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
This image is published under a Creative Commons
Attribution-Noncommercial-No Derivative Works 2.5 License
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