The NY Fed has produced a marvelous interactive map of U.S. dollar funding.

Zubin Al Genubi writes:

I wondered: Where does credit card money creation fit in M1?

According to an article I read:

"In short, credit cards, debit cards, and smart cards are different ways to move money when a purchase is made. But having more credit cards or debit cards does not change the quantity of money in the economy, any more than having more checks printed increases the amount of money in your checking account"

That doesn't seem right to me. Credit cards are the universal payment method and create much much more liquidity than cash, is easier to spend. Often people buy beyond their ability to pay in one month, so liquidity is being created. And the US economy runs on consumer purchases.

Stefan Jovanovich responds: 

ZAG has asked the questions that, in one form or another, American law and banking practice have done their best to avoid answering, ever since the country was founded: where is the boundary between money and credit and what is the definition of the U.S. dollar? The U.S. Code is no help; its only definition of the U.S. dollar is that it is legal tender. "United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts." 31 U.S.C. 5103. But what "it" is remains wonderfully vague. So, too, do the Treasury's own practices. It does not require payment of legal tender for taxes; you can use your credit card.

There is a good reason for all this seeming confusion. The country needed it in order to get started. When the war veterans met in Philadelphia in 1787, they had to establish a national unit of account that was not a fraud while, at the same time, borrowing enough money to pay the veterans' promised pensions and the government's own expenses. Their solution was an elegant finesse. Money would be defined, by weight and measure, but any Coin, foreign, private or newly-Minted by the U.S. government, would be legal tender currency. The United States would not issue paper money, as the British had; and there would be no national bank. Congress could borrow Money, but there would be no Bank of England that could use its own notes for repayment. Congress would be responsible for defining the unit of account to be used as the yardstick for measuring foreign and domestic currency, but U.S. law would only specie as Money. And, the States of the new United States would be specifically prohibited from doing what they had done during and even before the Revolution - turning their own bills of credit into money. This was so important that the Constitution goes far beyond its usual tact is pronouncing where Federal sovereignty would be supreme. The States would NOT issue bills of credit and would NOT go to war. For the veterans of the Revolutionary War, who had seen what the States had done to the country's money and what Tories had done when they had control of state government, those were the two rights the States would never be allowed to have. It worked. Before Washington left office, the U.S. had a perfect record of borrowing and paying back the money lent by its Dutch bankers.

There was only one problem: people were hot to buy more and more land, and the U.S. and most state governments were insisting on being paid, in money. Clearly, this would not do. The solution was for the States to get into the credit business. By creating banks, they could find their way around the Constitution's prohibition on bills of credit; the banks could issue notes, and those notes could be accepted by the Federal and state Treasuries as payment for Federal and state lands. The arguments over the Second Bank of the United States was not, as Schlesinger says, over "hard" money; it was over whose bank notes would be considered sufficient payment for the land sales. When Jackson decided that only gold coin would be accepted, he was creating the very paradise that Ron Paul wishes for - a country with only 100% gold-backed bank notes and, therefore, very little, if any, private credit.

A correspondent reminds me that the land sales were very much like the Treasury auctions in the good old days of guaranteed spreads. The land was sold to primary dealers at fixed prices per acre; the dealers then resold the property purchased at auction. When and where the auctions would be held became a matter of public record only after they were completed, and the funds paid to members of the House and Senate for what was truly inside information were worthy of the bribes that Vanderbilt and others paid to the New York State legislature. "There is no distinctly native American criminal class except Congress." 


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