1. What Gives Money Its Value? From Gold to Paper

Float is delay in the settlement of transactions, which results in double counting of the transaction amount. For example, under the old paper check system, if I deposit a check in my bank and the bank gives me credit for the amount in my account before the check is received by the bank on which it was drawn and charged to the drawer’s account, there is float in the amount of that transaction. It was not until 2004, with the Check 21 Act, that Congress eliminated the requirement that checks be returned to the bank on which they were drawn. Now, electronic images are transmitted among banks to settle the transactions, and checks do not physically move beyond the bank of first deposit. This eliminated the float.

See Walter Bagehot [3]. This book, which has become a classic, has been rediscovered in the early 21st century, as Bagehot’s observations about the financial system of his day, taken from his perspective as a banker and editor of The Economist, presages numerous conditions that prevail today in the fields of banking and monetary policy.

Many will see in this discussion an ironic comparison between the issues that early Americans struggled with in the 1790s and those facing members of the European Monetary Union in the 21st century. In recent times, Europe’s attempts to establish a fiscal union that would consolidate the debt of member countries in order to ease the challenges associated with solving the Greek crisis and the potential crises of others such as Italy and Spain, are reminiscent of the issues presented by Alexander Hamilton in his arguments for the Bank of the United States.

All references to central banks in this book refer to today’s generally accepted definition of a central bank, owned and operated by and for the government for the purposes of economic stabilization and protection of the currency. In earlier times, most central banks were established as private banks, with authorization to do certain functions for the government as ancillary activities. Since World War II, this has ceased to be the case, and all central banks now are agencies of their respective national governments.

Robert F. Bruner and Sean D. Carr [9]. There is further discussion of the Panic of 1907, beginning below on page 136. This episode had a catalytic effect in spurring Congress toward the passage of the Federal Reserve Act and the establishment of a central bank.

Allan H. Meltzer [10]. See especially Chaps. 1, 2, and 3.

It is common parlance in the financial world today, and in the financial press, to refer to the Federal Reserve System as “the Fed.” This book follows that convention.