[SUBCOMMITTEE PRINT]

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PRIMER ON MONEY

A
SUBCOMMITTEE ON DOMESTIC FINANCE

COMMITTEE ON BANKING AND CURRENCY

HOUSE OF REPRESENTATIVES
88th Congress, 2d Session

LEGISLATIVE RE! E:CE

crevarp

SEP 23 (33%

AUGUST
5,

1964

Printed for use on Banking and Currency

of

the Committee

U.S. GOVERNMENT PRINTING OFFICE

34-710 WASHINGTON 1964
:

For sale by the Superintendent Documents, U.S. Government Printing Office

of

-
D.C., 20402 Price
40

Washington, cents
-
s

COMMITTEE ON BANKING AND CURRENCY

WRIGHT PATMAN, Texas, Chairman
ALBERT RAINS, Alabama CLARENCE E. KILBURN, New York
ABRAHAM J. MULTER, New York WILLIAM B. WIDNALL, New Jersey
WILLIAM A. BARRETT, Pennsylvania EUGENESILER, Kentucky
LEONOR K. SULLIVAN, Missouri PAUL A. FINO, New York
HENRY S. REUSS, Wisconsin FLORENCE P. DWYER, New Jersey
THOMAS L. ASHLEY, Ohio SEYMOUR HALPERN, New York
CHARLES A. VANIK, Ohio JAMES HARVEY, Michigan
WILLIAM S. MOORHEAD, Pennsylvania OLIVER P. BOLTON, Ohio
ROBERT G. STEPHENS, J.R., Georgia W. E. (BILL) BROCK, Tennessee
FERNAND J. ST GERMAIN, Rhode Island ROBERT TAFT, JR., Ohio
HENRY B. GONZALEZ, Texas JOSEPH M. MCDADE, Pennsylvania
CLAUDE PEPPER, Florida SHERMAN P. LLOYD, Utah
JOSEPH G. MINISH, New Jersey BURT L. TALCOTT, California
CHARLES L. WELTNER, Georgia DEL CLAWSON, California
RICHARD T. HANNA, California
BERNARD F. GRABOWSKI, Connecticut
CHARLES H. WILSON, California
COMPTON I. WHITE, JR., Idaho
JoHN R. STARK, Clerk and Staff Director
JoHN E. BARRIERE, Professional Staff Member
ALVIN LEE MORSE, Counsel
ORMAN S. FINK, Minority Staff Member

SUBCOMMITTEE ON DOMESTIC EINANCE

WRIGHT PATMAN, Texas, Chairman
HENRY S. REUSS, Wisconsin WILLIAM B. WIDNALL, New Jersey
CHARLES A. VANIK, Ohio JAMES HARVEY, Michigan
CLAUDE PEPPER, Florida OLIVER P. BOLTON, Ohio
JOSEPH G. MINISH, New Jersey W. E. (BILL) BROCK, Tennessee
CHARLES L. WELTNER, Georgia ROBERT TAFT, JR., Ohio
RICHARD T. HANNA, California
CHARLES H. WILSON, California
RoBERT E. WEINTRAUB, Senior Economist
ROBERT A. SCHREMP, Investigator
HARVEY W. GEIST, Investigator
STEPHEN D. KENNEDY, Research Assistant
II
 CON TEN TS
Page
Letter of transmittal------------------------------------------------ III
“The Patman Crusade,” by Prof. Seymour E. Harris, Harvard University
Introduction------------------------------------------------------
Society--------------------------------------
Chapter I: Money and
II:
Chapter Money?---------------------------------------
What Is
III:
Chapter Created?-------------------------------
How Is Money
IV:
Chapter Why Was the Federal Reserve Act Passed?----------------
Chapter V: Who Determines the Money Supply?----------------------
VI:
Chapter Who Owns the Federal Reserve Banks?-------------------
VII:
Chapter Why Was the Federal Deposit Insurance Act Passed?-----

£
Chapter VIII: How the Federal Reserve Gives Away Public Funds to
the PrivateBanks-----------------------------------------------
ChapterIX: Policy?-----------------------------
What Is Monetary
X: What Improvements Are Needed in the Money System?-----
*------------------------------------------------------------ 137
VII
 A PRIMER ON MONEY 17

form value in every section of the country. Obviously, the unreli

ability of the money supply and

its
uniformity were serious

of
lack
nationwide trade. Moreover, the Nation was being trans

to
obstacles
formed into “money economy.” This means that even then Amer

a
icans were moving into specialized occupations,

to
earlier

in
contrast
farms, and each family produced

on
times when most people lived

at
In
more complex and diversified
of
home much what needed.

it

a
economy, people gradually began

an
ad;

be
realize that would

to

it
vantage have the Federal Government provide regulated national
to

a
system supplying reliable money finance the increasing produc;

to
a

of
tion and trade, place the State banks with their separate and
in

unrelated note issues.

What happened national bank notes?
to

up
When Woodrow Wilson set the Federal Reserve System

in
1913,
privilege issuing

of
the Government withdrew the national banks'
banknote currency. relatively small amount (about $37 million)
A

'',
still outstanding, however. People have either buried
of

these notes,
is

them away private holdings, lost,

or
destroyed them. The U.S.
in

Treasury will redeem them they are turned in,

at
the banks.
money the United States today?
of

What are the forms

in

use
in

Today, the American people use coins, currency (paper money),

and commercial bank demand deposits (checkbook money).
Why are commercial bank deposits listed money?
as

The reason that with checkbook—and some money an account,

in
is

a
of

course—anyone can make purchases, pay bills,

or
instantaneously
procure any money–currency and coins.

In
it of

of

the other forms

other words, possible do almost everything with check that
to
is

done with currency and coins. Not everything, however.

be

can
People do not offer bus drivers checks when they want change. Only
coins and paper money will do. Checks are not freely convertible
everywhere into paper money and coins—cashing check problem
is
a

away from the bank which holds the deposit. But checking account
a

very close pur

of
so

the other two forms money—representing

to
is

chasing power which immediately available—that students

of
is

monetary affairs find include commercial bank

to

most convenient
it

the meaning money. Savings deposits

of

demand deposits com

in

at

mercial banks—technically, “time” deposits—are not included. The

purchasing power savings account cannot transferred by check,
be
in
a

At the time the Constitution was adopted, bank checks were almost
unknown. By 1850, about half
of

the Nation’s money was

in in

the form
bank deposits. Today, about
of of

all money
80

percent
of

the form
is

commercial bank deposits. Currency and coin circulation out

in

side the Treasury, Federal Reserve System, and commercial banks,

as

and deposits follows the final week

in

in

commercial banks were

February 1964:
of

Millions
Currency and coin ---- $32,000
Demand deposits commercial banks------------------------------ 119, 700
in

Total----- - --- --- __-- 1:51, 900

 A PRIMER ON MONEY 19

Who issues currency?

In the United States only the Federal Government may print cur
rency. Specifically, the Federal Reserve banks issue Federal Reserve
notes. As the table indicates, about 94 percent of all currency in
circulation consists of Federal Reserve notes. However, the U.S.
Treasury itself did issue some silver certificates and U.S. notes. The

all
Treasury only recently ceased issuing silver certificates. For prac
tical purposes, only the Federal Reserve now issues paper money.
What backs the Treasury currency?
The Treasury currency circulation today largely silver certifi

in

is
By law, Treasury

on
requires keep de

to
cates. the Government the
posit certain amount of silver “back” silver certificates. The

to
a

Treasury must the same for the Treasury notes

do

of
1890. This means
that anyone holding silver certificates can obtain silver for them on
demand. The Treasury’s legal reserve about two

of
silver amounts

to
thirds the value of the silver certificates in circulation.
What backs the Federal Reserve notes?
Behind the Federal Reserve notes the credit of the U.S. Govern
is
you happen
If

to a or
$5, $10, $20 Federal Reserve note,
to

ment. have
a

you will notice across the top printed statement

of

of
the bill the
fact that the U.S. Government promises pay, not that the Federal
Reserve promises pay. Nevertheless, most Americans don’t realize
to

what the Government promises pay: American citizens holding

to

these notes cannot demand anything for them except (a) that they

be
be
ac
or

exchanged for other Federal Reserve notes, (b) that they

cepted payment for taxes and all debts, public and private. Certain
or in

official semiofficial foreign banks may exchange any “dollar credits”

is,

they may hold—that deposits with the commercial banks—for an

the Treasury’s gold. Americans themselves may not
of

equal amount

#
exchange them for gold. But because, commerce with foreign na
in

ericans may pay gold, gold actually “backs” American

in

OIIa I’S.

Who issues “checkbook money”?

The private commercial banks issue “checkbook money.” The next
it,

chapter will show the mechanics and how the Fed

of

how they do
of

eral Reserve controls the amount “checkbook money” they may

create. Right now, just necessary see what meant by saying
to
it
is

is

that the commercial banks create demand deposits, which may be ex

or

changed for currency coin anytime the depositor wishes.

Imagine there only one bank the country and that has two
in

it
is

private depositors, each with $50 his checking account. Total bank
in
be

demand deposits would then $100. Suppose John Jones asked for
$50 loan from the bank, and the bank approved the loan. The bank
a

would then lend the money Mr. Jones by simply opening checking

£
to

account for him and depositing $50 This what ordinarily

it.
in

is

private individual-borrows from

or

happens when anyone—business

of
al,

The bank deposits the amount

in

the loan the relevant

checking account.
making the loan Mr. Jones, the bank did not reduce anyone's
In

to

previous bank balance. simply credited the Jones account with

It

$50. The total amount held bank demand deposits now becomes
in

$150. The bank has, therefore, “checkbook money.”

in

issued $50
20 A PRIMER ON MONEY

Where does the bank get the addi

is,
The natural question to ask
tional $50 Mr. Jones? The answer, will become

as
to

to
issue and lend
the next chapter, that the bank did not “get” the money all.

at
in
clear

is
Money has been created. Of course, the bank's power create money

to
is limited. And later chapter will show that the Federal Reserve

a
of
sets the limits this power create money.

to
Did the State banks stop creating their own money after the Federal
Government passed the National Bank Act?
Although the State banks ceased issuing bank notes, they continued
bank deposits, just

do

In
of

as
create money, the form they today.

in
to

fact, “checkbook money” has become increasingly popular, State

as

create money this form. They now cre

to
banks have continued

in
money than before the Government passed the
of

of
ate more this kind
National Bank Act. This act merely stopped the State banks from
printing and issuing currency.
Who should have the power create money?
The power create money an inherent power to

of
to

Government.
is
As President Lincoln said:
The privilege of creating and issuing money not only the supreme preroga

is
tive of the Government, the Government's greatest opportunity.
it
is

During the past several centuries, various governments the West

in
World have, various times, delegated the money-creating power
at

ern
private groups had this power taken from them by default.

In
or
to

these situations,
of

control the Nation’s affairs has been not

so
much
the private
of

of

of
state, but
in

in
the hands the official head the hands
groups controlling the money system. famous British banker once
A

summed up the matter this way:

They who control the credit the nation direct the policy of governments,
of

and hold their hands the destiny of the people. (Reginald McKenna, Chan
in

cellor of the Exchequer Britain during the World War period.)

in

As we look over human history, we find that the tribal chief, the
king, the pharaoh, the emperor has usually had direct
or

or
indirect
the modern, constitutional gov
of In
of

control the society's money.

given responsi
or

ernments, one another branch the government

is

bility for establishing and managing the money system. In the

United States, the Constitution gives these powers the Congress.
to

Does the Constitution, which mentions only the power “coin”

to

money, give Congress sole power over all money?

paragraph the Constitution pro
is to of
8,

Yes. Article
1,

5,

section
vides that “the Congress shall have power coin money, regulate
foreign coin.” generally agreed that
of

the value thereof, and

It

only the word “coin” was used because there were no banks
of

issue
the country the time the Constitution was written, and the
at
in

Founding Fathers assumed that coins would always meet the needs
for lawful money.
-

Over the past century and half, many questions about Congress
a

powers over the Nation’s money system have arisen, and the Supreme
Court has upheld the proposition that “whatever power there over
is

the currency vested the Congress.”

in
is
 CHAPTER III
HOW IS MONEY CREATED?

Where does money come from? This is a question few of us ever

think about. Not having thought about the matter, most people tend
to assume that money has always been here and that some law of
nature guarantees a fixed and unchanging supply of

In
any case,

it.

it
seems that the less people know about money, the more strongly they
feel that the whole subject should left alone. When any public

be
figure suggests that the money system should improved

or be

in
some
or

respect, perhaps that there should less money, many

be
more
though were proposing

or
as

people react

to
he

meddle with nature

perhaps profane the sacred.
These attitudes, course, simply reflect confusion about one
of

in of
the

of
Government's most essential activities. The amount money the
anything
as

as
any time
at

of
Nation much decision Government
is

is,
course, an im

of
else the Government does. And this decision
portant one. determines the general level interest charges for of
It It

carrying home mortgage financing new school

or

or
other commu
a
a

nity facility. true that the Federal Government does sometimes

is

make decisions where decisions are not absolutely called for. There
are things that should left alone. But not the money supply. This
be

something which the Government must decide about. did not

If
is

do so, economic chaos would result.

it
There are many reasons why the general public doesn’t really under
stand our monetary system. In the first place, money something
is

people get emotional about. After all, money involves,

to

that tend
and always has involved, something closely akin faith—which
to

probably explains why many past societies the money system has
in

priesthood, the subject magical rites, and

of

of

the hands
in

been
a

the ceremonial services of the tribe's medicineman.

Then, some those who do understand the workings
of

of

our mone
tary system seem
of

feel they are possession

to

secrets which cannot

in

revealed safely the public. Unraveling the mystery, they feel,

be

to

£
paper
of

would somehow destroy money system built on exchanges

a

gold
or

silver. For this reason,

as

and not “real” goods such has

it

been traditional for bankers and other private managers money

to
of

cloak the working

of

the money system with the mantle secrecy.

of

And many our high public Although they

of

share this view.

are appointed represent the public interest they seem feel that
to

to
be

would somehow dangerous talk about our monetary system

in
to
it

ways that let the public understand who does what, and why. These
officials seem very partial phrase that imply that the
of

the turns
to

supply money—and interestrates—are subject powerful economic

of

to

laws over which men have no control.

27
 A Pl:IMER ON MONEY 37

and send it to a Federal Reserve bank where it is kept, in compliance

with the reserve requirement. Thus a typical explanation runs this
way: John Jones deposits $100 in cash with his bank. The bank is
required to keep, say, 20 percent of its deposits in reserves, so the bank
must deposit $20 of this $100 as reserves, with a Federal Reserve bank.
The bank is free to use the other $80, however, to make loans to cus
tomers or invest in securities. The expansion of money thus begins.
This kind of explanation not only leads to misunderstanding, it also
leads to misguided Government policies and rather constant agitation
on the part of bankers for other such policies. Many of the smaller
bankers, who are, on the whole, not as well versed with the mechanics
of the money system as they might be, actually believe that they have
deposited a portion of their money, or their depositors' money, with
the Federal Reserve. Thus they feel they are being denied the oppor
tunity to make profitable use of this money. Accordingly, there is
always agitation to have the Federal Reserve pay the banks interest
on this money which they think they have “deposited” with the Fed
eral Reserve.
Furthermore, they are quite certain that the Federal Reserve Sys
tem has “used” their money to acquire the Government securities
which the Federal Reserve may buy in the process of reserve creation.
Believing this, the bankers naturally feel that they are entitled to
some share of the tremendous profits which the System receives from
interest payments on its Government securities.
Many bankers know better. The leaders of the bankers' associa
tions certainly do. But some of these leaders have not hesitated to
play on general ignorance and misunderstanding to mobilize the whole
banking community behind drives that are nothing but attempts to
raid the Public Treasury.
The truth is, however, that the private banks, collectively, have
deposited not a penny of their own funds, or their depositors’ funds,
with the Federal Reserve banks. The impression that they do so
arises from the fact that reserves, once created, can be, and are,
transferred back and forth from one bank to another, as one bank
gains deposits and another loses deposits.
As was shown earlier, if a depositor transfers $100 from his check
ing account with one bank to another, the first bank loses $100 in re
serves and the other gains $100 in reserves. Similarly, when a new
bank comes into a banking business, it is required to “deposit” a certain
amount of reserves with the Federal Reserve bank, to begin operation.
Say the new bank makes an initial deposit of $100 with the Federal
Reserve bank. How did the bank get the $100? From the owners of
the new bank who probably shifted $100 out of their checking accounts
at other banks and paid the sum to the new bank as part of its initial
capital. The other banks, of course, lose $100 of reserves when they
settle their debt to the new bank. In one way or another, then, this
$100 comes out of the reserve account of some bank already in business.
In short, new banks may come into business, old banks may go out
of business, and reserves may be transferred from one bank to another
in countless ways. But, nothing the banks can do will increase the
total amount of reserves on high-powered money in the System; and
nothing the banks would care to do can decrease the total amount of
reserves in the System. Practically speaking, only the Federal Re