The Third Stage Of Money

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The Third Stage Of Money

The third comes after the gold standard. Banks are now permanently relieved of the obligation to pay gold to their depositors. And, needless to say, government paper can no longer be turned in for a specified amount of the metal. The regulation of the supply of money becomes exclusively a function of the central banks, of the Federal Reserve System, the Bank of England and the Bank of France. And this regulation, precisely as you would expect, is through control of the borrowing from the ordinary or commercial banks, for that, overwhelmingly, is now the way money gets created.

How do the central banks control lending by the ordinary banks? Variously. American practice, which we use best for illustration, requires the commercial banks to maintain a specified reserve of cash - that being now the irredeemable government currency - against their deposits. If the banks seem to be lending too freely, creating too much money in the resulting new deposits, the Federal Reserve - the central bank - can raise the reserve requirement. That, obviously, puts a crimp in what the banks can safely lend. Or, more commonly, the Federal Reserve sells from its inventory of government securities, an inventory which is always fairly large. When people and institutions buy these securities, they take cash - reserves, in other words - from the commercial banks to pay the Federal Reserve.

That also reduces what the banks can lend.

These are what is called open-market operations - often thought a great mystery but, in fact, as you see, very simple.

If their reserves are now too low, the banks can replenish them by borrowing from the Federal Reserve.

But this can be discouraged by raising the interest rate.

And since the banks will pass this higher rate on to their customers, that is presumed to discourage their borrowing, too.

When you control the borrowing in this fashion, you control the creation of deposits and so you control the money supply - or at least what is by far the largest item in the money supply.

Interested in American Policy

Gold As An Investment

One should never advise other people on their investments - not without compensation. If the investment turns out well, they think it's their own wisdom; if it goes sour, they remember who gave them the bad advice. From 1933 until a couple of years ago, Americans were protected from either gain or loss; they were forbidden by law to hold gold. The law was passed early in the presidency of Franklin Roosevelt.

The gold content of the dollar was being lowered in the hope that this would raise prices.

In other words, the amount of gold available for a paper dollar was being reduced and the... see: Gold As An Investment

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