Central bank dreams, monetary realities

The legislative creators of the Fed would be surprised to discover that the Fed today is one of the biggest owners of real estate loans, with more than $900 billion of mortgage-backed securities on its books.

There was a time when there was no Federal Reserve.

Before the Fed, there was the National Banking Era of 1863–1914, for which the key legislation was the National Banking Act, originally called the National Currency Acts of 1863 and 1864, during the Lincoln administration. Exactly like the foundation of the Bank of England in 1694, which was created to finance King William III’s wars, a central purpose of the National Currency Acts was to finance the Civil War. In both cases, banks were given the power to issue paper currency in exchange for lending the government money.

The new national banks could issue their own paper currency, but 100 percent of this currency had to be secured (or “backed”) by U.S. government bonds. This was a handy way of raising debt for the war, but it was also statement of an essential banking principle: that money should be necessarily tied to claims on some safe asset. Stated as a question: What is the asset that can legitimately back the issuance of money? After the resumption of gold payments in 1879 under the Resumption of Specie Act, the government bonds backing the national bank currency were payable in gold.

What institutions are there today which are most like national banks as conceived in 1863?  How many of them are there? The answer is 12: the 12 Federal Reserve Banks. They buy government bonds and issue paper money, just as the original national banks did. They are very useful in financing the government. Only now do we have a monopoly of currency issuance by the Fed, instead of every national bank having that power.

The full text of this article is available on The American's website.

 

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About the Author

 

Alex J.
Pollock
  • Alex J. Pollock is a resident fellow at the American Enterprise Institute (AEI), where he studies and writes about housing finance; government-sponsored enterprises, including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks; retirement finance; and banking and central banks. He also works on corporate governance and accounting standards issues.


    Pollock has had a 35-year career in banking and was president and CEO of the Federal Home Loan Bank of Chicago for more than 12 years immediately before joining AEI. A prolific writer, he has written numerous articles on financial systems and is the author of the book “Boom and Bust: Financial Cycles and Human Prosperity” (AEI Press, 2011). He has also created a one-page mortgage form to help borrowers understand their mortgage obligations.


    The lead director of CME Group, Pollock is also a director of the Great Lakes Higher Education Corporation and the chairman of the board of the Great Books Foundation. He is a past president of the International Union for Housing Finance.


    He has an M.P.A. in international relations from Princeton University, an M.A. in philosophy from the University of Chicago, and a B.A. from Williams College.


  • Phone: 202.862.7190
    Email: apollock@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: (202) 419-5212
    Email: emily.rapp@aei.org

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