Question about AGD

[Smiling_Dave]

In Part 2, Chapter 4, Creating the Inflation II, Total Reserves, Rothbard writes about the various kinds of reserves in the banks in the 1920’s. He lists ten things. There was some gold, of course, then there was a category he calls Federal Reserve Assets Purchased. He says how this category has two components:

The major assets purchased are “Bills Bought” and “U.S. Government Securities.”

U.S. Government Securities are perhaps the most publicized field of “open-market operations”; Federal Reserve purchases add to bank reserves and sales diminish them.

OK, I’m with him so far. Then he goes on to describe what he means by Bills Bought:

Bills Bought were acceptance paper which the Federal Reserve bought outright in a policy of subsidy that practically created this type of paper de novo in the United States.

Some writers treat Bills Bought as an uncontrolled factor, because the Federal Reserve announced a rate at which it would buy all acceptances presented to it. No law, however, compelled it to adopt this policy of unlimited purchase; it therefore must be counted as a pure creation of Federal Reserve policy and under its control.

This is where I lose him. What are acceptance papers? Who did the Fed buy them from? Why are they considered assets? What is the rate he is referring to with regard to these acceptance papers?

[John_James]

This is what I was able to find in a quick search (link):

[…] But it was through a virtual monopoly of U.S. acceptance banking, achieved by the International Acceptance Bank Inc. and its affiliated units, that Warburg was able to get society to go to work for the Warburgs and their banking friends. Revisionist historian Murray Rothbard has examined the origins of the 1920s inflation that led to the collapse of 1929 and makes this pertinent observation:

While purchase of U.S. securities has received more publicity, bills bought were at least as important and indeed more important than discounts. Bills bought led the inflationary parade of Reserve credit in 1921 and 1922, were considerably more important than securities in the 1924 inflationary spurt, and equally important in the 1927 spurt. Furthermore, bills bought alone continued the inflationary stimulus in the fatal last half of 1928.¹³

What were these “bills bought” pinpointed by Rothbard as the key culprit of the 1929 depression? Bills bought were acceptances, and almost all were bankers acceptances.

Who created the acceptance market in the United States, largely unknown before 1920? Paul Warburg.
Who gained the lions’ share of this acceptance business at artificially low subsidized rates? The International Acceptance Bank, Inc.

Who was the International Acceptance Bank, Inc? Its chairman was Paul Warburg, with Felix Warburg and James Paul Warburg as co-directors. However, a closer look at the make-up of the banks (see below page 95) suggests that it was a vehicle representing the financial élite of Wall Street.

Did the Warburgs and their Wall Street friends know where their financial policy would lead? In other words, did their financial policies of the 1920s have elements of deliberation? There exists a memorandum by Paul Warburg that clearly notes that banks had the capability to prevent inflation:

If the Government and the banks of the United States were helpless automatons, inflation, no doubt, would have to ensue. But it is insulting our banks to have the impression go out that they should not be capable of cooperating in some common plan of protection such, for instance, as keeping all cash reserves higher than required by the law, if indeed such a step should become advisable for the greater safety of the country.¹⁴

Consequently, Rothbard quite rightly concludes:

Surely, Warburg’s leading role in the Federal Reserve System was not unconnected with his reaping the lion’s share of benefits from its acceptance policy.¹⁵

[JoshE]

Maybe this will help?
http://en.wikipedia.org/wiki/Bankers’_acceptance