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Episode 2 - On the Money

Intro

Welcome to the Bankster podcast, my name is Alexander Bagehot and I’ll be your host today. This is Episode 2 - On the Money. Every episode I dive into the intricate world of central banking! I summarize, translate, and explain a few points from the Centralverse, which to our new listeners is the deep, fascinating, ever changing, and incredibly consequential world of central bankers and the economies they attempt to support. This includes the latest news and events touching the Federal Reserve and monetary policy from around the world. I use just one or two news items to explain how the Centralverse works, what it means, and most importantly to give you a glimpse into why central bankers do what they do.

The purpose of this podcast is not to give you an update on every single event happening in the Centralverse (that would take hours...every single day, if you don’t believe me turn on CNBC or Bloomberg News); but rather my purpose is to provide a vital resource to help you build a foundation of Centralverse understanding. As you listen you’ll become more and more versed in Centralverse language/lingo/and history. You’ll be able to interpret those daily or weekly news feeds, and you’re understanding of the world will expand tremendously. You’ll have a solid foundation upon which to converse about Central Banking’s role in this big world we share.

Also in each episode, after the news insight, I take a more in depth look into an historical event or person that helped shape what central banking is today. On this episode we’ll talk about a very exciting and surprisingly relevant announcement by the United States Secretary of the Treasury and what it has to do with the Centralverse. The news section and historical perspective are nearly one in the same today! So let’s dive in. 

News

On Wednesday of last week, Secretary Jack Lew, made an exciting announcement via an open letter he posted to the website Medium, quote  “Today I am excited to announce that for the first time in more than a century, the front of our currency will feature the portrait of a woman — Harriet Tubman on the $20 note.” This announcement filled the news streams, and was lauded across the world. So what does it have to do with the Centralverse? Well, let’s first hear what one very important Central Banker had to say.

Shortly after the publication of the open letter, Janet Yellen, the current chairwoman of the Federal Reserve, also made an announcement. Her’s came by means of a short paragraph published on the Board of Governor’s website. Because this is the first time I've mentioned the current leader of the Federal Reserve on the podcast, and because she is such a fundamental player in the Centralverse I want to describe her a little bit.  Picture a nice, small, white haired, grandma type who has a PhD in economics, and who is married to another PhD and nobel winning economist (they actually have a wonderfully, nerdy romantic story that maybe we’ll talk about in a later episode).

But for now you know what to imagine as I read her statement, quote, Throughout American history, women have made important contributions to the free and democratic society we enjoy today. I welcome the decision by the Treasury Department to honor these achievements.” Close quote. See, the Treasury department and the Federal Reserve have a fascinating, intertwining, and often misunderstood history that we are going to learn a little bit about in the next few minutes and we’ll use the redesign of the newly announced next batch of US currency as a case study for this relationship. But first let’s wind the clock back and briefly describe the establishment of the Treasury and of the Fed.

 

On the Money, a Case Study in Treasury/Fed History

 

For the former, the year was 1789. The revolution had recently ended, Washington had been unanimously elected President of the newly united states and The First Congress gathered in the beautiful Federal Hall of New York City. One of the first items of business for the new congress was to answer the question, “How shall we organize the finances of our newly organized and liberated country?” After months of debate, they would partially answer this question with An Act to Establish the Treasury Department. And it is language from this very act that would give Jack Lew, over 200 years later, the power to make the announcement last week about the redesign of the $5, $10, and $20 dollar bills. According to the act he would have the power, quote, “to grant...all warrants for monies to be issued from the Treasury.”

Federal Hall of New York City where the Treasury Act was written.

Alexander Hamilton, played an indispensable role in the creation of the Treasury Department and the early fiscal organization of the Federal Government. He has recently received renewed fame due to the incredibly successful musical Hamilton. However, not only did he serve as the Treasury Secretary, but he also helped create the First Bank of the United States, which was the newly formed country’s first attempt at a nationally chartered Central Bank.

Unfortunately, the first and then second bank’s 20 year charters would not be renewed and it would not be until the 20th century that the Central Bank as we know it today would be created. For this episode we’ll briefly summarize the making of the Federal Reserve, but believe me, the story is fascinating and drawn out, so we will absolutely return to it in future episodes. But the basics are as follows. During the decades and decades that the country didn’t have a Central Bank during the 19th century, there were extreme swings in the business cycles. Hypes and booms would lead to devastating crashes and widespread business failures.

The National Bureau of Economic Research is the institution tasked with recording and dating United States recessions. During the late 1800’s there was a recession every two or three years and as the century progressed the recessions got deeper and deeper and the consequences of business failures grew darker and darker.

In 1907, a big bank’s failed attempt to corner the market of a copper company led to a collapse at the New York Stock Exchange and a panicked run on healthy and unhealthy banks in the area. Remember the first episode with Marriner Eccles? Imagine that scene, but instead of the fear gripping a small town in Northern Utah, imagine the fear sweeping through the densely populated, urban New York City. The stock market would fall 50%, production would drop, the city would nearly file for bankruptcy because the lending market froze, and the unemployment rate would more than double from 3% up to 8%.

Eventually, with the help of some heavy hitting robber barons of the day, the panic subsided and the economic dust settled. But realizing that something fundamental needed to change politicians, bankers, and business leaders banded together to form a Central Bank. After six years of debate and compromise the Federal Reserve Act was signed by President Woodrow Wilson in December of 1913. And this time, they didn’t give the charter an expiration date, so the Federal Reserve today is very similar to the one created over 100 years ago.

So now that we have a foundational understanding of the creation of both the Treasury Department and the Federal Reserve we can wind the clocks forward again to today, and return to the story behind the announcement of new money up and coming.

As stated in the law, the Secretary of the Treasury gets to pick what the money looks like. Using this power, Secretary Lew announced in 2015 that for the next note slated to be redesigned, the ten dollar bill, he would place a woman on the front. Acknowledging the importance of this kind of decision he asked for ideas and feedback from the public. In his words, “The response was powerful.” See, Alexander Hamilton has been on the ten for nearly 100 years and as the founder of the nation’s financial backbone and infrastructure, it would have been sad to lose him.

On the other hand, remember how the early central banks of the country didn’t survive past their 20 year charter? Well, Andrew Jackson was responsible for the Second Bank’s death. One of the principal platforms of his presidential candidacy was based on denying an extension of the Second Bank’s charter. Taking in all this information, Secretary Lew’s announcement last week was extra exciting and a win for the history of the Centralverse. Here’s how the new money is going to look:

  • The $20 note will feature Harriet Tubman (the Civil War abolitionist hero) on the front. The back of the bill will show the White House and an image of Andrew Jackson.
  • The $10 note will continue to feature Alexander Hamilton. While the back of the bill will memorialize the 1913 women’s suffrage march with five suffrage fighters demonstrating in front of the Treasury building.

  • The $5 note will keep Abraham Lincoln on the front and display notable civil rights events that took place at the Lincoln memorial on the back.

So how will we get this new money? Well, the official designs will not be released until 2020 and to describe how they’ll make it into our wallets and purses after that, let’s talk about the frequently misunderstood responsibilities of the Fed and the Treasury in regards to money. The Treasury Department is responsible for the physical creation of the nation’s paper currency. They design and print the money. The Federal Reserve then distributes that money through the banking system, which eventually makes its way into the hands of individuals like you and I.

So to clarify, the Fed does not print money. When one of the twelve Federal Reserve Banks which are spread out across the country needs more money, they send a request to the Treasury department, who has printing presses in Washington DC and Fort Worth, Texas. Depending on the value of the currency being printed the Treasury then drives or flies the money to the petitioning Federal Reserve Bank. Then your bank or credit union comes and picks it up from the Fed in armored trucks. So you can think of the Treasury as the first step in the money process; they design and print the money. Then the Federal Reserve picks up the responsibility of distributing that money to you and I. This is part of the Fed’s responsibility to maintain a healthy Payment System. They keep the notes in circulation healthy, fit, and modern.

In an age of political stiffness and discord it was comforting to watch the Treasury secretary’s open letter announcement last week. Both the Treasury and the Federal Reserve carry heavy responsibility in regards to our money (which is also used in countries all over the world). They work in tandem to create a safe and prosperous economy of currency.

 

Conclusion

 

This podcast is young, and if you want to be a part of its growth please reach out with comments, recommendations, or questions about the The Bankster Podcast or the Centralverse in general. You can email me, alexander@thebanksterpodcast.com. Find me on twitter at the handle alexbagehot (that’s alexbagehot). And at my website www.thebanksterpodcast.com you can find a transcript of today’s episode with links to all of the sources I used in creating the content. And check back in to the website over the next few weeks as it will be growing and expanding tremendously! You’ll find it an ever more useful source for all things Centralverse.

Now in order to spread the word about The Bankster Podcast there is one very simple thing that each of you listening right now can do--Write a Review! It’s as simple as going to the iTunes store, searching “The Bankster Podcast”. Then after you select the show, the middle option is Reviews. So that’s iTunes, Bankster Podcast, Reviews. If you’ve learned anything new this episode or the previous one, share that with your friends and family and most importantly write a review. The Centralverse is an incredibly important place that is interwoven with the daily lives of each of us. And as the podcast grows and strengthens you’ll appreciate more and more an understanding of the world of central bankers.

Today’s episode was written, edited, and produced by me, Alexander Bagehot. I dedicate this episode to Ira Glass, the godfather of podcasting. And to all of you, thanks for listening. I’m Alexander Bagehot, and I’ll see you next time on The Bankster Podcast!

 

 

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Episode 1 - Show No Signs of Panic