Thomas Tooke

How to finance the war bonds and destabilize the monetary system. Repression creating inflation.

In Unreserved Banking on May 19, 2012 at 9:42 pm

In 1920 Kemmerer wrote the following:


By maintaining official discount and loan rates at federal reserve banks below the market rates and by granting rediscounts liberally, we placed “the market in the federal reserve banks,” we encouraged a “borrow and buy” policy for war bonds and certificates of indebtedness, and made borrowing that resulted in a rapid expansion of our circulating bank credit — deposit-credit and federal reserve notes– appear to be both profitable and a matter of patriotic duty to all parties concerned. The fact that these two kinds of circulating credit were interchangeable to the public on demand, by the deposit of federal reserve notes or by the cashing of checks for notes, enabled the public to decide what proportion of this increased supply of circulating credit it should hold in the form of federal reserve notes. We inflated by expanding circulating credit. The public decided the form in which this newly created should circulate. Preferentially lower discount rates on war paper were an additional factor in this deposit and note expansion, and one that explains in part the large holdings of such paper by our banking institutions, holdings that are estimated to amount to something in the neighborhood of six billion dollars.

Now that the war is over this sort of expansion clearly should be stopped. War patriotism and progressive bank-credit expansion can no longer buoy up securities to artificially high levels. The real market rate of interest must now emerge and dominate the situation. There is no question but that the real rate is much higher than the camouflaged war rate. To an increasing degree Government war bonds and certificates of indebtedness must stand upon their own bottoms as investments.  The market should be “outside of the federal reserve banks. ” In other words, the federal reserve bank should rule as it did before our entrance into the war, and as does usually the Bank of England´s official rate, higher than the market so that recourse by banks to the discount and loan facilities of the federal reserve banks should be only an emergency recourse for temporary needs, not a recourse for permanent funds.

In the future preference should be shown to short-time loans of a self-liquidating character, as originally contemplated by the federal reserve system; and to an increasing degree, loans on the security of government debt should be discriminated against by federal reserve banks, both as to discount rates and in the matter of the banks´discretion, as to how much they shall loan and to whom.

Gradually but firmly government paper should be forced out of the federal reserve banks and out of the commercial member banks and into the strong boxes of the investing public, including the vaults of saving banks, insurance companies, and endowed institutions. To this end, in my judgment, the federal reserve banks should follow up their recent advances in discount rates, gradually raising the rates higher until they become effective in forcing a contraction.

The present preferentially low rate on loans secured by certificates of indebtedness should be discontinued. If an artificially and preferentially low re discount rate is necessary in order to enable the government to float these securities at their present low interest rate, then we are paying the price of further inflation for a low interest rate on the certificates. In that case why not frankly recognize the fact that in an unsupported market, the present rate is too low and should be raised, if further issues become necessary.


Kemmerer continues…


We should not be under the necessity of seriously impairing our banking system and of perpetuating highly inflated and unstable circulating media, with consequent high prices,in order to buoy up the market prices of bonds that were floated at abnormally low interest rates on waves of war patriotism.


A personal comment here: It seems that the same old tricks are being used to “stuff” the banks with government war bonds, expand the circulation and have the war bonds a source of debt-rehypothetication. The result is massive inflation between 1913 and 1920.


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