Mitchell, B. (2014) “Direct central bank purchases of government debt“, Bill Mitchell Blog, 02 Οκτωβρίου.
There was a recently published Federal Reserve Bank of New York Staff Report – Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks – by Kenneth D. Garbade, which recounts the way the central bank in the US could purchase unlimited amounts of treasury debt by creating funds out of thin air and how that capacity was eventually constrained. The Report is an understated account of the way in which the conservative ideological forces eventually prohibited this capacity and forced the US government to only issue debt to the private sector. He shows that between 1917 and 1935, this capacity was used often “without incident” but as the conservative antagonism grew it was limited (in 1935) and then abandoned altogether in the early 1980s. The Report demonstrates there were no intrinsic financial reasons for abandoning this capacity.
There was an article in the New York Times (March 28, 1917) – Reserve Banks Lend M’Adoo $50,000,000 – which said that:
To maintain the working level of the general fund of the Treasury, Secretary McAdoo has borrowed on Treasury certificates from the Federal Reserve Banks $50,000,000 at 2 per cent per annum … The Federal Reserve Banks subscribed with such promptness that at 3 P.M. today the entire amount had been taken.
The Secretary of the Treasury Mr McAdoo said that the “twelve Federal Reserve Banks … are fiscal agents of the Government”.
Part of the funds went to pay the sale price of the Danish West Indies, now the US Virgin Islands (note: Did you know this Warren?!).
The other interesting aspect of the ‘loan’ was that the private bond markets were not interested in the deal and a spokesperson said that “other institutions would not care to invest their funds in these securities at the very unattractive rate”.
The prevailing market rate at the time on short-term Treasury certificates was 3 per cent.
These developments are considered in detail by the recently published Federal Reserve Bank of New York Staff Report – Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks – by Kenneth D. Garbade, who has also written some interesting historical papers (and a book) on related topics.
The essential facts traversed in the Report are as follows.
1. “The original version of the Federal Reserve Act provided a robust safety net because the act implicitly authorized the new Reserve Banks to buy securities directly from the Treasury”.
2. “The Banks made active use of their “direct purchase authority” during, and for a decade and a half after, World War I. Congress acted to prohibit direct purchases in 1935, but reversed course and provided a limited wartime exemption in 1942. The exemption was renewed from time to time following the conclusion of the war but ultimately allowed to expire in 1981.”
Σχετικές Αναρτήσεις:
- Mitchell, B. (2014) “Direct central bank purchases of government debt“, Bill Mitchell Blog, 02 Οκτωβρίου.
- Chrepa, E. & Chrysoloras, N. (2014) “Private Bad Debt Buildup Casts Shadow on Greek Rebound“, Bloomberg News, 29 Σεπτεμβρίου.
- Joyce, P. J. (2014) “The IMF and Sovereign Debt“, Economonitor–A Roubini Global Economics Project, 09 Σεπτεμβρίου.