7/31/2019 What is a dollar comprised of?

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Federal Reserve notes issued to any such bank shall, upon delivery...

become a first and paramount lien on all the assets of such bank.-Section 16.4, Federal Reserve Act

What the above phrase boils down to is that

should the Federal Reserve, for some reason or

other, decide to wind down operations, the dollar

in your wallet has first claim on the Feds remaining

assets. That dollars claim comes before anyone

elses claim on the Fed, including Fed deposit hold-

ers, jobless Fed Chairmen looking for back salary,and suppliers looking to collect on unpaid debts.

Each dollar, by virtue of its first and paramount

lien, is effectively backed.

The fact that dollars are backed makes it impor-

tant to understand the sorts of assets that provide

the backing. This chart shows how the proportion

of Federal Reserve assets has changed over time.

Gold was the main backing asset for the first few

decades of the Feds existence. Discounts, advances,

and loans by the Fed to commercial banks wereimportant too. The huge expansion in discounts in

1918, for instance, helped pay for World War I as

the Fed offered cheap loans collateralized by gov-

ernment war debt.

Things began to change in the 1930s with modifi-

cations allowing the Fed to collect more govern-

ment debt on its balance sheet through open

market purchases, and accelerated during World

War II as the Fed helped fund war expenses by

buying government bonds. By 2006, government

bonds purchased by the Fed accounted for almost

90% of the assets backing your dollar. Gold and

discounts were nowhere to be found.

This all changed with the credit crisis. For the firsttime since WWI, Fed discounts, loans, and advances

account for the largest component of assets backing

the dollar. But in 2009, these loans include a host of

emergency facilities created to deal with the credit

crisis such as TAF, loans to fund the bankrupt assets

of Bear Stearns and AIG, and more. Some of these

loans are collateralized by risky and often undefined

assets. Government debt as a proportion of all

assets has fallen to its lowest level since World War

II, while Agency debt and mortgage-backed securi-ties have expanded their presence on the Feds bal-

ance sheet. The quality of your dollars backing, it

would seem, has become much harder to evaluate.

Notes:1. SDRs are special depository receipts.2. Agency debt includes debt issued by Freddie Mac, Fannie Mae, and the FHLBanks.MBS are guaranteed by Freddie or Fannie.3. Government bonds include outright purchases and temporary repos.4. Discounts, advances, and loans include TAF, PDCF, MMIFF, AMLF, CPFF and MaidenLane I-III5. Other assets include Fed buildings and property, foreign assets, central bank swaps,coin, and float.

What Backs the Buck?The proportions of Federal Reserve assets behind each U.S. dollar, 1914 - 2010

1915

1920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2007

2008

2009

2010

0%

20%

40%

60%

80%

100%

100%

80%

60%

40%

20%

0%

Government bonds bought

Gold and SDRs

All other assets

Discounts, advances, and loans Agency debt and MBS

Acceptances

bought

assetasa%o

fallFedassets

Financial Graph & Artwww.financialgraphart.com

2009

John Paul Koning

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Attribution-Noncommercial-No Derivative Works 2.5 License