The Federal Reserve's Temple

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Posted on Monday, June 9th, 2014

Written by Ralph J. Benko

One of the most impressive, if (appropriately) reserved federal buildings in the national capital is that of the Federal Reserve's headquarters located on Constitution Avenue.  For its classical architectural elements -- and perhaps for the somewhat hermetic rituals therein performed -- it has been called a "temple."

Photograph courtesy of the Board of Governors of the Federal Reserve System

According to the Fed's own historical account:

From 1913 to 1937, the Board of Governors of the Federal Reserve System met in the United States Treasury building at 1500 Pennsylvania Avenue, N.W., and the employees were scattered across three locations throughout the city. With the implementation of the Banking Act of 1935, which centralized control of the Federal Reserve System and placed it in the hands of the Board, it became necessary for the staff to be united in one building.

In the spring of 1935, the Federal Reserve Board made the decision to use a national competition to select an architect for its new building. ... Ultimately, Paul Philippe Cret (1876-1945) submitted drawings that impressed the members of the Board of Governors. Born in France, Cret trained at the École des Beaux-Arts in Lyons and Paris before moving to Philadelphia in 1903 to teach architecture at the University of Pennsylvania. Soon, Cret started his own practice and won many important commissions for buildings across the country. In Washington, D.C., Cret is also known for his design for the Organization of American States building (1908), the Folger Shakespeare Library (1929), and the Calvert Street Bridge (1935, now known as the Duke Ellington Bridge).

Cret's training focused on the study of Greek and Roman architecture and encouraged the interrelationship of all the arts. His design for the new Board building managed to combine a number of classic elements by skilled craftsmen who were highly regarded in their fields, while also exercising restraint.

One could perhaps wish, in this era of QEs, Twists, and Tapers, that the Federal Reserve would be inspired in its conduct of monetary affairs by the  restraint -- or, at least, becoming reserve -- showed by Cret.

Sir Isaac Newton and the Royal Mint

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Posted on Thursday, June 5th, 2014

Written by Ralph J. Benko

Wikipedia gives us a glimpse of the picturesque history of the British Royal Mint, where Sir Isaac Newton created, de facto, the modern classical gold standard that was to well serve the world for nearly 200 years:

The London Mint first became a single institution in 886,^{[citation needed]} during the reign of Alfred the Great, but was only one of many mints throughout the kingdom. By 1279 it had moved to the Tower of London, and remained there the next 500 years, achieving a monopoly on the production of coins of the realm in the 16th century. Sir Isaac Newton took up the post of Warden of the Mint, responsible for investigating cases of counterfeiting, in 1696, and subsequently held the office of Master of the Royal Mint from 1699 until his death in 1727. He unofficially moved the Pound Sterling to the gold standard from silver in 1717.

The Royal Mint moved from the Tower of London to new premises c.1809

By the time Newton arrived, the Mint had expanded to fill several rickety wooden buildings ranged around the outside of the Tower. In the seventeenth century the processes for minting coins were mechanised and rolling mills and coining presses were installed. The new machinery and the demand on space in the Tower of London following the outbreak of war with France led to a decision to move the Mint to an adjacent site in East Smithfield. The new building, designed by James Johnson and Robert Smirke, was completed in 1809, and included space for the new machinery, and accommodation for the officers and staff of the Mint.

Pepys on the Mystery of the Missing Gold

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Posted on Tuesday, June 3rd, 2014

Written by Ralph J. Benko

The great Restoration diarist Samuel Pepys confided, to his diary, on May 19, 1663, some observations he made at the Royal Mint and its manufacture of coins under the new "milled" method.  This method was considered in its day a state secret, making his observations, published long after the fact, all the more interesting. 

Pepys, by by Godfrey Kneller, 1689, courtesy of Wikipedia

He dined with some of the officials of the mint after, and records:

At dinner they did discourse very finely to us of the probability that there is a vast deal of money hid in the land, from this:
That in King Cha[r]les’s time time there was near 10 millions of money coyned – besides what was then in being of King James’s and Queen Elizabeths, of which there is a good deal at this day in being.

Next, that there was but 750,000l. coyned of the harp and Cross-mony [i.e., Commonwealth coins, so-called from the English cross and the Irish harp on the reverse], and of this there was 500,000l. brought in upon its being called in, and from very good arguments they find that there cannot be less of it in Ireland and Scotland then 100,000l.; so that there is but 150,000l. missing; and of that, suppose that there should be not above 50,000l. still remaining, either melted down, hid or lost or hoarded up in England, there will then be but 100,000l. left to be thought to have been transported [i.e., taken abroad].

Now, if 750,000l. in twelve yeares time lost but a 100,000l. in danger of being transported, then 10,000,000l. in 35 Years time will have lost but 3,888,880l. and odd pounds. And as there is 650,000l. remaining after 12 years’ time in England, so after 35 years’ time, which was within this two years, there ought in proportion to have been resting 6,111,120l. or thereabouts besides King James and Queen Elizabeth mony.

Now, that most of this must be hid is evident as they reckon, because of the dearth of money immediately upon the calling-in of the State’s money, which was 500,000 that came in; and yet there was not any money to be had in this City – which they say to their own observation and knowledge was so. And therefore, though I can say nothing in it myself, I do not dispute it.

There is contemporary speculation as to the contents of the Treasury Repository at Fort Know and the contents of the vaults of the Federal Reserve Bank of New York.  (That state of such contents is operationally nearly immaterial to the ability to restore the classical gold standard.) 

It would seem that there is something, then and now, about dinner conversations that encourages speculation as to missing or hidden gold.

Two Federal Reserve scholars on "The First Wall Street Crash"

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Posted on Tuesday, May 27th, 2014

Written by Ralph J. Benko

James Narron and David Skeie, two meticulously scholarly monetary officials of the Federal Reserve System, publishing, again, valuable lessons from history at the NY Fed's Liberty Street Economics. This time, about the first Wall Street panic.

Liberty Street Economics

Narron and Skeie:

From Political to Financial Revolution
Although the American political revolution ended in 1783, it was soon followed by a financial revolution as the United States implemented a number of key reforms common to modern financial systems. The first American mint was established in Philadelphia in 1786 in a move to create a more stable currency. In 1787, Congress was given the power of taxation to pay off the debt, which helped the United States make significant progress toward more stable public finances. And after Hamilton was appointed Treasury Secretary, he worked to pay off war debts, in the process creating an active securities market in what were called U.S. Sixes—the U.S. 6 percent bond that the Treasury issued in 1790. But it was Hamilton’s second Report on Public Credit, delivered to Congress in December 1790, in which he called for a national bank, headquartered in Philadelphia.

...

Panic of 1792—Wall Street’s First Crash
In late 1791, a former Treasury Department assistant and later speculator and businessman William Duer conspired to corner U.S. securities.  Duer and his co-conspirators borrowed heavily to do so. At the same time, the Bank of the United States opened in December 1791 and began making loans and issuing banknotes. So as Duer borrowed heavily to finance his securities purchases, and as the Bank expanded credit, the price of U.S. Sixes [6% interest bonds] rose from 110 to 125 from early December 1791 to mid-January 1792. But by February 1792, depositors began returning liabilities for gold and silver specie and the Bank slowed its credit expansion, as did other banks, creating another credit crunch.

     By early March 1792, U.S. Sixes fell back to nearly 115, but because Duer was long U.S. securities, he was unable to pay his debts. By early March, Duer defaulted. Duer’s debt was overwhelming and his default caused a selloff in the securities market. By March, U.S. Sixes fell to 95. But once again, Hamilton moved quickly to calm the markets. By mid-March, in coordination with the Bank of New York, Hamilton began a series of lender-of-last-resort operations in the Treasury market, authorizing open market purchases of securities at a penalty rate of 7 percent, but against all good collateral in the form of Sixes presented. By April, the panic had subsided.

The authors go on to marvel at how Hamilton's actions anticipated Bagehot's dictum, set forth in Lombard Street, long before formulated by Bagehot:

The Panic of 1792 appears to have been effectively managed with little or no long-term spillover to the economy. And most importantly, it didn’t derail the financial and economic revolution taking place. What’s more, key features of Hamilton’s market intervention predate Walter Bagehot’s famous rules for central bank crisis management by nearly a century. For example, Hamilton instructs Bank of New York to lend on good collateral, in this case U.S. Treasury securities, at a penalty rate of 7 percent on the U.S. Sixes. This action was coordinated with the bond dealers in New York so as not to drain gold and silver specie from the banks. And this coordination ultimately led to a May 1792 meeting of twenty-four broker-dealers under a buttonwood tree on Wall Street, who signed an agreement of cooperation, an act many historians view as the origin of the New York Stock Exchange.

     While mismanagement of one financial crisis may sow the seeds of the next, effective management by Hamilton prevailed and the United States was able to avoid another financial crisis until 1819. How should Hamilton’s early example of market crisis management be compared with the later, more famous “Bagehot’s dictum” for a central bank to lend freely to solvent banks during a banking crisis at a high interest rate against good collateral?

The authors conclude, "Tell us what you think."

This writer thinks that the Federal Reserve System is extremely well served to have two of its career civil servants, Narron, a senior vice president and cash product manager at the Federal Reserve Bank of San Francisco, and Skeie, a senior economist in the Federal Reserve Bank of New York’s Research and Statistics Group, so immersed in the facts that only can be found in what Lewis E. Lehrman, founder and chairman of the Lehrman Institute, calls "the laboratory of history."