This PDF is a selection from an out-of-print volume from the National
Bureau of Economic Research
Volume Title: Determinants and Effects of Changes in the Stock of Money,
1875–1960
Volume Author/Editor: Philip Cagan
Volume Publisher: NBER
Volume ISBN: 0-870-14097-3
Volume URL: http://www.nber.org/books/caga65-1
Publication Date: 1965
Chapter Title: High-Powered Money
Chapter Author: Philip Cagan
Chapter URL: http://www.nber.org/chapters/c1642
Chapter pages in book: (p. 45 - 117)
, 3
HIGH-P0 WERED MONEY
HIGH-POWERED MONEY as defined here—bank reserves and currency
held by the public—is ultimately under the control of governments,
which have authority to alter the conditions of issue and to change
the quantity outstanding. Statutory regulations concerning money
therefore play an important role in the monetary histories of most
countries and in particular of the United States. This country had an
inconvertible paper standard from the Civil War until 1879. It was
on the gold standard from then until 1933, except for an embargo on
gold exports during World War I. Since 1934 it has had the so-called
gold bullion standard, which—because of the huge gold stock ac-
cumulated in excess of statutory requirements during the 1920's and
1930's—until the late l950's allowed the government much of the
freedom of an inconvertible standard. Those regulations account for
much of the behavior of high-powered money in this country, though
they do not alone explain the timing and amplitude of many variations
associated with important economic developments. To assess the role
of statutory regulations and to identify other influences, it is desirable
to distinguish the various sources of change in high-powered money.
For the United States, the components of high-powered money are
gold coin or certificates and other money fully backed by gold; paper
money or deposit balances not secured by gold reserves but constituting
a liability of the Treasury or (since 1915) of Federal Reserve Banks;
and (until 1935) bank notes issued as the liability of national banks.
Issue of money by the U.S. government has never been completely
centralized; indeed, there have always been numerous sources of
issue. They can be conveniently classified, however, into four general
sources: the gold stock, Federal Reserve Banks, the Treasury, and
national banks. Changes in the gold stock are determined by gold
production and the balance of foreign payments. The other three
are issuing agencies whose operations are sources of change in high-
powered money. The Federal Reserve Banks are the only agency
,46 HIGH-PO WERED MONEY
specifically charged with some of the responsibilities of central banking.
The Treasury's operations include its cash outflow for budgetary
expenditures and the management of the public debt, and inflow,
including all revenues; outflow also includes silver purchases, shown
separately because of the special character of silver in U.S. monetary
TABLE 9
DESCRIPTION OF SOURCES OF CHANGE IN HIGH—POWERED NONEY
By Operations of Issuing Agencies By Changes in Nonetary Assets or Liabilities
1. Gold flows (including changes in 1. Change in gold coin or certificates in
earmarkings), domestic production circulation and change In the part of
sold to the Treasury or coined and Treasury and Federal Reserve monetary
circulated, minus coin melted for liabilities secured by gold
use in the arts, or lost
2. Federal Reserve System operations: 2. Change in Federal Reserve domestic
total change in Federal Reserve monetary liabilities (i.e., excluding
credit outstanding (excluding deposits held by foreign banks) minus
change in deposits held by change in FRS monetary reserves (i.e.,
foreign banks and in capital holdings of gold and gold certificates,
and surplus not offset by changes of Treasury currency, and of bank note
in fixed assets) on account of: liabilities of national banks)
Loans to banks
Open-market operations
3. Treasury operations: addition of net 3. Change in Treasury monetary liabilities
cash payments or subtraction of net (i.e., Treasury currency outstanding)
cash receipts on account of: minus change in high—powered monetary
Budget deficits or surpluses assets (i.e., Treasury holdings of
Debt retirements or issues gold, of Federal Reserve currency, of
Deposits or withdrawals of bank note liabilities of national
funds at commercial banks banks, and Treasury deposits at Federal
and in miscellaneous Treasury fleserve Banks)
accounts (including write—offs
of discontinued currencies
unredeemed and presumed lost)
Cost of silver purchases
and receipts from sales
4. Issue or retirement of notes by 4. Change in bank note liabilities of
national banks national banks.
Note: Table describes high—powered money outside the Treasury and Federal Reserve
Banks. For a more detailed description, see notes to Table F—5.
history.National banks issued national bank notes until 1935, under
conditions set by the government. These operations covering all
changes which occur in high-powered money are listed on the left-
hand side of Table 9. Each corresponds to changes in a specific com-
ponent of high-powered money involved in that operation, listed in the
table on the right-hand side. Two or more changes may, of course,
simultaneously offset each other, as in gold sterilization, when a gold in-
flow is offset by Treasury sale of bonds, or in the withdrawal of Treasury
deposits from commercial banks to finance Treasury expenditures.
, HIGH-POWERED MONEY 47
The breakdown separates the operations of the Treasury and Federal
Reserve Banks. Federal Reserve activities are essentially govern-
mental, and for many purposes the balance sheet of the Reserve Banks
could be consolidated with the accounts of the Treasury. In some
important respects, however, its activities are independent of the
Treasury, and separate treatment seems preferable. If Federal Reserve
and Treasury operations are not consolidated, there are some trans-
actions between the two agencies that do not involve the public, such
as the sale of a bond by the Treasury directly to a Reserve Bank.
The bond sale shows up on Treasury accounts as a cash receipt through
the issue of debt, and on Federal Reserve Bank statements as an in-
crease in earning assets. The transaction cancels out in terms of the
change in high-powered money outstanding but still shows up in
records of operations of the two agencies.
The change in high-powered money attributable to the Federal
Reserve Banks is the change in the Banks' total domestic monetary
liabilities not covered by monetary reserves. These liabilities include
amounts extended by Reserve to the Treasury (which cancel
out against Treasury operations) as well as to domestic commercial
banks (including, of course, loans to member banks') but not to foreign
banks (which do not create dollar liabilities within the United States).
Monetary reserves comprise the Reserve Banks' holdings of gold and
gQld certificates, Treasury currency, and national bank notes, all of
which stand behind and in a sense create an equal amount of Federal
Reserve monetary liabilities. Changes in these liabilities can also be
described by the Federal Reserve operations involved. For example, a
loan to a member bank increases Federal Reserve earning assets and
therefore augments high-powered money. Changes in Reserve Bank
1
Some students distinguish analytically between loans to member banks and other
Federal Reserve credit outstanding. (A corresponding distinction is also made from
banks' point of view between borrowings and other high-powered reserves of member
banks, by defining net free reserves as equal to gross reserves minus required reserves
and borrowings.) The purpose of the distinction is to assess the effects of the discount
rate (relative to short-term market rates) on member bank borrowings. The distinction
is of doubtful value in understanding the issue of high-powered money, because other
Federal Reserve credit is not—or at least need not be—independent of the volume of
member bank borrowing. Indeed, open market operations presumably are intended
to provide a desired total amount of credit to banks after taking account of the amount
of borrowing. \Vhatever the amount of borrowing may be, Reserve Banks still have
full control over the total amount of their credit outstanding, though in the very short
run, of course, unexpected variations may occur.
Bureau of Economic Research
Volume Title: Determinants and Effects of Changes in the Stock of Money,
1875–1960
Volume Author/Editor: Philip Cagan
Volume Publisher: NBER
Volume ISBN: 0-870-14097-3
Volume URL: http://www.nber.org/books/caga65-1
Publication Date: 1965
Chapter Title: High-Powered Money
Chapter Author: Philip Cagan
Chapter URL: http://www.nber.org/chapters/c1642
Chapter pages in book: (p. 45 - 117)
, 3
HIGH-P0 WERED MONEY
HIGH-POWERED MONEY as defined here—bank reserves and currency
held by the public—is ultimately under the control of governments,
which have authority to alter the conditions of issue and to change
the quantity outstanding. Statutory regulations concerning money
therefore play an important role in the monetary histories of most
countries and in particular of the United States. This country had an
inconvertible paper standard from the Civil War until 1879. It was
on the gold standard from then until 1933, except for an embargo on
gold exports during World War I. Since 1934 it has had the so-called
gold bullion standard, which—because of the huge gold stock ac-
cumulated in excess of statutory requirements during the 1920's and
1930's—until the late l950's allowed the government much of the
freedom of an inconvertible standard. Those regulations account for
much of the behavior of high-powered money in this country, though
they do not alone explain the timing and amplitude of many variations
associated with important economic developments. To assess the role
of statutory regulations and to identify other influences, it is desirable
to distinguish the various sources of change in high-powered money.
For the United States, the components of high-powered money are
gold coin or certificates and other money fully backed by gold; paper
money or deposit balances not secured by gold reserves but constituting
a liability of the Treasury or (since 1915) of Federal Reserve Banks;
and (until 1935) bank notes issued as the liability of national banks.
Issue of money by the U.S. government has never been completely
centralized; indeed, there have always been numerous sources of
issue. They can be conveniently classified, however, into four general
sources: the gold stock, Federal Reserve Banks, the Treasury, and
national banks. Changes in the gold stock are determined by gold
production and the balance of foreign payments. The other three
are issuing agencies whose operations are sources of change in high-
powered money. The Federal Reserve Banks are the only agency
,46 HIGH-PO WERED MONEY
specifically charged with some of the responsibilities of central banking.
The Treasury's operations include its cash outflow for budgetary
expenditures and the management of the public debt, and inflow,
including all revenues; outflow also includes silver purchases, shown
separately because of the special character of silver in U.S. monetary
TABLE 9
DESCRIPTION OF SOURCES OF CHANGE IN HIGH—POWERED NONEY
By Operations of Issuing Agencies By Changes in Nonetary Assets or Liabilities
1. Gold flows (including changes in 1. Change in gold coin or certificates in
earmarkings), domestic production circulation and change In the part of
sold to the Treasury or coined and Treasury and Federal Reserve monetary
circulated, minus coin melted for liabilities secured by gold
use in the arts, or lost
2. Federal Reserve System operations: 2. Change in Federal Reserve domestic
total change in Federal Reserve monetary liabilities (i.e., excluding
credit outstanding (excluding deposits held by foreign banks) minus
change in deposits held by change in FRS monetary reserves (i.e.,
foreign banks and in capital holdings of gold and gold certificates,
and surplus not offset by changes of Treasury currency, and of bank note
in fixed assets) on account of: liabilities of national banks)
Loans to banks
Open-market operations
3. Treasury operations: addition of net 3. Change in Treasury monetary liabilities
cash payments or subtraction of net (i.e., Treasury currency outstanding)
cash receipts on account of: minus change in high—powered monetary
Budget deficits or surpluses assets (i.e., Treasury holdings of
Debt retirements or issues gold, of Federal Reserve currency, of
Deposits or withdrawals of bank note liabilities of national
funds at commercial banks banks, and Treasury deposits at Federal
and in miscellaneous Treasury fleserve Banks)
accounts (including write—offs
of discontinued currencies
unredeemed and presumed lost)
Cost of silver purchases
and receipts from sales
4. Issue or retirement of notes by 4. Change in bank note liabilities of
national banks national banks.
Note: Table describes high—powered money outside the Treasury and Federal Reserve
Banks. For a more detailed description, see notes to Table F—5.
history.National banks issued national bank notes until 1935, under
conditions set by the government. These operations covering all
changes which occur in high-powered money are listed on the left-
hand side of Table 9. Each corresponds to changes in a specific com-
ponent of high-powered money involved in that operation, listed in the
table on the right-hand side. Two or more changes may, of course,
simultaneously offset each other, as in gold sterilization, when a gold in-
flow is offset by Treasury sale of bonds, or in the withdrawal of Treasury
deposits from commercial banks to finance Treasury expenditures.
, HIGH-POWERED MONEY 47
The breakdown separates the operations of the Treasury and Federal
Reserve Banks. Federal Reserve activities are essentially govern-
mental, and for many purposes the balance sheet of the Reserve Banks
could be consolidated with the accounts of the Treasury. In some
important respects, however, its activities are independent of the
Treasury, and separate treatment seems preferable. If Federal Reserve
and Treasury operations are not consolidated, there are some trans-
actions between the two agencies that do not involve the public, such
as the sale of a bond by the Treasury directly to a Reserve Bank.
The bond sale shows up on Treasury accounts as a cash receipt through
the issue of debt, and on Federal Reserve Bank statements as an in-
crease in earning assets. The transaction cancels out in terms of the
change in high-powered money outstanding but still shows up in
records of operations of the two agencies.
The change in high-powered money attributable to the Federal
Reserve Banks is the change in the Banks' total domestic monetary
liabilities not covered by monetary reserves. These liabilities include
amounts extended by Reserve to the Treasury (which cancel
out against Treasury operations) as well as to domestic commercial
banks (including, of course, loans to member banks') but not to foreign
banks (which do not create dollar liabilities within the United States).
Monetary reserves comprise the Reserve Banks' holdings of gold and
gQld certificates, Treasury currency, and national bank notes, all of
which stand behind and in a sense create an equal amount of Federal
Reserve monetary liabilities. Changes in these liabilities can also be
described by the Federal Reserve operations involved. For example, a
loan to a member bank increases Federal Reserve earning assets and
therefore augments high-powered money. Changes in Reserve Bank
1
Some students distinguish analytically between loans to member banks and other
Federal Reserve credit outstanding. (A corresponding distinction is also made from
banks' point of view between borrowings and other high-powered reserves of member
banks, by defining net free reserves as equal to gross reserves minus required reserves
and borrowings.) The purpose of the distinction is to assess the effects of the discount
rate (relative to short-term market rates) on member bank borrowings. The distinction
is of doubtful value in understanding the issue of high-powered money, because other
Federal Reserve credit is not—or at least need not be—independent of the volume of
member bank borrowing. Indeed, open market operations presumably are intended
to provide a desired total amount of credit to banks after taking account of the amount
of borrowing. \Vhatever the amount of borrowing may be, Reserve Banks still have
full control over the total amount of their credit outstanding, though in the very short
run, of course, unexpected variations may occur.
