwise sound institutions during the 1930’s (some mistrust was warranted, but some was not), meant that open market purchases might not channel the funds to banks under depositor attack, similar to the breakdown of communications on September 11, 2001 described by McAndrews’ and Potter (2002, p.72). The mechanism for currency creation under the Aldrich-Vreeland Act would have provided credit at the bank’s initiative directly to banks needing it most. V. A Concluding Recommendation for Current Federal Reserve Policy
The Aldrich Vreeland Act helped William G. McAdoo triumph over the financial crisis during the summer of 1914. Two key characteristics of the process — direct aid to an individual bank, at the initiative of the bank — suggest that the Aldrich Vreeland mechanism would be especially appropriate in avoiding discretionary delays in liquidity provision and in circumventing problems associated with funds transfers among financial institutions. The Federal Reserve’s revised guidelines for extending primary credit at the discount window moved in the direction of the Aldrich-Vreeland Act by limiting discretionary delays, but still falls short.
The Federal Reserve should complete the progress it has made towards incorporating the 1908 emergency currency legislation in its operating procedures.
Chandler, Lester V., 1971, American Monetary Policy: 1928-1941, Harper & Row publishers, New York.
Comptroller of the Currency, 1907, Annual Report, Government Printing Office, Washington, D.C.
Friedman, Milton, and Anna J. Schwartz, 1963, A Monetary History of the United States, Princeton University Press.
McAndrews, James J. and Simon M. Potter, 2002, “Liquidity Effects of the Events of September 11, 2001,” Federal Reserve Bank of New York
Review, November Meltzer, Allan H., 2003, A History of the Federal Reserve, Volume I, 1913-1951, Chicago, University of Chicago Press
Noyes, Alexander D., 1916, Financial Chapters of the War, Charles Scribner’s and Sons, New York
Silber, William L., 2007, When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy, Princeton University Press
Sprague, O. M. W., 1915, “The Crisis of 1914 in the United States,” American Economic Review, Volume 5, No. 3, pp. 499-513
If the creation of wealth for the reason outlined had not been so manipulated as to eventually allow the use of “The Albert Vreeland Act” to be use in such a way, as to give rise to the eventually creation of “The Federal Reserve” allowing currency to become controlled under the “The Office of the Comptroller of the Currency in the offices of the US Treasury ” we would not be in the position we are today.
The blatant misuse of the certain acts, enabled a misdirection to take place, allowing the then “Treasury Secretary ” William McAdoo to as it was put – “McAdoo flirted with Aldrich-Vreeland currency during the spring of 1913 allowing him to eventually both manipulate and control the price of gold and the eventual allowing banks to issue national bank notes, an important form of currency in pre-Federal Reserve days, without the normal requirement that the currency be secured by U.S. Government bonds.
The overall plan being to put in place a way of “Printing Currency at Times of Financial Crisis” or at such time of needing to raise “The Debt Ceiling” levels above their norm ,even when the amount owed in “Debt Repayments” exceeds the GDP of the country.
The fact that simply by “Creation of Currency Legislation” allowing control of “Peoples Spending” by valuation and devaluation of their effective currency, they could use the “Federal Reserve” as a tool for currency manipulation, and create what has become simply known as “Quantitative Easing” to borrow more against the book debt, by simply revaluing the book debt by how much you owe in debts.
This eventually led to what is now termed as inter-bank lending that was started here – “Open market operations, the preferred method of injecting funds in the modern banking system, may not have accomplished its objective. Impaired funds transfer prevented some banks that needed cash from borrowing it in the inter-bank market”. This was cited as ” Direct aid to individual banks needing liquidity may be the best way to combat a panic under wartime conditions”. Interruptions in communications facilities, caused by total war or by terrorist attacks, can precipitate liquidity shortages at specific financial institutions. McAndrews and Potter (2002, p.72) cite the importance of the Federal Reserve’s lending at the discount window to individual banks as the key to mitigating the financial consequences of the terrorist attacks of September 11, 2001.
Finally this led to the single currency of US of A and the creation of more of the same leading to the eventual “Financial Crash of 2008”
But of course the real reason was Money!
The route or root of all evil – but not so, as the real saying is ” The Love of Money is the of All Evil” and it is that word “Love” that makes all the difference, between “Good and Evil” as it measures the person as either “Wanting or Lacking” as so many a person now destitute or alone or having taken their own life, all for the “Want” of money!
The Bible steps up to the plate so many times as a way to change but simply put ” Change Or Be Damned” seems to fit the bill in this case, as chasing the ” Dollar a Day” as a way to build you future is gradually dying a death, as the new kid on the block “China” says no longer are you our ” “Preferred Reserve Currency” the question in the future will not be, is it the Chinese, Hungary, Russia, India, Syria or Turkey [C.H.R.I.S.T] that is in charge ,but simply –
“The Word of God ”