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<blockquote>[T]he money market can also have its own crises (wholly or mostly unrelated to industrial disturbances) .... In this connection there is still much to be ascertained and investigated especially in the last twenty years. - Engels, Letter to Conrad Schmidt : London, October 27, 1890.</blockquote>Marx deduced the possibility of a general crisis from the asymmetry latent in the process of capital expansion itself. Namely, the possibility that "the supply of all commodities can be greater than the demand for all commodities, since the demand for the general commodity, money, exchange-value, is greater than the demand for all particular commodities." (Marx-Engels reader, Crisis Theory) In times of crisis, money becomes scarce, ruining those who get caught holding the bag (of commodities). Behind all this is the necessity that value, in order to expand, must transform itself continuously between use and exchange values, ''and that only in the passage from commodity to money can surplus value emerge''. In M-C-M', C-M' is therefore the critical junction, and the problem which emerges time and time again is that C cannot become M' without the ruination of countless capitalists. | <blockquote>[T]he money market can also have its own crises (wholly or mostly unrelated to industrial disturbances) .... In this connection there is still much to be ascertained and investigated especially in the last twenty years. - Engels, Letter to Conrad Schmidt : London, October 27, 1890.</blockquote>Marx deduced the possibility of a general crisis from the asymmetry latent in the process of capital expansion itself. Namely, the possibility that "the supply of all commodities can be greater than the demand for all commodities, since the demand for the general commodity, money, exchange-value, is greater than the demand for all particular commodities." (Marx-Engels reader, Crisis Theory) In times of crisis, money becomes scarce, ruining those who get caught holding the bag (of commodities). Behind all this is the necessity that value, in order to expand, must transform itself continuously between use and exchange values, ''and that only in the passage from commodity to money can surplus value emerge''. In M-C-M', C-M' is therefore the critical junction, and the problem which emerges time and time again is that C cannot become M' without the ruination of countless capitalists. | ||
All of this is in the context of falling profits. "The gradual growth of constant capital in relation to variable capital must necessarily lead to a gradual fall of the general rate of profit." In Capital Volume III Marx outlined several "counteracting influences" by which capitalists could escape this dilemma - if only for a time. My thesis here is that the mitigative role played by central banks is to be understood as such a 'counteracting influence,' one unrecognized by Marx. Whether this takes the form of | All of this is in the context of falling profits. "The gradual growth of constant capital in relation to variable capital must necessarily lead to a gradual fall of the general rate of profit." In Capital Volume III Marx outlined several "counteracting influences" by which capitalists could escape this dilemma - if only for a time. My thesis here is that the mitigative role played by central banks is to be understood as such a 'counteracting influence,' one unrecognized by Marx. Whether this takes the form of leveraged bailouts or an elastic money supply is unimportant - the essential function is to secure the purchase of those commodities which, if the Market remained 'free,' could not have been sold without ruin. <blockquote>In so far as the payments balance one another, money functions only ideally as money of account, as a measure of value. In so far as actual payments have to be made, money does not serve as a circulating medium, as a mere transient agent in the interchange of products, but as the individual incarnation of social labour, as the independent form of existence of exchange-value, as the universal commodity. This contradiction comes to a head in those phases of industrial and commercial crises which are known as monetary crises. Such a crisis occurs only where the ever-lengthening chain of payments, and an artificial system of settling them, has been fully developed. '''Whenever there is a general and extensive disturbance of this mechanism, no matter what its cause, money becomes suddenly and immediately transformed, from its merely ideal shape of money of account, into hard cash. Profane commodities can no longer replace it. The use-value of commodities becomes valueless, and their value vanishes in the presence of its own independent for'''m. On the eve of the crisis, the bourgeois, with the self-sufficiency that springs from intoxicating prosperity, declares money to be a vain imagination. Commodities alone are money. But now '''the cry is everywhere: money alone is a commodity!''' As the hart pants after fresh water, so pants his soul after money, the only wealth. In a crisis, the antithesis between commodities and their value-form, money, becomes heightened into an absolute contradiction. Hence, in such events, the form under which money appears is of no importance. The money famine continues, whether payments have to be made in gold or in credit money such as bank-notes.<ref>Marx, Capital V1, [https://www.marxists.org/archive/marx/works/1867-c1/ch03.htm Chapter Three: Money, Or the Circulation of Commodities]</ref></blockquote>A variable money supply allows liquidity infusions which circumvent the breakdown of payments described above. When there is a crisis, what happens is that no one will part with money to buy commodities which need to circulate, and so the whole cycle breaks down. Under and elastic currency regime, such a crisis will be met with infusions of artificial liquidity. It is a sort of cardiopulmonary recitation of the economic body - blood stops flowing, but an outside pressure can get it going again. | ||
It is only a temporary measure, as it had to be, lest inflation be rampant, something undesirable at that time. The idea was that the 'elastic currency' would be self-liquidating as businesses and banks paid off their loans, returning it to the federal reserve where it would be retired from circulation. This allows capital to deal with crises on a case-by-case basis, but what of the falling rate of profit in general? In theory, the falling rate of profit should continue, and ultimately, however sophisticated the methods of dealing with individual crises become, the situation should become untenable. At some point, as the rate of profit goes on decreasing, the 'elastic' currency can't stretch anymore. But after WWI, the gold standard was effectively smashed, and since 1971, even the formal pretense of 'elasticity' (stretching with respect to gold) has been abandoned. As a distinguished assembly of bourgeois simpletons explained to a fiscally anxious congress during the 90s, failure to expand US debt: "could worsen the economic downturn, causing greater loss of jobs, production, and income."<ref>Congressional Record Volume 141, Number 27 (Friday, February 10, 1995) https://web.archive.org/web/20240208025511/https://www.govinfo.gov/content/pkg/CREC-1995-02-10/html/CREC-1995-02-10-pt1-PgS2457.htm</ref> In other words, US debt (the global money supply) must continuously expand - the alternative being prolonged global capitalist crisis. | It is only a temporary measure, as it had to be, lest inflation be rampant, something undesirable at that time. The idea was that the 'elastic currency' would be self-liquidating as businesses and banks paid off their loans, returning it to the federal reserve where it would be retired from circulation. This allows capital to deal with crises on a case-by-case basis, but what of the falling rate of profit in general? In theory, the falling rate of profit should continue, and ultimately, however sophisticated the methods of dealing with individual crises become, the situation should become untenable. At some point, as the rate of profit goes on decreasing, the 'elastic' currency can't stretch anymore. But after WWI, the gold standard was effectively smashed, and since 1971, even the formal pretense of 'elasticity' (stretching with respect to gold) has been abandoned. As a distinguished assembly of bourgeois simpletons explained to a fiscally anxious congress during the 90s, failure to expand US debt: "could worsen the economic downturn, causing greater loss of jobs, production, and income."<ref>Congressional Record Volume 141, Number 27 (Friday, February 10, 1995) https://web.archive.org/web/20240208025511/https://www.govinfo.gov/content/pkg/CREC-1995-02-10/html/CREC-1995-02-10-pt1-PgS2457.htm</ref> In other words, US debt (the global money supply) must continuously expand - the alternative being prolonged global capitalist crisis. | ||
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''De jure'', the system was acephalic and possessed no recourse to elastic currency. ''De facto'', things are complicated by the presence of the '''New York Clearing House'''. Already by 1860 the “largest ten banks in New York City [came to possess] 46% of the total banking assets of the City.” This ongoing concentration of capital was reflected in the explicit organization of New York Banking during the 1850s in the form of the New York Clearing House Association, formed 1853. Originally organized to virtualize specie transfer, the Clearing House “soon developed into a mutual association capable of developing and enforcing cooperative action among the City banks … controlled by a committee composed of five bank officers, usually representing each of the most powerful banks in the City… regulating the admission or expulsion of Clearing House members.”<ref>Gische, David M. “The New York City Banks and the Development of the National Banking System 1860-1870.” ''The American Journal of Legal History'' 23, no. 1 (January 1979): 21. <nowiki>https://doi.org/10.2307/844771</nowiki>.</ref> | ''De jure'', the system was acephalic and possessed no recourse to elastic currency. ''De facto'', things are complicated by the presence of the '''New York Clearing House'''. Already by 1860 the “largest ten banks in New York City [came to possess] 46% of the total banking assets of the City.” This ongoing concentration of capital was reflected in the explicit organization of New York Banking during the 1850s in the form of the New York Clearing House Association, formed 1853. Originally organized to virtualize specie transfer, the Clearing House “soon developed into a mutual association capable of developing and enforcing cooperative action among the City banks … controlled by a committee composed of five bank officers, usually representing each of the most powerful banks in the City… regulating the admission or expulsion of Clearing House members.”<ref>Gische, David M. “The New York City Banks and the Development of the National Banking System 1860-1870.” ''The American Journal of Legal History'' 23, no. 1 (January 1979): 21. <nowiki>https://doi.org/10.2307/844771</nowiki>.</ref> | ||
By 1907, the organization functioned in this vacuum as an unofficial 'bankers bank.' It took care of the daily exchange of checks between banks and, more importantly, they would pool member bank reserves and issue emergency currency ('loan certificates') to mitigate fallout during crises.<ref name=":1">Broz, J. Lawrence. 1999. “Origins of the Federal Reserve System: International Incentives and the Domestic Free-Rider Problem.” ''International Organization'' 53 (1): 39–70. <nowiki>https://doi.org/10.1162/002081899550805</nowiki></ref> Holding this power, they could dictate terms to the lesser houses during crises. To deny their services at such a juncture was to destroy, and they knew this. With this power, the clearinghouse, "dominated by the more conservative and solidly entrenched institutions which were either within the Morgan sphere of influence or the National City Bank | By 1907, the organization functioned in this vacuum as an unofficial 'bankers bank.' It took care of the daily exchange of checks between banks and, more importantly, they would pool member bank reserves and issue emergency currency ('loan certificates') to mitigate fallout during crises.<ref name=":1">Broz, J. Lawrence. 1999. “Origins of the Federal Reserve System: International Incentives and the Domestic Free-Rider Problem.” ''International Organization'' 53 (1): 39–70. <nowiki>https://doi.org/10.1162/002081899550805</nowiki></ref> Holding this power, they could dictate terms to the lesser houses during crises. To deny their services at such a juncture was to destroy, and they knew this. With this power, the clearinghouse, "dominated by the more conservative and solidly entrenched institutions which were either within the Morgan sphere of influence or the National City Bank sphere of influence," imposed an order on New York finance which favored establishment finance.<ref>Allen, F.L., G. Morgenson, and M.C. Miller. ''The Lords of Creation: The History of America’s 1 Percent''. Forbidden Bookshelf Series. Open Road Integrated Media, Incorporated, 2017. <nowiki>https://books.google.com/books?id=4fwnswEACAAJ</nowiki>. p110</ref> | ||
=== Necessity: the 1907 Crisis === | === Necessity: the 1907 Crisis === | ||
Despite the grumblings of certain bankers, the question of currency/banking reform could wait so long as economic conditions allowed it to be ignored. After the 1907 Crisis, bankers ''as a class'' could no longer ignore it. As they so often do, the crash followed a period of feverish speculation. By the fall of 1906, this boom was beginning to drain English gold across the Atlantic, and the Bank of England took notice. As Frank Vanderlip reported to James Stillman, “The Bank of England is extremely nervous on the subject of gold exports.”<ref>Lowenstein, Roger. ''America’s Bank: The Epic Struggle to Create the Federal Reserve''. New York: Penguin Press, 2015. p 58</ref> | Despite the grumblings of certain bankers, the question of currency/banking reform could wait so long as economic conditions allowed it to be ignored. After the 1907 Crisis, bankers ''as a class'' could no longer ignore it. As they so often do, the crash followed a period of feverish speculation. By the fall of 1906, this boom was beginning to drain English gold across the Atlantic, and the Bank of England took notice. As Frank Vanderlip reported to James Stillman, “The Bank of England is extremely nervous on the subject of gold exports.”<ref>Lowenstein, Roger. ''America’s Bank: The Epic Struggle to Create the Federal Reserve''. New York: Penguin Press, 2015. p 58</ref> In the fall of 1906, the Bank of England dropped the hammer.<blockquote>London raised its interest rate from 3.5 percent to 6 percent. The Reichsbank in Berlin raised rates as well. Since international capital ever flows to where the yield is highest, these moves inevitably induced investors to ship their gold back across the Atlantic. The Bank of England further insulated the mother country from the overheated American economy by directing British banks to liquidate the finance bills—short-term loans—that they provided to American firms, thereby tightening credit.<ref>Lowenstein, Roger. ''America’s Bank: The Epic Struggle to Create the Federal Reserve''. New York: Penguin Press, 2015. p 59</ref></blockquote>When the Mercantile National Bank, along with a number of failing trusts, appealed to the Clearing House for aid, the Clearing House demanded the "immediate resignation of Messrs. Heinze, Morse, and Thomas from all their banking connections."<ref>Allen, F.L., G. Morgenson, and M.C. Miller. ''The Lords of Creation: The History of America’s 1 Percent''. Forbidden Bookshelf Series. Open Road Integrated Media, Incorporated, 2017. <nowiki>https://books.google.com/books?id=4fwnswEACAAJ</nowiki>. 111</ref> For days on end the newspapers blared the casualties of the Clearing House sterilization campaign. As the spectacle grew, the public began to balk, and a run on banks and banking trusts was the result. | ||
Already, the American economy was headed toward crisis. More immediately, the crisis was caused by the failure of a bid to corner the copper market by F. Augustus Heinze of the United Copper Company in collaboration with his brother Otto and the notorious Charles W. Morse. Over mid-October an attempt was made to squeeze short sellers, but the attempt failed. Heinze and company were ruined.<blockquote>the damage done by these failures would probably have been limited had Heinze and his friends not been bankers as well as gamblers. Heinze was president of the Mercantile National Bank; Morse and Thomas were directors of it... depositors naturally became suspicious and began to withdraw their funds. Suspicion spread to the Morse chain of banks, too. The Mercantile, finding its cash being drained away by uneasy depositors, applied to the New York Clearing House for help.<ref>Allen, F.L., G. Morgenson, and M.C. Miller. ''The Lords of Creation: The History of America’s 1 Percent''. Forbidden Bookshelf Series. Open Road Integrated Media, Incorporated, 2017. <nowiki>https://books.google.com/books?id=4fwnswEACAAJ</nowiki>. p109</ref></blockquote>Because of the extreme degree to which the boards of these banks and trusts interlocked, the crisis was virulent. Morse was associated with Charles T. Barney of Knickerbocker Trust Company, who lent him money on occasion. One of the largest in New York, Knickerbocker Trust was targeted by the Clearing House, which demanded resignations. This, coupled with the National Bank of Commerce's refusal to any longer clear their checks, spelled destruction for the trust. On October 21st executives met in a popular restaurant to discuss the emergency. They resolved that only Morgan could save them, and called on him early the following morning. | Already, the American economy was headed toward crisis. More immediately, the crisis was caused by the failure of a bid to corner the copper market by F. Augustus Heinze of the United Copper Company in collaboration with his brother Otto and the notorious Charles W. Morse. Over mid-October an attempt was made to squeeze short sellers, but the attempt failed. Heinze and company were ruined.<blockquote>the damage done by these failures would probably have been limited had Heinze and his friends not been bankers as well as gamblers. Heinze was president of the Mercantile National Bank; Morse and Thomas were directors of it... depositors naturally became suspicious and began to withdraw their funds. Suspicion spread to the Morse chain of banks, too. The Mercantile, finding its cash being drained away by uneasy depositors, applied to the New York Clearing House for help.<ref>Allen, F.L., G. Morgenson, and M.C. Miller. ''The Lords of Creation: The History of America’s 1 Percent''. Forbidden Bookshelf Series. Open Road Integrated Media, Incorporated, 2017. <nowiki>https://books.google.com/books?id=4fwnswEACAAJ</nowiki>. p109</ref></blockquote>Because of the extreme degree to which the boards of these banks and trusts interlocked, the crisis was virulent. Morse was associated with Charles T. Barney of Knickerbocker Trust Company, who lent him money on occasion. One of the largest in New York, Knickerbocker Trust was targeted by the Clearing House, which demanded resignations. This, coupled with the National Bank of Commerce's refusal to any longer clear their checks, spelled destruction for the trust. On October 21st executives met in a popular restaurant to discuss the emergency. They resolved that only Morgan could save them, and called on him early the following morning. | ||
=== Morgan the Fixer === | === Morgan the Fixer === | ||
Morgan had a reputation for fixing these kind of problems. Back in 1893 he had all but single-handedly diffused a similar crisis. In 1890 when the Barings bubble collapsed in Argentina, British capital fled the new world, spurred along by fears that the US government would begin experimenting with bimetallic currency.<ref>Chernow, Ron. ''The House of Morgan'', p 105</ref> In 1893, with US gold reserves evaporating, Grover Cleveland approached John Pierpont Morgan Sr. and August Belmont Jr., the American representative of the London Rothschilds.<ref>Spence, Richard B. ''Wall Street and the Russian Revolution: 1905-1925'', p42</ref> They offered him him $50 million at 3.75%, an outrageous rate which Cleveland declined. But on the night of February 7th Morgan and his coterie arrived at the white house; informed that they could not simply drop in on the President of the United States, Morgan replied “I have come down to see the president, and I am going to stay here until I see him,” and there he waited, playing solitaire through the night.<ref>Chernow, ''The House of Morgan,'' 109</ref> In the morning they were received, and Cleveland told them a public issue of bonds, as opposed to their private scheme, had been decided on. Morgan declared this impossible, and Cleveland asked for his alternative.<blockquote>Pierpont laid out an audacious scheme. The Morgan and Rothschild houses in New York and London would gather 3.5 million ounces of gold, at least half from Europe, in exchange for about $65 million worth of thirty-year gold bonds. He also promised that gold obtained by the government wouldn’t flow out again. This was the showstopper that mystified the financial | Morgan had a reputation for fixing these kind of problems. Back in 1893 he had all but single-handedly diffused a similar crisis. In 1890 when the Barings bubble collapsed in Argentina, British capital fled the new world, spurred along by fears that the US government would begin experimenting with bimetallic currency.<ref>Chernow, Ron. ''The House of Morgan'', p 105</ref> In 1893, with US gold reserves evaporating, Grover Cleveland approached John Pierpont Morgan Sr. and August Belmont Jr., the American representative of the London Rothschilds.<ref>Spence, Richard B. ''Wall Street and the Russian Revolution: 1905-1925'', p42</ref> They offered him him $50 million at 3.75%, an outrageous rate which Cleveland declined. But on the night of February 7th Morgan and his coterie arrived at the white house; informed that they could not simply drop in on the President of the United States, Morgan replied “I have come down to see the president, and I am going to stay here until I see him,” and there he waited, playing solitaire through the night.<ref>Chernow, ''The House of Morgan,'' 109</ref> In the morning they were received, and Cleveland told them a public issue of bonds, as opposed to their private scheme, had been decided on. Morgan declared this impossible, and Cleveland asked for his alternative.<blockquote>Pierpont laid out an audacious scheme. The Morgan and Rothschild houses in New York and London would gather 3.5 million ounces of gold, at least half from Europe, in exchange for about $65 million worth of thirty-year gold bonds. He also promised that gold obtained by the government wouldn’t flow out again. This was the showstopper that mystified the financial world—a promise to rig, temporarily, the gold market .... When the syndicate bonds were offered, on February 20, 1895, they sold out in two hours in London, in only twenty-two minutes in New York.<ref>Chernow, ''The House of Morgan,'' 110</ref></blockquote>So in 1907, when the sky was falling on top of New York finance, Morgan seemed the man to call. Morgan formed a team of young bankers loyal to him, including Henry P. Davison of First National Bank and Benjamin Strong of his own Bankers Trust. He sent these men to audit Knickerbocker's books, and found them wanting. Knickerbocker was allowed to fail October 22.<ref name=":2">Chernow, ''The House of Morgan.'' 166-67</ref> | ||
At this point, even Morgan felt himself out of his depth, and he sought government assistance. Already, back in September, with crisis all but inevitable, Morgan had appealed directly to Theodore Roosevelt. At that time, the Treasury shifted millions of dollars to commercial bank deposits around the nation and tried to limit government withdrawals. Now, October 23, Morgan and other bankers met at a Manhattan hotel with Treasury Secretary George B. Cortel, and the following day Cortel put $25 million in government funds at Pierpont’s disposal.<ref name=":2" /> Through the rest of October and into November Morgan affected a series of last minute miracles, saving the New York Stock Exchange, a number of trusts, and New York City itself. By November, the Treasury was again intervening, issuing "$150 million in low-interest bonds and certificates and permitted the banks to use the government securities as collateral for creating new currency — an expedient device for pumping up the money supply in a hurry."<ref>Greider, William. ''Secrets of the Temple: How the Federal Reserve Runs the Country''. Simon and Schuster, 1989. p278</ref> Effectively, the alliance between Morgan and the US treasury was attempting to act as a central bank by providing emergency liquidity. | At this point, even Morgan felt himself out of his depth, and he sought government assistance. Already, back in September, with crisis all but inevitable, Morgan had appealed directly to Theodore Roosevelt. At that time, the Treasury shifted millions of dollars to commercial bank deposits around the nation and tried to limit government withdrawals. Now, October 23, Morgan and other bankers met at a Manhattan hotel with Treasury Secretary George B. Cortel, and the following day Cortel put $25 million in government funds at Pierpont’s disposal.<ref name=":2" /> Through the rest of October and into November Morgan affected a series of last minute miracles, saving the New York Stock Exchange, a number of trusts, and New York City itself. By November, the Treasury was again intervening, issuing "$150 million in low-interest bonds and certificates and permitted the banks to use the government securities as collateral for creating new currency — an expedient device for pumping up the money supply in a hurry."<ref>Greider, William. ''Secrets of the Temple: How the Federal Reserve Runs the Country''. Simon and Schuster, 1989. p278</ref> Effectively, the alliance between Morgan and the US treasury was attempting to act as a central bank by providing emergency liquidity. | ||
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=== The New York Fed === | === The New York Fed === | ||
Real power in the system resides with the New York Fed, which conducts Open Market Operations, implements monetary policy, and deals with all international relations. Over time this concentration of influence has diffused, but only slightly. | Real power in the system resides with the New York Fed, which conducts Open Market Operations, implements monetary policy, and deals with all international relations. Over time this concentration of influence has diffused, but only slightly. At the first board meeting, '''Benjamin Strong''', a Morgan man and Jekyll Island attendee, was elected governor. He would spend the next fourteen years working tirelessly alongside '''Montagu Norman''', Governor of the Bank of England from 1920 to 1944, to reinstate an international gold standard. Norman - like the Morgans - was a Nazi collaborator and member of the Anglo-german fellowship. He funded the rearmament of Germany with loans, transferred gold from Czech to Nazi bank accounts,<ref>Blaazer, David (2005). "Finance and the End of Appeasement: The Bank of England, the National Government and the Czech Gold". ''Journal of Contemporary History''. '''40''' (1): 25–39.</ref> and was a close personal friend of nazi central bank leader, '''Hjalmar Schact'''.<ref>Forbes, Neil (2000), "Doing Business with the Nazis"</ref> | ||
At the first board meeting, '''Benjamin Strong''', a Morgan man and Jekyll Island attendee, was elected governor. He would spend the next fourteen years working tirelessly alongside '''Montagu Norman''', Governor of the Bank of England from 1920 to 1944, to reinstate an international gold standard. Norman - like the Morgans - was a Nazi collaborator and member of the Anglo-german fellowship. He funded the rearmament of Germany with loans, transferred gold from Czech to Nazi bank accounts,<ref>Blaazer, David (2005). "Finance and the End of Appeasement: The Bank of England, the National Government and the Czech Gold". ''Journal of Contemporary History''. '''40''' (1): 25–39.</ref> and was a close personal friend of nazi central bank leader, '''Hjalmar Schact'''.<ref>Forbes, Neil (2000), "Doing Business with the Nazis" | |||
=== Monetary Operations === | === Monetary Operations === | ||
The Federal reserve handles money supply through four main levers, all aimed at increasing or decreasing the '''federal funds rate''', which is the rate at which banks make overnight loans to each other. This is what is referred to when it is said that the fed is 'changing interest rates.' These operations aim either to effect supply or demand.<ref>Mishkin, Frederic S., and Apostolos Serletis. ''The Economics of Money, Banking and Financial Markets''. 4th Canadian ed. Toronto: Pearson Addison Wesley, 2011. | The Federal reserve handles money supply through four main levers, all aimed at increasing or decreasing the '''federal funds rate''', which is the rate at which banks make overnight loans to each other. This is what is referred to when it is said that the fed is 'changing interest rates.' These operations aim either to effect supply or demand.<ref>Mishkin, Frederic S., and Apostolos Serletis. ''The Economics of Money, Banking and Financial Markets''. 4th Canadian ed. Toronto: Pearson Addison Wesley, 2011. | ||
(I rely in this section mainly on this work, but intermixed with notes I took in an undergraduate course on Banking | (I rely in this section mainly on this work, but intermixed with notes I took in an undergraduate course on Banking) </ref> | ||
==== Open Market Operations (Supply) ==== | ==== Open Market Operations (Supply) ==== | ||
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First, and used more commonly than any other method since the 1980s, are '''Open Market Operations''' conducted by the New York Fed under the oversight of the Federal Open Market Committee. Primary dealers keep in contact through a dedicated desk at the NY Fed, and buy Governmental bonds from the fed using TRAPS (Trading Room Automated Processing System), a software used exclusively for these transactions. There are two types, defensive and dynamic. Defensive operations try to stabilize the market in response to some externality. For this reason, they are usually temporary measures like repo or matched sale-purchase agreements. Repo is when the fed buys securities with an understanding that they will be returned at a future data, and matched sale-purchase agreements are just the opposite, the Fed selling with an agreement for future re-acquisition. Dynamic operations, like that of Jerome Powel in March of 2023 to raise interest rates, are when the fed wants to make a change in the market, in this instance to fight inflation. | First, and used more commonly than any other method since the 1980s, are '''Open Market Operations''' conducted by the New York Fed under the oversight of the Federal Open Market Committee. Primary dealers keep in contact through a dedicated desk at the NY Fed, and buy Governmental bonds from the fed using TRAPS (Trading Room Automated Processing System), a software used exclusively for these transactions. There are two types, defensive and dynamic. Defensive operations try to stabilize the market in response to some externality. For this reason, they are usually temporary measures like repo or matched sale-purchase agreements. Repo is when the fed buys securities with an understanding that they will be returned at a future data, and matched sale-purchase agreements are just the opposite, the Fed selling with an agreement for future re-acquisition. Dynamic operations, like that of Jerome Powel in March of 2023 to raise interest rates, are when the fed wants to make a change in the market, in this instance to fight inflation. | ||
Purchases increase the amount of non-borrowed reserves, shifting the vertical portion of the supply curve right and thereby lowering the federal funds rate, leading to an increase in overall market liquidity. In the second, because the federal funds rate cannot fall below the interest rate paid on reserves, we hit the flat section and there is no effect on federal funds rate | |||
==== Discount Rate (Supply) ==== | ==== Discount Rate (Supply) ==== | ||
[[File:DISCOUNT RATE.png|thumb|366x366px|Discount Rate Diagram]] | [[File:DISCOUNT RATE.png|thumb|366x366px|Discount Rate Diagram]] | ||
A second supply targeting method is to charge the discount rate. Banks can borrow from each other or from the Fed. If they borrow from each | A second supply targeting method is to charge the discount rate. Banks can borrow from each other or from the Fed. If they borrow from each they they face the federal funds rate. If they borrow from the Fed they face the discount rate. Since 2003, Reserve Banks establish the primary credit rate at least every 14 days, subject to review and determination of the Board of Governors. | ||
Federal Reserve Banks have three main lending programs for depository institutions — primary credit, secondary credit and seasonal credit. Primary credit is offered on a very short-term basis as a backup rather than a regular source of funding, and borrowers are not required to seek alternative sources of funds before requesting. Secondary credit is also short term and is offered to banks not eligible for primary credit. It is meant to get people back to normal market funding. Seasonal credit is available to relatively small depository institutions to meet regular seasonal funding needs. | Federal Reserve Banks have three main lending programs for depository institutions — primary credit, secondary credit and seasonal credit. Primary credit is offered on a very short-term basis as a backup rather than a regular source of funding, and borrowers are not required to seek alternative sources of funds before requesting. Secondary credit is also short term and is offered to banks not eligible for primary credit. It is meant to get people back to normal market funding. Seasonal credit is available to relatively small depository institutions to meet regular seasonal funding needs. | ||
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==== Requirement Ratio (Demand) ==== | ==== Requirement Ratio (Demand) ==== | ||
[[File:REQUIREMENT RATIO.png|thumb|301x301px|Requirement Ratio Diagram]] | [[File:REQUIREMENT RATIO.png|thumb|301x301px|Requirement Ratio Diagram]] | ||
Open Market Operations and the Discount Rate effect supply, but the Federal Reserve has two more methods, each effecting demand. First, they can change the '''requirement ratio''', which is the amount of reserves banks are required to keep in the with the fed. Because these reserves cannot be used for investment, ''increasing the required reserves '''increases demand,''' shifts demand for funds right, lowering the federal funds rate'' | Open Market Operations and the Discount Rate effect supply, but the Federal Reserve has two more methods, each effecting demand. First, they can change the '''requirement ratio''', which is the amount of reserves banks are required to keep in the with the fed. Because these reserves cannot be used for investment, ''increasing the required reserves '''increases demand,''' shifts demand for funds right, lowering the federal funds rate'', and vice-versa. | ||
==== Interest on Reserves (Demand) ==== | ==== Interest on Reserves (Demand) ==== | ||
[[File:INTEREST ON RESERVES1.png|thumb| | [[File:INTEREST ON RESERVES1.png|thumb|258x258px|Interest on Reserves Diagram]] | ||
Another way to affect demand is by changing interest on reserves. Until 2008, the Federal Reserve did not pay interest on reserves banks held with them | Another way to affect demand is by changing interest on reserves. Until 2008, the Federal Reserve did not pay interest on reserves banks held with them, when it was introduced as an additional form of leverage. Paying interest on reserves allows the Fed to place a floor on the federal funds rate (the horizontal line in the supply curve), because banks have little reason to lend at rates below the rate of interest they receive on their reserve balances. The rate is determined by the Board of Governors. | ||
==== Extraordinary Measures (2008) ==== | ==== Extraordinary Measures (2008) ==== | ||
Above are the conventional methods of monetary policy. In some circumstances, they become insufficient. In particular, there is what is known as the '''Zero-Lower Bound Problem'''. Interest rates, for obvious reasons, cannot | Above are the conventional methods of monetary policy. In some circumstances, they become insufficient. In particular, there is what is known as the '''Zero-Lower Bound Problem'''. Interest rates, for obvious reasons, cannot be negative, so as they approach zero there comes a point where nothing further can be done. If the economy is still unresponsive, the Fed can, as it did in 2008, take extraordinary measures. One method was to '''extend the term of discount loans''', giving banks longer to pay them back. Another was the '''Term Auction Facility''', through which the Fed extended 3.8 trillion in collateralized loans at rates below the discount rate. The auctions were administered by the New York Fed though loans were offered through all twelve of the Federal Reserve Banks. At the same time, the Fed also began to make '''large scale purchases of toxic assets'''. | ||
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[[Category:Good Articles]] | [[Category:Good Articles]] | ||