Document Type

Article

Publication Date

Summer 2024

Abstract

Money is a motley. While the state enjoys a monopoly on issuing new physical currency, a variety of instruments serve money-like roles in the financial system. The commercial banking system significantly augments the money supply through issuing deposits. Alongside it, a shadow banking system has also developed, offering a range of deposit substitutes.

This Article seeks to cast new light on the U.S. financial system by exploring how, over the course of the twentieth century, federal policymakers engaged in a series of distinct and largely uncoordinated monetary experiments. As we show through historical case studies, federal authorities designed, promoted, and repurposed financial instruments, endowing them with money-like characteristics by providing them with liquidity support, credit support, or both.

In essence, policymakers created special purpose moneys to further national policy ambitions. The result of each intervention was a debt instrument with monetary properties. Market participants understood, in part due to these instruments’ implicit federal guarantees, that they would be rapidly convertible into base money under a wide range of circumstances. In short, the market treated these instruments as money substitutes.

Yet the creation and use of these instruments was not coordinated and controlled by the United States’ central bank and formal monetary authority, the Federal Reserve, nor was it subject to the same level of scrutiny and supervision as the banking system. Almost invariably, these special purpose monies proved less visible than traditional monetary policy. Hence our description of it as a kind of submerged or “hidden monetary state.”

This historical account enriches our understanding of the costs and benefits of such approaches. As a normative matter, we show how pursuing public ends by means of special money creation is generally more complex, less visible, and more regressive than most monetary policy. We also show, however, that these policies have led to important public benefits that are not always recognized. These relate to the international role of the dollar and the functioning of the U.S. Treasury and mortgage markets. As a policy matter, our account helps clarify how shadow banking emerged in ways that can inform policy making. In particular, crypto assets present many of the same challenges that policymakers faced in the 1960s and 1970s. We also link shadow banking to broader debates about the nature of the state and public policy.

Disciplines

Administrative Law | Banking and Finance Law | Law

Download

Share

COinS