What is the current U.S. monetary standard?

What is the current U.S. monetary standard?

Despite my greatest efforts, I could not find any information about what standard the U.S. is using at this time. Apparently, we used to be on a gold standard. What about now? Do we even have a standard?


The American dollar is now Fiat Money, unbacked by any physical asset


The United States abandoned the gold standard on 15 August 1971. Since then it has been using fiat money, which is not backed by any commodity. It derives its value solely from government authority.

This is sometimes also known as a "managed currency standard".


I decided to answer it even if briefly it is already answered by Semaphore and Pieter Geerkens

The money itself not backed by any physical assets, to understand the current situation, the existing two answers contain the "Fiat money" definition, which is one big part of the story.

The complete story is way bigger than it can be told in this single answer, but I will try to collect all vital, and useful information since I was interested in it for few years now.

First of all, an official source: Modern Money Mechanics from Federal Reserve central bank (mostly privately owned bank), which tells us how money is created out of nothing (actually from some demand of money supply), which means unlike previous money system backed by gold or silver assets (or anything limiting factor) the money supply can be expanded theoretically to infinity (see Hyperinflation), but in reality people lose faith in currency by that time and start bartering.

I would recommend lectures from documentaries like: Money Masters, or Chris Martenson's and Albert Bartlett's lectures available on youtube (the scope of theirs are broader than just money system). Also might be useful Mike Maloney's "Hidden Secrets Of Money", which contains a good part of monetary history.

I wouldn't recommend Zeitgeist movie even if it contains valuable informations, it is sort of manipulative and you might get drifted far from the information which you are looking for.

For summary: the standard of USD technically the faith of the people (not just US citizens, but foreigners too), which is losing rapidly in the past 10 years, for ex China started agreeing not using USD for international trades so far with 8 currencies (most recently EUR), and also there are serious debates on how to trade oil without using USD.


American paper currency come in seven denominations: $1, $2, $5, $10, $20, $50, and $100. The Bureau of Engraving and Printing (BEP) manufactures paper money. It also redesigns money, with new appearances and enhanced security features. BEP includes security features to prevent counterfeiting. Purchase commemorative or bulk versions of American currency through the Bureau's Money Store.

The United States no longer issues bills in larger denominations, such as $500, $1,000, $5,000, and $10,000 bills. But they are still legal tender and may still be in circulation. All U.S. currency issued since 1861 is valid and redeemable at its full face value.


Treasury Notes


The federal government began issuing its own currencies during the Civil War as it tried to meet funding and money circulation emergencies. In 1861, Secretary of the Treasury Salmon P. Chase directed the Treasury to issue Demand Notes to pay expenses. As the first national currency, Demand Notes earned their name from the fact that they were redeemable on demand for gold coin at the Treasury.

The government also created the United States Note, another currency designed as a temporary financing measure, with the passage of the Legal Tender Act of February 25, 1862. Almost bankrupt, the United States needed money to pay suppliers and troops during the Civil War. The plan was to print a limited supply of U.S. Notes to meet the crisis. However, U.S. Notes became popular and were issued for decades, coming to be known as Greenbacks.


The Civil War also brought about a shortage of coins. In response to this problem, Treasury issued currency notes in denominations of less than one dollar, ranging from three cents to fifty cents, in 1863. These small value notes are known as fractional currency. They were the first notes printed by the Bureau of Engraving and Printing, and were issued until 1876.

In an effort to get control over the chaos of the monetary system, Secretary Chase advocated the creation of a system of National Banks in 1863 that would issue a uniform, national currency. The National Bank Act of June 3, 1864, created National Bank Notes that were redeemable at any National Bank of the Treasury. The notes proved a success, and were issued well into the 20th century.

In the same year it authorized National Bank Notes, Congress also created another new form of currency, Gold Certificates. One could deposit gold at the Treasury and receive Gold Certificates in exchange. The first Gold Certificates were issued in November 1865, with a maximum denomination of $10,000.


By 1878, U.S. Notes, National Bank Notes, and Gold Certificates co-circulated. That same year, Congress introduced the Silver Certificate. The act authorizing these notes allowed people to deposit silver coins in the Treasury in exchange for certificates, giving people an alternative to carrying numerous silver dollars. Silver Certificates became very popular and were a major form of currency for many years.

Twelve years later, the growth of silver mining in the United States led to another form of currency known as Treasury Coin Notes, which the Treasury Note Act of 1890 authorized. Until 1893, the law required the Treasury to purchase silver bullion and to pay for it with the new notes.

The close of the 19th century saw various forms of currency co-circulating in the nation’s economy, but money-related economic and banking crises continued. A central problem revolved around the inability of the supply of these currencies to expand or contract to meet economic conditions. Part two of this series, to be posted later this week, will explore the solution to this problem.​


A Short History of U.S. Monetary Policy

The monetary system that the Framers established with the Constitution was the most unusual and the most radical in history. That unique monetary system, along with such things as the absence of an income tax, a welfare state, and a warfare state, along with open immigration, contributed to the tremendous economic prosperity that pulled countless people out of poverty in the 19th century here in the United States.

From the inception of the United States until the Franklin Roosevelt administration in the 1930s, the official money of the American people consisted of gold coins and silver coins. Contrary to popular opinion, the “gold standard” did not consist of a system of paper money that was “backed by gold.” There was no paper money because the Constitution did not authorize the federal government to issue paper money. The Constitution gave the federal government the power to “coin” money,” not print it. Coinage involved coins, specifically coins made of the precious metals, as well as copper coins for small transactions.

Everyone understood that federal bills and notes were promises to pay money, not money itself. The money the bills and notes were promising to pay was the gold and silver coins.

Moreover, under the Constitution the states were expressly restricted from making anything but gold and silver coins “legal tender.” They were also expressly prohibited from printing paper money (i.e., “emitting bills of credit).

Examine a one-dollar bill. Notice that at the top, it says, “Federal Reserve Note.” But a note is ordinarily a debt instrument — it promises to pay something. What is a Federal Reserve “Note” promising to pay? Actually, it promises to pay nothing. The Federal Reserve Note is a throwback to America’s founding monetary system, one where everyone understood that the money was gold and silver coins and that federal bills and notes were promising to pay the creditor gold and silver coins.

Historically, Governments had debased their nation’s money by simply printing more of it. This process was especially useful for governments who had incurred mountains of debt. To pay off the debt, they simply would crank up the printing presses and use the newly printed money to pay off creditors.

The payment of debts in this fashion brought big benefits to government officials. For one, it relieved them from raising taxes to pay off the debt, something that isn’t always very popular. Second, when prices for everything would start to rise, in response to the inflated supply of paper money, most people had no idea that the government was behind it. They blamed business establishments for the rising prices. Of course, the government would reinforce the deception by condemning business for being greedy and by imposing price controls on them.

That’s not to say that there wasn’t legalized plunder through inflation before the invention of the printing press. There was. For example, in the olden days when gold coins would come into the realm for payment of taxes, the king would have his people shave off the edges and melt them down into new coins. The old coins would now contain, say, a bit less than an ounce of gold.

Under America’s founding monetary system, the federal government was responsible for minting the gold and silver coins. One of the fascinating aspects to this was that for more than 125 years, there was no intentional debasement of the money. That is, there were no edges shaved off and melted down into new coins for the government to use to pay off its debts or fund its operations. U.S. coins were honest and were what they were represented to be. The only disparity that would periodically take place was when the government’s exchange rate between gold and silver coins would be adjusted in accordance with market conditions.

Thus, sound money was a core feature of America’s economic system throughout the 19th century. Corporations would even issue 100-year bonds, which people would purchase without fear that they would lose their value to government debasement.

That all came to an end in 1934, when the federal government, under President Franklin Roosevelt, made it illegal for Americans to own gold coins. Imagine that: What had been the official money of the American people for more than 125 years was suddenly made illegal to own. U.S. officials mandated the American people, on pain of a felony conviction, to turn in their gold coins to the federal government. Federal bills and notes were made the new official money of the United States, even though they were now irredeemable in gold and silver coins. Ironically, people in other countries were still free to own gold coins without being turned into felons for doing so.

When gold and silver coins were the official money, U.S. officials were effectively precluded from printing an over-supply of bills and notes and using them to fund their activities. If they printed too many, they ran the risk that everyone would demand to be paid their gold and silver coins. That’s why we often hear about how the “gold standard” kept federal spending and borrowing in check.

Once Americans were converted into felons for owning gold coins, however, everything changed for federal officials. Now they could spend and borrow to their heart’s content because they could now print money to their heart’s content. That was what the Federal Reserve, which had been established in 1913, was all about — to expand the money supply to accommodate the ever-increasing expenditures and debts of the welfare state, which Roosevelt brought into existence in the 1930s, and the warfare state, which he brought into existence in the 1940s.

Adding insult to injury was that it was the Federal Reserve, through monetary mismanagement, that had brought on the stock market crash of 1929, which led to the Great Depression, which Roosevelt then used as his excuse for nationalizing gold and go to a fiat money system. Of course, U.S. officials didn’t tell people that. They said that the stock market crash and the Great Depression constituted the failure of America’s “free enterprise system” and that welfare, regulation, and fiat money were necessary to save free enterprise.

Another of the fascinating parts about all this was that it was done without even the semblance of a constitutional amendment. Keep in mind that that’s the process that the Framers established with the Constitution. If anyone wanted to change the U.S. government in a fundamental way, he would have to go the very difficult route of amending the Constitution. It would be difficult to find a better example of a fundamental change in our governmental system than an abandonment of what had been the monetary system under the Constitution for more than 125 years in favor of a totally different monetary system.

In any event, that’s how we ended up with decade after decade of inflationary debasement of the currency, to the point where silver coins were driven out of circulation by cheap, alloyed coins. It’s also how we got out-of-control federal spending and borrowing to fund the ever-increasing expenditures of the welfare-warfare state. It’s how we ended up with a federal government whose profligate ways are threatening to send our nation into bankruptcy.


United States History Content Standards

ERA STANDARDS
Era 1
Three Worlds Meet (Beginnings to 1620)
Standard 1: Comparative characteristics of societies in the Americas, Western Europe, and Western Africa that increasingly interacted after 1450

Standard 2: How political, religious, and social institutions emerged in the English colonies

Standard 2: The impact of the American Revolution on politics, economy, and society

Standard 2: How the industrial revolution, increasing immigration, the rapid expansion of slavery, and the westward movement changed the lives of Americans and led toward regional tensions

Standard 3: The extension, restriction, and reorganization of political democracy after 1800

Standard 2: The course and character of the Civil War and its effects on the American people

Standard 2: Massive immigration after 1870 and how new social patterns, conflicts, and ideas of national unity developed amid growing cultural diversity

Standard 3: The rise of the American labor movement and how political issues reflected social and economic changes

Standard 2: The changing role of the United States in world affairs through World War I

Standard 2: How the New Deal addressed the Great Depression, transformed American federalism, and initiated the welfare state

Standard 2: How the Cold War and conflicts in Korea and Vietnam influenced domestic and international politics


The China of the mid-20th century looks remarkably different when compared to the modern-day nation. Prior to the 1980s, China was going through a period of social upheaval, poverty, and dictatorship under Mao Zedong.

The 1970s

Beginning in the late 1970s, China’s share of global exports stood at less than 1%. The country had few trade hubs and little industry. In 1979, for example, Shenzhen was a city of just around 30,000 inhabitants.

In fact, China (excluding Taiwan* and Hong Kong) did not even show up in the top 10 global exporters until 1997 when it hit a 3.3% share of global exports.

YearShare of Global ExportsRank
20004.0%#7
20057.3%#3
201010.3%#1
201513.7%#1
202014.7%#1

*Editor’s note: The above data comes from the UN, which lists Taiwan as a separate region of China for political reasons.

The 1980s

In the 1980s, several cities and regions, like the Pearl River Delta, were designated as Special Economic Zones. These SEZs had tax incentives that worked to attract foreign investment.

Additionally, in 1989, the Coastal Development Strategy was implemented to use strategic regions along the country’s coast as catalysts for economic development.

The 1990s and Onwards

By the 1990s, the world saw the rise of global value chains and transnational production lines, with China offering a cheap manufacturing hub due to low labor costs.

Rounding out the ‘90s, the Western Development Strategy was implemented in 1999, dubbed the “Open Up the West” program. This program worked to build up infrastructure and education to retain talent in China’s economy, with the goal of attracting further foreign investment.

Finally, China officially joined the World Trade Organization in 2001 which allowed the country to progress full steam ahead.


International Monetary Arrangements

Abstract

International monetary relations are subject to frequent change, with fixed exchange rates, floating exchange rates, and commodity-backed currency all having their advocates. This chapter considers the merits of various alternative international monetary systems , and also provides an interesting and useful historical background of the international monetary system, beginning with the late 19th century when the gold standard began and continuing to present-day systems. International reserve currencies are discussed in detail, with emphasis on the types of foreign exchange arrangements. Major topics covered include currency boards, “dollarization,” choices of exchange rate systems, optimum currency areas, the European Monetary System, and the emergence of the euro.


George Wallace

The grandstanding governor of Alabama was already known nationally for his hard pro-segregation stance thanks to his attempts to keep black students from entering the University of Alabama campus in 1963. Painting himself as a champion of the common man who won the governorship on a platform of economic populism, Wallace sought the presidency on four different occasions, first as a Democrat in 1964 challenging Lyndon Johnson.

Populism and racism have often walked hand-in-hand, and Wallace is seen as one of the most successful practitioners of this partnership, though he sometimes claimed that his racist tones were merely political calculations to gain popular support.

During his third run for the presidency in 1972, Wallace announced that he no longer supported segregation. The campaign seemed headed for success until he was shot in Maryland by 21-year-old Arthur Bremer. Wallace spent the rest of his life in a wheelchair, though he ran for president one more time, unsuccessfully. When he wasn’t seeking the presidency, he was getting elected to non-consecutive Alabama governorships.


A Timeline of United States Currency

Or maybe you’ve wondered why you’ve seen about five different versions of a $20 bill over the course of your lifetime.

The history of American currency not only spans centuries, but also boasts quite the fascinating and, shall we say, colorful past.

Not only is this pretty interesting stuff, but it will help you make sense of how we arrived at our current situation of fiat currency, a central bank, and a dollar that is rapidly losing value. And what’s that old saying about history repeating itself? Knowing where we’ve been and how we got there always gives you an edge as an investor, as you may be able to predict trends that are giving you deja vu.

Plus you’ll learn more about how the dreaded Federal Reserve came to be and the history from which their behaviour stems. While you may be sick of hearing about the fed, what they say and do moves markets, and as an investor, you have to be aware of what they’re saying, thinking, and planning.

United States currency has been an evolutionary process that walks hand-in hand with the growth of our nation, often changing in times of crisis -like the Great Depression or September 11th- or as a response to a frustrated society struggling to create a monetary system that would actually function correctly and restore confidence in the American dollar.

From purchasing power, to the size, shape and color of bills, to the creation of the independent central bank, read on for a run-down on the United States history of what makes the world go round money.

In 1690, early Americans in the Massachusetts Bay Colony were the first to issue paper money to meet high demands for trade and as a response to the shortage of coins, which were the primary form of money at the time.

The first paper money was issued to pay for military expeditions, but other colonies followed suit and, although this early money was supposed to be backed by gold or silver, some colonists found that they could not redeem the paper currency as promised, and it quickly lost its worth.

1739: Franklin and Counterfeiting

But where were these colonial bills being created? Benjamin Franklin had a printing firm in Philadelphia that printed paper currency with nature prints. These were completely unique, raised impressions of patterns cast from actual leaves, which added a counterfeit to the money. Benji’s innovative method was not completely understood until centuries later.

For years Britain had been placing restrictions on colonial paper money, and in 1764 they finally ordered a complete ban on the issuance of paper money by the Colonies.

1775-1791: The Dawn of U.S. Currency As We Know It

The Continental Congress had to do something to finance the American Revolution, so they printed our brand spankin’ new country’s first ever paper money, known as “continentals.” This was the dawn of fiat currency as we know it today.

These paper money notes didn’t have solid backing, were counterfeited easily, and were issued in such large quantities to so many people that, what do you think happened? You guessed it – inflation.

It started off pretty mild, but as the war trudged on there was massive acceleration in inflation. The phrase “not worth a continental” became part of the common lexicon, meaning something was entirely worthless.

First Charter Original Series note with Allison-Spinner signatures and a small red seal with rays. This was one of the most popular Gold Bank notes issued in California in the 1870s.
Source: MindSerpent.com

1791-1811: Central Banking – Let’s Give This a Shot

At the time, Alexander Hamilton was the Treasury Secretary. He’s the guy who urged Congress to establish the First Bank of the United States in 1791 to help the government handle war debt. Hamilton was also the architect of the bank, headquartered in Philadelphia. It was the largest corporation in the entire country, and was dominated by money interests and big banking.

It started out with a capital of $10 million, but most Americans were strongly against the idea of a large and powerful bank. And, the government’s war debt was largely paid off, so when the bank’s 20-year charter finally expired in 1811, Congress refused to renew it by one vote.

1816-1836: Let’s Try That Again…

Federal debt started stacking up again with the War of 1812, and the political climate once again found itself entertaining the concept of a central bank. By only a small margin, Congress agreed to charter the Second Bank of the U.S.

In 1828 Andrew Jackson was elected president. Jackson was a notorious foe of the central bank and vowed to destroy it. His point of view struck a chord with most Americans, and when the Second Bank’s charter expired in 1836, it was, to the shock of no one, not renewed.

1836-1865: The Free Banking Era

During what is known as the Free Banking Era, state-chartered banks and unchartered “free banks” took hold. Banks began issuing their own money notes that could be redeemed in gold or coins, and offered demand deposits to enhance commerce.

This caused a big jump in the volume of check transactions. In response, the New York Clearing House Association was established in 1853, which provided a way for the city’s banks to formally exchange checks and settle accounts.

The New York Clearing House depicted in the 19th century
Source: Wikipedia.org

1863: Passing of the National Banking Act

During the Civil War, the National Banking Act of 1863 was passed. Abraham Lincoln signed what was originally known as the National Currency Act, which for the first time in American history established the federal dollar as the sole currency of the United States. Having everyone on the same currency provided for nationally chartered banks, whose circulating notes had to be backed by U.S. government securities.

There was an amendment to the act, which required taxation on state bank notes but not national bank notes, which effectively created a uniform currency for the nation. Even though they were being taxed on their notes, state banks continued to flourish in light of the increasing popularity of demand deposits, which, as we told you, took hold during the Free Banking Era.

1873-1907: Financial Freak Outs

While there was a little bit of currency stability for our rapidly growing country, thanks to the National Banking Act of 1863, bank runs and financial panics were far from a thing of the past, and perpetually plagued the economy.

These bank panics were so universal that they made their way into mainstream popular culture. You might remember this clip from the old classic It’s a Wonderful Life:

In 1893, a bank panic triggered the worst depression the United States had ever seen. The economy only stabilized after hot-shot financial mogul J.P. Morgan swooped in with an ‘S’ on his chest to save the day. Now more than ever, it was crystal clear that the nation’s banking and financial system needed serious attention and reform.

The 1896 Broadway melodrama The War of Wealth was inspired by the bank panic of 1893.
Source: Wikipedia.org

Saying that 1907 was a very bad year for the stock market could be the understatement of the century. What started as a bout of speculation on Wall Street ended in utter failure, triggering a particularly severe banking panic. Again, tried-and-true J.P. Morgan was called upon to save the American people and avert disaster.

We mentioned that, by this time, most Americans were fed up with the banking system jerking them and their savings around. Everyone agreed that the current system desperately needed some kind of reform, but the structure of that reform deeply divided American citizens between conservatives and progressives.

The one thing they could agree on was that a central banking authority was needed to ensure a healthy banking system and provide for an elastic currency.

1908-1912: A Decentralized Central Bank

An immediate response to the panic of 1907 was the Aldrich-Vreeland Act of 1908, which would provide for emergency currency issue during crises. Lead by Senator Nelson Aldrich, the commission developed a banker-controlled plan.

Progressives like William Jennings Bryan strongly opposed they wanted a central bank under public control. The act also established the national Monetary Commission in the hopes of finally finding a long-term solution to the nation’s seemingly endless banking and financial problems.

Alas, the election of Democrat Woodrow Wilson in 1912 effectively killed the Republican Aldrich plan, but the stage was set for a decentralized central bank to emerge.

1912: Creating the Federal Reserve Act

Woodrow Wilson was a far cry from a finance and banking expert, so he wisely sought out expert advice from Virginia Representative and soon-to-be chairman of the House Committee on Banking and Finance, Carter Glass, and H. Parker Willis, a former professor of economics at Washington and Lee University.

Sen. Carter Glass (left) and Rep. Henry B. Steagall, the co-sponsors of the Glass-Steagall Act.
Source: Wikipedia.org

For the majority of 1912, Glass and Willis worked on a central bank proposal, and by December of that year, they presented Wilson with what would become the Federal Reserve Act. The Glass-Willis proposal was intensely debated and modified from December of 1912 to December of 1913.

1913: The Creation of the Federal Reserve System

December 23, 1913, President Woodrow Wilson signs the Federal Reserve Act into law. Many saw this Act as a classic example of compromise—a decentralized central bank that worked to balance the two competing interests of private banks and what the American people wanted.

1914: Come On In, We’re Open

The Reserve Bank Operating Committee was composed of Secretary of Agriculture David Houston, Treasury Secretary William McAdoo, and Comptroller of the Currency John Skelton Williams. It was these three men who had the daunting and unenviable task of building a functioning institution around the brass tacks of the new law before the new central bank could begin operating.

However, come November 16, 1914, 12 cities had been chosen as sites for regional Reserve Banks, and they were open for business. But the timing wasn’t great, as this was just as hostilities in Europe erupted into World War I.

1914-1919: WWI Federal Reserve Policy

Thanks to the emergency currency issued under the Aldrich-Vreeland Act of 1908, banks continued to operate normally despite the breakout of World War I in mid-1914. The bigger impact in the U.S. came from the Reserve Banks’ ability to discount bankers acceptances.

This allowed the United States to indirectly help finance the war and aid the flow of trade goods to Europe. That is until 1917, when the United States officially declared war on Germany and financing our own war effort became priority number one.

1920s: Open Market Operations – The Beginning

Benjamin Strong (head of the New York Fed from 1914-1928) acknowledged that, following WWI, gold was no longer the central factor in controlling credit. Strong started to buy up a large amount of government securities in an effort to stem a recession in 1923.

To a lot of people, this was a clear indication of the influential power of open market operations on the availability of credit in the banking system.

It was during the 1920s that the Fed started using open market operations as a tool for monetary policy. During his time there, Strong elevated the Fed’s standing by promoting relationships with other central banks, particularly the Bank of England.

1929-1933: The Crash and the Depression

All throughout the 1920s, Carter Glass warned the general public that stock market speculation would lead to dire consequences. But did they listen? In October 1929, he had the displeasure of being right when his predictions proved to be spot-on and the stock market crashed.

What followed was the worst depression in American history.

Nearly 10,000 banks failed from 1930 to 1933, and by March of 1933, freshly inaugurated President Franklin Delano Roosevelt declared a bank holiday while government officials desperately tried to fix the nation’s extreme economic problems.

People were angry with the Fed, and blamed them for failing to diminish the speculative lending that led to the crash in the first place. Others argued that a fundamentally inadequate understanding of economics and monetary policy prevented the Fed from going after policies that could have arguably lessened the depth and effects of the Depression.

National Bank note issued in 1929 by the Atlanta and Lowry National Bank. The red seal reads, “Redeemable in lawful money of the United States at United States Treasury or at the bank of issue.” At the time, lawful money referred to gold coin, silver coin, gold or silver certificates, or U.S. notes.
Source: www.let.rug.nl

After the Great Depression, Congress passed the Banking Act of 1933 (or the Glass-Steagall Act) which separated commercial and investment banking, and required government securities to be used as collateral for Federal Reserve notes.

This Act also established the Federal Deposit Insurance Corporation (FDIC), which gave the Fed control over open market operations and required them to examine bank holding companies.

This practice proved to have major future impacts when holding companies became a prevalent structure for banks. Along with all the other massive reforms taking place left and right, Roosevelt went ahead and recalled each and every gold and silver certificate, effectively ending gold and other metallic standards.

The Banking Act of 1935 required even more changes to the Fed’s structure.

The FOMC was created (Federal Open Market Committee) as an entirely separate legal entity, the Treasury Secretary and the Comptroller of the Currency were removed from the Fed’s governing board, and members’ terms were set at 14 years.

Adding further to the Fed’s list of responsibilities post-WWII, the Employment Act added the goal of promising maximum employment levels.

In 1956, The Fed was named the regulator of bank holding companies owning more than one bank with the passing of the Bank Holding Company Act. In 1978 the Humphrey-Hawkins Act required that the Fed chairman report to Congress twice a year on monetary policy goals and objectives.

1951: The Treasury Accord

After the U.S. entered WWII in 1942, the Federal Reserve System committed to keeping a low interest rate peg on government bonds. This was at the request of the Treasury so the federal government could participate in cheaper debt financing of the war. To maintain the pegged rate, the Fed was forced to give up control of the size of its portfolio as well as the money stock.

Conflict between the Treasury and the Fed became obvious when the Treasury directed the Fed to maintain the peg after the start of the Korean War in 1950.

President Harry Truman and Secretary of the Treasury John Snyder both strongly supported the low interest rate peg. Truman felt it was his duty to protect patriotic citizens by not lowering the value of the bonds that they had purchased during the war.

The Federal Reserve, on the other hand, was focused on containing inflationary pressures in the economy, caused by the growing intensity of the Korean War.

The Fed and the Treasury got into an intense debate for control over interest rates and U.S. monetary policy. They were only able to settle their dispute with an agreement known as the Treasury-Fed Accord. The Fed was no longer obligated to monetize the debt of the Treasury at a fixed rate, and the Accord became essential to the independence of central banking and the Fed pursues monetary policy today.

1970s-1980s: Inflation, Deflation

The 1970s were on an inflation skyrocket to the moon as producer and consumer prices rose, oil prices surged, and the federal deficit more than doubled.

Paul Volcker was sworn in as Fed chairman in August 1979, and, by that time, drastic action was needed to break inflation’s death grip on the United States economy. Like lancing a nasty wound, Volcker’s leadership as Fed chairman in the 80s proved painful in the short term, but successful in bringing the double-digit inflation infection under control overall.

1980: Movin’ On Up! Preparing for Financial Modernization

The Monetary Control Act of 1980 marked the beginning of modern banking industry reforms.

The Act required the Fed to competitively price its financial services against those of private sector providers, and to establish reserve requirements for all eligible financial institutions.

After the Act was passed, interstate banking quickly increased, and banks started to offer interest-paying accounts to attract customers from brokerage firms.

Change was chugging along quite steadily, and, in 1999, the Gramm-Leach-Bliley Act was passed, essentially overturning the Glass-Steagall Act of 1933 and permitting banks to offer an array of financial services that were previously unavailable, including investment banking and insurance.

1990s: A Decade of Economic Expansion

A mere two months after Alan Greenspan took office as the Fed chairman, the stock market crashed on October 19, 1987. Lucky guy. So what does he do? On October 20, he ordered the Fed to issue a one-sentence statement before the start of trading:

The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.

When a decade of economic expansion in the 90s came to a close in March 2001, what followed was a short, shallow recession ending in November 2001. After the stock market bubble burst in in the early years of the decade, the Fed moved to lower interest rates rapidly.

The Fed used monetary policy during this time on several occasions – including the Russian default on government securities and the credit crunch of the early 90s – in order to keep financial problems from negatively affecting the real economy.

The hallmarks of the decade were (generally) declining inflation and the longest peacetime economic expansion in United States history.

As the terrorist attacks on New York, Washington, and Pennsylvania severely disrupted U.S. financial markets on September 11, 2001, the effectiveness of the Federal Reserve as a central bank was truly put to the test.

The central bank issued a statement very similar to Greenspan’s 1987 announcement:

The Federal Reserve System is open and operating. The discount window is available to meet liquidity needs.

In the following days and weeks, the Fed lowered interest rates and, in order to provide some semblance of stability to the U.S. economy, loaned more than $45 billion to financial institutions.

In rare form, the Fed actually played a critical role in lessening the impact of the September 11 attacks on the American financial markets. As September came to a close, Fed lending had returned to levels seen before 9/11, and a potential liquidity crunch had been successfully avoided. The Fed played the pivotal role in dampening the effects of the September 11 attacks on U.S. financial markets.

January 2003: Changes in Discount Window Operation

The Federal Reserve changed its discount window operations in 2003 in order to have rates at the window set above the prevailing Fed Funds rate, and to provide rationing of loans to banks through interest rates.

2006 and Beyond: Our Current Financial Crisis and the Response

The American Dream of homeownership was realistically attainable for many more people during the early 2000s, thanks to low mortgage rates and expanded access to credit.

This increased demand for housing drove up prices, creating a housing boom that got a boost from increased securitization of mortgages—a process in which mortgages were bundled together into securities that were traded in financial markets. Securitization of riskier mortgages expanded rapidly, including subprime mortgages made to borrowers with poor credit records.

House prices faltered in early 2006 and then began their steep tumble downward, head over feet, along with home sales and construction. With house prices falling left and right, some homeowners owed more on their mortgages than their homes were even worth.

Starting with subprime and eventually spreading to prime mortgages, more and more homeowners fell behind on their payments. Delinquencies were on the rise, and lenders and investors alike finally got the wake up call that a lot of residential mortgages were not nearly as safe as everyone once believed.

The mortgage meltdown surged on, and the magnitude of expected losses rose dramatically and spread across the globe, thanks to millions of U.S. mortgages being repackaged as securities. This made it difficult to determine the value of loans and mortgage-related securities, and institutions became more and more hesitant to lend to each other.

2007-2008: Lehman and Washington Mutual Fail

The situation reached a fever-pitch crisis point in 2007. Fears about the financial health of other firms led to massive disruptions in the wholesale bank lending market, which caused rates on short-term loans to rise sharply relative to the overnight federal funds rate.

Then, in the fall of 2008, two large financial institutions failed: the investment bank Lehman Brothers and the savings and loan Washington Mutual. Since major financial institutions were extensively intertwined with each other, the failure of one could mean a domino effect of losses through the financial system, threatening many other institutions.

Needless to say, everyone completely lost confidence in the financial sector, and the stock prices of financial institutions around the world plummeted. No one wanted anything to do with them. Banks couldn’t sell loans to investors because securitization markets had stopped working, so banks and investors tightened standards and demanded higher interest rates.

This credit crunch dealt a huge blow to household wealth, and people started cutting back on spending as they wondered what the hell they were going to do about their depleted savings. The snowballing continued as businesses canceled expansion plans and laid off workers, and the economy entered a recession in December 2007. In reality, the recession was pretty mild until the fall of 2008 hit and financial panic intensified, causing job losses to soar through the roof.

2008: The Fed’s Response to the Economic Crisis

By December of 2008, the FOMC slashed its target for the federal funds rate over the course of more than a year, bringing it nearly to zero – the lowest level for federal funds in over 50 years. This helped lower the cost of borrowing for households and businesses alike on mortgages and other loans.

The Fed wanted to stimulate the economy and lower borrowing costs even further, so they turned to some pretty unconventional policy tools.

The Fed purchased $300 billion in longer-term Treasury securities, which are used as benchmarks for a variety of longer-term interest rates like corporate bonds and fixed-rate mortgages. In an effort to support the housing market, the Fed authorized the purchase of $1.25 trillion in mortgage-backed securities guaranteed by agencies like Freddie Mac and Fannie Mae, and about $175 billion of mortgage agency longer-term debt.

So, what does that mean exactly?

Well, these purchases by the Fed have worked to reduce interest rates on mortgages, making home purchases more affordable for everyday Americans.

16 Money Fun Facts – Did You Know?

1. The Constitution only authorized the federal government to issue coins, not paper money.

Article One of the Constitution granted the federal government the sole power “to coin money” and “regulate the value thereof.” However, it said nothing about paper money.

This was largely because the founding fathers had seen the bills issued by the Continental Congress to finance the American Revolution—called “continentals”—become virtually worthless by the end of the war.

The implosion of the continental eroded faith in paper currency to such an extent that the Constitutional Convention delegates decided to remain silent on the issue.

2. Prior to the Civil War, banks printed paper money.

For America’s first 70 years, private entities, and not the federal government, issued paper money. Notes printed by state-chartered banks, which could be exchanged for gold and silver, were the most common form of paper currency in circulation.

From the founding of the United States to the passage of the National Banking Act, some 8,000 different entities issued currency, which created an unwieldy money supply and facilitated rampant counterfeiting.

By establishing a single national currency, the National Banking Act eliminated the overwhelming variety of paper money circulating throughout the country and created a system of banks chartered by the federal government rather than by the states. The law also assisted the federal government in financing the Civil War.

3. Foreign coins were once acceptable legal tender in the United States.

Before gold and silver were discovered in the West in the mid-1800s, the United States lacked a sufficient quantity of precious metals for minting coins. Thus, a 1793 law permitted Spanish dollars and other foreign coins to be part of the American monetary system. Foreign coins were not banned as legal tender until 1857.

4. The highest-denomination note ever printed was worth $100,000.

The largest bill ever produced by the U.S. Bureau of Engraving and Printing was the $100,000 gold certificate. The currency notes were printed between December 18, 1934, and January 9, 1935, with the portrait of President Woodrow Wilson on the front.

Don’t ask your bank teller for a $100,000 bill, though. The notes were never circulated to the public and were used solely for transactions among Federal Reserve banks. the 100,000 bill, printed between 1934 and 1935

The $100,000 bill, printed between 1934 and 1935.
Source: Wikipedia.org

5. You won’t find a president on the highest-denomination bill ever issued to the public.

The $10,000 bill is the highest denomination ever circulated by the federal government. In spite of its value, it is adorned not with a portrait of a president but with that of Salmon P. Chase, treasury secretary at the time of the passage of the National Banking Act.

Chase later served as chief justice of the Supreme Court. The federal government stopped producing the $10,000 bill in 1969 along with these other high-end denominations: $5,000 (fronted by James Madison), $1,000 (fronted by Grover Cleveland) and $500 (fronted by William McKinley). (Although rare to find in your wallet, $2 bills are still printed periodically.)

Confederate currency featuring George Washington.
Source: Wikipedia.org

6. Two American presidents appeared on Confederate dollars.

The Confederacy issued paper money worth approximately $1 billion during the Civil War—more than twice the amount circulated by the United States.

While it’s not surprising that Confederate President Jefferson Davis and depictions of slaves at work in fields appeared on some dollar bills, so too did two Southern slaveholding presidents whom Confederates claimed as their own: George Washington (on a $50 and $100 bill) and Andrew Jackson (on a $1,000 bill).

7. Your house may have been built with old money. Literally.

When dollar bills are taken out of circulation or become worn, they are shredded by Federal Reserve banks. In some cases, the federal government has sold the shredded currency to companies that can recycle it and use it for the production of building materials such as roofing shingles or insulation.

The Bureau of Engraving and Printing also sells small souvenir bags of shredded currency that was destroyed during the printing process… If you’re into that sort of thing.

8. The $10 bill has the shortest lifespan of any denomination.

According to the Federal Reserve, the estimated lifespan of a $10 bill is 3.6 years.

The estimated life spans of a $5 and $1 bill are 3.8 years and 4.8 years, respectively.

The highest estimated lifespan is for a $100 bill at nearly 18 years.

9. There’s a specific formula for tearing a dollar bill.

According to the federal government, it takes approximately 4,000 double folds (forward, then backward) to tear a note.

10. You can use a torn dollar bill.

More than half of a dollar bill is considered legal tender, and only the front of a dollar is valuable. If you could separate the front of a bill from the back, only the front half would be considered “money.”

11. Spanish dollars were once accepted in the U.S.

During much of the 17th and 18th centuries, the Spanish Dollar coin served as the unofficial national currency of the American colonies.

12. Without coins, the dollar had to be literally cut into parts to make change.

To make change the dollar was actually cut into eight pieces or “bits.” This where the phrase “two bits” comes from.

These words had first appeared on the United States two-cent coin piece in 1864, and in 1955 a law was passed that all new designs for coin and currency would bear the same inscription, “In God We Trust.”

14. The dollar used to be bigger.

Until 1929, dollars measured 7.42 x 3.13 inches. Since then it has remained at its present size of 6.14 x 2.61 inches, an easier size to handle and store.

Since that size requires less paper, it’s also cheaper to make.

15. The Secret Service was initially established to combat counterfeiting.

By 1865 approximately one-third of all circulating currency was counterfeit, and the Department of Treasury established the United States Secret Service in an effort to control counterfeiting.

16. Until 1869, the face on the original United States $1 bill is not a president’s.

Salmon P. Chase designed the original US one dollar bill in 1862, and, in what should’ve been the most foolproof marketing strategy of all time, put his own face on the bill in the hopes of fulfilling his presidential dreams. Clearly that didn’t work out so great, but hey, he got Chase National Bank named after him.


Facts About the Current Good Manufacturing Practices (CGMPs)

Pharmaceutical Quality affects every American. The Food and Drug Administration (FDA) regulates the quality of pharmaceuticals very carefully. The main regulatory standard for ensuring pharmaceutical quality is the Current Good Manufacturing Practice (CGMPs) regulation for human pharmaceuticals. Consumers expect that each batch of medicines they take will meet quality standards so that they will be safe and effective. Most people, however, are not aware of CGMPs, or how FDA assures that drug manufacturing processes meet these basic objectives. Recently, FDA has announced a number of regulatory actions taken against drug manufacturers based on the lack of CGMPs. This paper discusses some facts that may be helpful in understanding how CGMPs establish the foundation for drug product quality.

What are CGMPs?

CGMP refers to the Current Good Manufacturing Practice regulations enforced by the FDA. CGMPs provide for systems that assure proper design, monitoring, and control of manufacturing processes and facilities. Adherence to the CGMP regulations assures the identity, strength, quality, and purity of drug products by requiring that manufacturers of medications adequately control manufacturing operations. This includes establishing strong quality management systems, obtaining appropriate quality raw materials, establishing robust operating procedures, detecting and investigating product quality deviations, and maintaining reliable testing laboratories. This formal system of controls at a pharmaceutical company, if adequately put into practice, helps to prevent instances of contamination, mix-ups, deviations, failures, and errors. This assures that drug products meet their quality standards.

The CGMP requirements were established to be flexible in order to allow each manufacturer to decide individually how to best implement the necessary controls by using scientifically sound design, processing methods, and testing procedures. The flexibility in these regulations allows companies to use modern technologies and innovative approaches to achieve higher quality through continual improvement. Accordingly, the "C" in CGMP stands for "current," requiring companies to use technologies and systems that are up-to-date in order to comply with the regulations. Systems and equipment that may have been "top-of-the-line" to prevent contamination, mix-ups, and errors 10 or 20 years ago may be less than adequate by today's standards.

It is important to note that CGMPs are minimum requirements. Many pharmaceutical manufacturers are already implementing comprehensive, modern quality systems and risk management approaches that exceed these minimum standards.

Why are CGMPs so important?

A consumer usually cannot detect (through smell, touch, or sight) that a drug product is safe or if it will work. While CGMPs require testing, testing alone is not adequate to ensure quality. In most instances testing is done on a small sample of a batch (for example, a drug manufacturer may test 100 tablets from a batch that contains 2 million tablets), so that most of the batch can be used for patients rather than destroyed by testing. Therefore, it is important that drugs are manufactured under conditions and practices required by the CGMP regulations to assure that quality is built into the design and manufacturing process at every step. Facilities that are in good condition, equipment that is properly maintained and calibrated, employees who are qualified and fully trained, and processes that are reliable and reproducible, are a few examples of how CGMP requirements help to assure the safety and efficacy of drug products.

How does FDA determine if a company is complying with CGMP regulations?

FDA inspects pharmaceutical manufacturing facilities worldwide, including facilities that manufacture active ingredients and the finished product. Inspections follow a standard approach and are conducted by highly trained FDA staff. FDA also relies upon reports of potentially defective drug products from the public and the industry. FDA will often use these reports to identify sites for which an inspection or investigation is needed. Most companies that are inspected are found to be fully compliant with the CGMP regulations.

If a manufacturer is not following CGMPs, are drug products safe for use

If a company is not complying with CGMP regulations, any drug it makes is considered “adulterated” under the law. This kind of adulteration means that the drug was not manufactured under conditions that comply with CGMP. It does not mean that there is necessarily something wrong with the drug.

For consumers currently taking medicines from a company that was not following CGMPs, FDA usually advises these consumers not to interrupt their drug therapy, which could have serious implications for their health. Consumers should seek advice from their health care professionals before stopping or changing medications. Regulatory actions against companies with poor CGMPs are often intended to prevent the possibility of unsafe and/or ineffective drugs. In rare cases, FDA regulatory action is intended to stop the distribution or manufacturing of violative product. The impact of CGMP violations depends on the nature of those violations and on the specific drugs involved. A drug manufactured in violation of CGMP may still meet its labeled specifications, and the risk that the drug is unsafe or ineffective could be minimal. Thus, FDA’s advice will be specific to the circumstances, and health care professionals are best able to balance risks and benefits and make the right decision for their patients.

What can FDA do to protect the public when there are CGMP violations?

If the failure to meet CGMPs results in the distribution of a drug that does not offer the benefit as labeled because, for example, it has too little active ingredient, the company may subsequently recall that product. This protects the public from further harm by removing these drugs from the market. While FDA cannot force a company to recall a drug, companies usually will recall voluntarily or at FDA’s request. If a company refuses to recall a drug, FDA can warn the public and can seize the drug.

FDA can also bring a seizure or injunction case in court to address CGMP violations even where there is no direct evidence of a defect affecting the drug’s performance. When FDA brings a seizure case, the agency asks the court for an order that allows federal officials to take possession of “adulterated” drugs. When FDA brings an injunction case, FDA asks the court to order a company to stop violating CGMPs. Both seizure and injunction cases often lead to court orders that require companies to take many steps to correct CGMP violations, which may include repairing facilities and equipment, improving sanitation and cleanliness, performing additional testing to verify quality, and improving employee training. FDA can also bring criminal cases because of CGMP violations, seeking fines and jail time.