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Collectors have seen it before

Wall Street had a wild ride yesterday. The Dow Jones Industrial average went down over 300 points before recovering almost all of the loss.

There are many in the hobby/industry who keep at least one eye on the gyrations of the financial markets. The market players work with borrowed money. If it is difficult for Wall Street to borrow, then I am sure lines of credit are being checked in the numismatic industry.

Then there is the buy side. Most collectors have assets set aside, whether in retirement accounts or in their homes. If securities prices are dropping, home prices are steady to falling and mortgage rates uncertain, they might just pause in their collecting activities.

These observations are a roundabout way of leading up to the creation of the Federal Reserve System. Some believe the central bank is the center of some secret effort to control and profit from our national currency. If you look in your wallet, you will find that every piece of paper money has “Federal Reserve Note” at the top.

Federal Reserve Notes are direct obligations of the Federal Reserve, which has 12 regional banks and is directed by a board of governors in Washington, D.C.

The current conditions on Wall Street are a reminder of why the Fed was created in 1913. The Panic of 1907 saw many bank and financial firm failures and a contraction of economic activity. The nation was so traumatized by the events that the cry went up to increase the elasticity of money. What that meant was that sometimes the supply of cash needs to be increased very rapidly to prevent financial insolvency of entities that have temporarily unsalable assets backing up their debts.

The creation of Date Back National Bank notes after the passage of the Aldrich-Vreeland Act of 1908 was intended to provide a more elastic currency. But they were not enough. The Fed was created.

You might have read in the newspapers in the last few days that the Fed is injected reserves into the banking system. This is elasticity. Cash is being created and pumped into the system through Fed purchases of Treasury securities from banks to prevent widespread financial panic and failure as happened in 1907. Bank deposit insurance was added in the 1930s.

Not every run has a happy ending like that at the Bailey Savings and Loan in the movie “It’s a Wonderful Life.”

The Fed isn’t perfect. It has made terrible errrors in the past. But what it is currently doing is what the nation intended back in 1913. Let’s see if it is enough.

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