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“He who controls the money supply of a nation controls the nation”: James Garfield
October 3, 2009 4:31 AM   Subscribe

The First Bank of the United States was Americas first attempt at forming a Central Bank. Inaugurated by Congress in 1791, it was followed by The Second Bank of the United States, which was dissolved in 1836.

And then The United States of America was without a Central Bank for 77 years.

Those were hardly halcyon years; as US States and banks shared responsibility for printing money, inflation, asset volatility, market crashes and even depressions were common, for example The Financial Panic of 1837, The Panic of 1857, The Panic of 1873 (aka "The Long Depression"), The Panic of 1893, and the Panic of 1907.

Central Banks serve two very important groups of customers: they provide banking services both to the government as well as retail, commercial and investment banks. Also, as recent events have shown, the importance of their role as "lender of last resort" in time of financial stress (systemic as well as specific) can not be underestimated.

Regardless, suspicion of Central Banking is very high in post bailout America, leading to a variety of demands ranging from requests for an audit of The Federal Reserve, to more extreme views that The Federal Reserve should be abolished altogether.

But if not The Fed then who would control the nation's money supply?
posted by Mutant (54 comments total) 33 users marked this as a favorite

 
I found Greenback by Jason Goodwin, a history of the dollar, to be a very good guide to this fascinating and forgotten period for someone who knew nothing about it. It was crazy, with just about anyone capable of calling themselves a bank and issuing dolars.

But hist! I hear the thundering hooves of mounted legions of goldbugs and Ron Paul supporters, and must away.
posted by WPW at 4:54 AM on October 3, 2009 [7 favorites]


The cabal, surely?
posted by pompomtom at 5:16 AM on October 3, 2009


Why is it that there are more people complaining about bailouts than there are people complaining about those who were bailed out?
posted by Saydur at 5:25 AM on October 3, 2009 [2 favorites]


As someone who likes my financial history on a platter (youngin, short attention span, all that), I appreciate the point-of-view of this post as much as all the links.
posted by sachinag at 5:25 AM on October 3, 2009


If you'll note, almost always with panics and crashes, you get an economic boom driven by false promises, via currencies that are not actually convertible for what they say they are. Then, as the boom peaks, it's discovered that the currencies are, in fact, false, and the economy goes into very dramatic contraction, because the debts that were taken on were no good. Debts function as a form of currency as well, and this worsens the deflation. Entrepreneurs made their economic projections using false information, and were thus misled into overbuilding, and the low prices caused by the combination of oversupply and loss of liquidity cause a self-reinforcing contraction that does terrible damage.

But a very great chunk of that damage is just revealed via the deflation, rather than caused by it; much of the damage was actually done during the prior inflation/boom. (the "overbuilding" part.) The false prosperity induced by liquidity injection was the root of the problem. Absent artificial stimulation, the booms, and thus the following recessions, would be far smaller and less severe.

Fast forward to modernity, and all we have anymore is liquidity injection; we have no idea what the economy can even do without the constant overstimulation of money from nothing. The Long Term Capital Management fiasco led to huge bailouts and liquidity injection to fight the "Asian Flu"; this set off the Nasdaq mania. When that blew up, the massive liquidity injections and ridiculously low interest rates, to try to dodge the fallout from that overbuilding and excess optimism, caused another round of overbuilding and excess optimism, the property and debt manias.

That round of overstimulation just almost caused a gigantic crash; the reality of our massive leverage and inability to actually pay the debts we've incurred, at least at par value, were briefly revealed. The Fed has been attempting to cover over this ugly truth with the largest monetary intervention in world history. Among many, many other interventions, handing out trillions of dollars in total secrecy, at this point they are the housing market. Their total injections of currency-from-nothing into the mortgage market appear to actually be in excess of the total loans being made. There doesn't appear to be a significant private mortgage market anymore. If you get a house loan, it's extremely likely to be guaranteed by the government via Fannie Mae and Freddie Mac, and funded by the Federal Reserve. This is, of course, highly inflationary, not to mention an incredibly conflicted position for a government to be in.

The liquidity and poor lending standards will, in turn, cause yet more overbuilding and misallocation of resources, doing yet more damage to an already very sick economy. It's much like treating an addict with more drugs. It makes the junkie feel great for awhile, but the damage to his system, and the pain of the eventual withdrawal, only gets worse with each and every hit.

The only way to get off drugs is to go through withdrawal; it can be managed somewhat, but raising the dose will not get the patient healthy again.

Bailouts feel wonderful, but they always have a price tag, and the systemic cost isn't always obvious. The simple enshrining of 'too big to fail' is very probably the single worst economic decision the United States has ever made.
posted by Malor at 6:53 AM on October 3, 2009 [16 favorites]


But if not The Fed then who would control the nation's money supply?

I'm willing.
posted by procrastination at 7:00 AM on October 3, 2009 [2 favorites]


Mutant and Malor really ought to have their own show on CNBC or some other cable network.
posted by briank at 7:43 AM on October 3, 2009 [9 favorites]


Which mod would we send to keep the peace?
posted by gman at 7:57 AM on October 3, 2009


lol
posted by d4v1dr0b3r7s0n at 8:01 AM on October 3, 2009


Bailouts feel wonderful, but they always have a price tag, and the systemic cost isn't always obvious.

Neither are the systemic benefits. In many cases the benefits ultimately ought weigh the costs. Sure lots of people got wiped out by the .com bubble, but it also left behind massive network capacity and established the initial business models allowing more sustainable businesses to thirve. If you only focus on the crash you forget the upside. All the cheap infrastructure that was built buy people in the last bubble that enables the next wave of entrepreneurs. There is only a problem if the next bubble doesn't materialize. So far it always has.
posted by humanfont at 8:07 AM on October 3, 2009


Malor: 'The Long Term Capital Management fiasco led to huge bailouts and liquidity injection to fight the "Asian Flu"'

Asian currency crisis: July 1997
LTCM: Sept 1998

I'm not exactly sure what your causal connection is there. My understanding is that the Asian currency crisis impacted LTCM, but it was the Russian (debt moratorium?) problem that was much more detrimental. Furthermore, the LTCM bailout was private money (the consortium), but suggested by FRBNY - but I don't believe the Fed was privy to the details or the terms and conditions of the agreement - so moral suasion only. Which injection are you talking about relating to LTCM?
posted by rider at 8:08 AM on October 3, 2009 [2 favorites]


Look, all I'm saying is that MY money would come in flavors, have good fiber-to-fat ratio, and look cooler than all this weirdo lavender-green oversized numbers pablum you all think is so cool.

A vote for me is a vote for feed!
posted by Lipstick Thespian at 8:19 AM on October 3, 2009


The Bank of the United States also played a central role in the canonical Constitutional law case of McCulloch v. Maryland. Very cool.
posted by leotrotsky at 8:39 AM on October 3, 2009


More like McCulloch v. Maryland played a central role in the Bank of the United States, amirite?

Nice try, 1L
posted by jock@law at 8:47 AM on October 3, 2009 [1 favorite]


Soylent greenbacks is made out of people!
posted by jonp72 at 9:07 AM on October 3, 2009 [1 favorite]


humanfont: All the cheap infrastructure that was built buy people in the last bubble that enables the next wave of entrepreneurs. There is only a problem if the next bubble doesn't materialize. So far it always has.

Which is why there many people, and I suspect that Malor is in this group, feel that a financial and housing bubble is pretty much a disaster. We are propping up banks that lent huge amounts of money to people who used it to buy too-big houses filled with crown molding and granite counter tops. What productive use are we going to make of a financial infrastructure that exists to earn fees making bad loans and too-numerous houses that don't really produce anything?
posted by procrastination at 9:22 AM on October 3, 2009


But if not The Fed then who would control the nation's money supply?
The Illuminati? Warren Buffet? Oh, wait, they're the same.
posted by joetrip at 9:37 AM on October 3, 2009 [1 favorite]


Which is why there many people, and I suspect that Malor is in this group, feel that a financial and housing bubble is pretty much a disaster. We are propping up banks that lent huge amounts of money to people who used it to buy too-big houses filled with crown molding and granite counter tops.

There were plenty of high density upscale urban condos built too. Also manny inner siburbs saw a massive influx of younger families and updates to existing stock. The surplus exists and someone will figure out a way.
posted by humanfont at 10:00 AM on October 3, 2009


How independent must the Central Bank be to do it's work? New Zealand's Reserve Bank has explicit inflation targets, and the head can be fired if he fails to deliver target inflation rates.

I don't necessarily agree with these arguments, but I'd like to have better reasons to disagree than I currently do:

Economists’ Pro-Fed Petition Discredits Its Signers
for more than a century before the Fed’s establishment, the purchasing power of the dollar fluctuated around an approximately horizontal trend line—that is, despite inflations and deflations usually associated with the wartime issuance of fiat money and the postwar return to specie-backed currency, the dollar more or less retained its exchange value against goods and services over the long run, whereas since the Fed’s establishment the dollar has lost more than 95 percent of its purchasing power.
The Quiet Coup
Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. I vividly remember a meeting in early 2008—attended by top policy makers from a handful of rich countries—at which the chair casually proclaimed, to the room’s general approval, that the best preparation for becoming a central-bank governor was to work first as an investment banker. [...]

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.
Should the Fed be Audited?
I perceive signs of what Danny Kaufmann calls "cognitive capture" of the Fed by the banks that it regulates. That is, the Fed sees the world through the eyes of the executives at large banks. [...] The audit that I would like to see is one that examines how the Fed determined that the financial crisis should have been treated as consisting largely of an extraordinary loss of confidence, rather than consisting of mostly bad bets with excessive leverage.
I tend to prefer expert management of the currency supply, but that doesn't mean that experts, captured by private interests and ideologies, aren't occasionally just as bad, if not worse, than the ignorant masses because those biases systematically undermine the legitimacy and efficacy of the system the experts purport to regulate.
posted by anotherpanacea at 10:13 AM on October 3, 2009


My mistake. I should have said "too expensive" instead of "too big". But I don't have much confidence in "Someone will figure out a way". I think we made a big financial mistake, we have taken on too much debt in the pursuit of non-productive enterprise, and working our way out of it is going to be a long and painful process.
posted by procrastination at 10:14 AM on October 3, 2009


Between Mutant and Malor it sounds like the classic centralized vs decentralized power debate. I must confess I was pro Ron Paul on this issue until I read Mutant's arguments.

Having a centralized bank can lead to a simple and unified monetary system as well as putting monetary regulation in the hands of a single body. While this has many advantages it is easier for a single entity to corrupt.

A decentralized banking system would be harder to corrupt but it would be less effective and result in the chaos mutant describes. In my opinion, I believe there would be a private banking monopoly or cartel by now if the Federal Reserve hadn't already filled that spot.

Also, isn't there some kind of lack of transparency in the Federal Reserve that's missing in this debate. I've got to go to work soon so I can't muck through the wikipedia article and figure out the details. Does anyone know what I'm talking about? I've heard passing references to a secret board of stakeholders or something.
posted by Pseudology at 10:33 AM on October 3, 2009


as US States and banks shared responsibility for printing money, inflation, asset volatility, market crashes and even depressions were common, for example The Financial Panic of 1837, The Panic of 1857, The Panic of 1873 (aka "The Long Depression"), The Panic of 1893, and the Panic of 1907.

Post-World War I recession (1918), Recession of 1921, Recession of 1923, Recession of 1926, Great depression (1929), Roosevelt Recession (1937), Recession of 1945, Recession of 1953, Recession of 1958, Recession of 1960, Recession of 1969, Recession of 1973, Recession of 1980, Early 1980s recession (1981), Early 1990s recession (1990), Recession of early 2000s, Recession of late 2000s (now).

/me takes a deep breath

Silver Thursday, Black Monday, junk bonds, S&L crisis, LTCM, dotcom bubble, housing bubble, financials bubble (and the ensuing destruction of the IBs).

The second list is the stuff that's happened in my lifetime. I'm sure an older person could name more events.

So what sort of stability has the Fed brought to the boom/bust cycle?
posted by ryoshu at 11:24 AM on October 3, 2009 [1 favorite]


Mutant and Malor really ought to have their own show on CNBC or some other cable network.

With rough ashlar as the wacky neighbor!
posted by Pope Guilty at 11:26 AM on October 3, 2009 [1 favorite]


Hmm, and two massive needless tax cuts for the super-rich, two pointless massive and expensive wars, and a government with an agenda to keep the costs of all of this hidden and the majority of the population subdued with no sacrifices until its 8 years is up had nothing to do with our current crisis?
posted by peppito at 12:01 PM on October 3, 2009 [2 favorites]


So what sort of stability has the Fed brought to the boom/bust cycle?

It's not just mere existence of an entity called the Federal Reserve, but the answer is "any plot of change in real US gdp." The singular feature in any such plot is the nearly complete collapse of the standard deviation after about 1950.
posted by ROU_Xenophobe at 12:23 PM on October 3, 2009


But a very great chunk of that damage is just revealed via the deflation, rather than caused by it; much of the damage was actually done during the prior inflation/boom. (the "overbuilding" part.) The false prosperity induced by liquidity injection was the root of the problem. Absent artificial stimulation, the booms, and thus the following recessions, would be far smaller and less severe.

Deflation would be even worse with something like a gold backed currency. Duh.
posted by delmoi at 12:31 PM on October 3, 2009


Post-World War I recession (1918), Recession of 1921, Recession of 1923, Recession of 1926, Great depression (1929), Roosevelt Recession (1937), Recession of 1945, Recession of 1953, Recession of 1958, Recession of 1960, Recession of 1969, Recession of 1973, Recession of 1980, Early 1980s recession (1981), Early 1990s recession (1990), Recession of early 2000s, Recession of late 2000s (now).

you notice those are "recessions" rather then "Panics", right?
posted by delmoi at 12:34 PM on October 3, 2009


I wouldn't equate a recession to the panics like those that happened prior to the Fed, nor the dotcom bubble, the S&L crisis, etc. Those are minor league compared to the panics and the depressions. This current recession would have been equal to any of them, probably even worse, but the Fed saved us. Imagine a major panic every 15 years or so -- that's what we had prior to the Fed. I don't mean a mere recession, I mean major collapses, everyone losing everything, then starting over, just to have it happen again right as people were getting their feet back under them...over and over and over, generation after generation.

No system will ever be perfect, with flawless stability. For that to happen, there would have to be no risk anywhere and life isn't like that. But by and large, the Fed has prevented the occasional bad from becoming the unimaginably horrendous. Had the Fed not stepped in this time, well, I don't know what might have happened, but it could have been oh so much worse, maybe even end-of-civilization-as-we-know-it bad.
posted by jamstigator at 12:45 PM on October 3, 2009


Post-World War I recession (1918), Recession of 1921, Recession of 1923, Recession of 1926, Great depression (1929), Roosevelt Recession (1937), Recession of 1945, Recession of 1953, Recession of 1958, Recession of 1960, Recession of 1969, Recession of 1973, Recession of 1980, Early 1980s recession (1981), Early 1990s recession (1990), Recession of early 2000s, Recession of late 2000s (now).

The severity and duration of the earlier panics generally was much greater than the later recessions (with the exception of the Great Depression). You can't just count dates -- you have to look at the numbers behind those dates. The Fed has successfully been a moderating force, especially after learning the lessons of the GD.
posted by JackFlash at 2:05 PM on October 3, 2009


you notice those are "recessions" rather then "Panics", right?

In 1929 there was the mother of all panics called The Great Depression. The Fed caused it (don't take my word for it, Bernanke admitted it). Fast forward 70 years and we get the Fed, once again, keeping interest rates low, creating an asset bubble and another crash.

It's like some drunk guy at a party taking a dump on your floor then patting himself on the back for cleaning up the mess. Everyone would be much happier if the guy would just stop shitting on the floor.
posted by ryoshu at 2:12 PM on October 3, 2009 [1 favorite]


So what sort of stability has the Fed brought to the boom/bust cycle?

Other than the Great Depression, the scale of the busts have been much smaller.

The Panic of 1893, for example, led to either a severe recession or a full-blown depression depending on what economist or historian you're talking to. Unemployment in the US was above 10% for a solid four years. Companies collapsed left and right, including several major railroads. (Do you know why haunted houses are always Victorian houses? Because the foreclosure rate was so high in the aftermath of the Panic that people were walking away from homes left and right -- and those houses sat vacant for decades, giving rise to neighbor kid myths about the scary old house.)

Here's the thing, though: 1893 came on the back of the Panic of 1873, which was essentially a 20 year post-Civil War recession. After the economy normalized in 1901, there were only six years until the next big calamity, the Panic of 1907, which led to a short recession. So, in essence, from 1865 to 1910, the US spent most of that time with recessionary economic conditions (with some big booms in between).

Since 1907, we've had the Great Depression -- which was the fault of the Fed and Congress refusing to intervene constructively before 1933 -- and a lot of recessions that look small by comparison. The current recession is looking similar to 1893, so the question is whether we'll come out of it in eight years like in 1893 or just a couple of years like all recessions since the 1937-40 recession.

I think the arguments of people like Malor are valid -- eventually, we will have a cataclysmic depression because of all the borrowing, and what we're essentially doing is trying to backfill the market valleys while not cutting anything off the market peaks. At the same time, though, we have a lot more ways to control the situation than we would under some Austrian School return to precious metal backed currency. Most of the world's precious metal reserves have been played out, so putting more capital into the market would be impossible with the gold standard. It would only make capital so precious that it would encourage those at the top to hoard and not distribute it to keep the wheels of capitalism moving. With fiat you can add and withdraw capital as needed. It's harder to understand, and it's tricky to master, but as long as we have smart people managing the system and not trying to game it, we can continue to ameliorate the busts.

Of course, the problem is that humans still run the system, so gaming and incompetence are always possible.
posted by dw at 2:13 PM on October 3, 2009 [2 favorites]


I would also be curious to know if the panics of the 1800s would have occurred if the protections we have now -- thanks to The Great Depression -- had been in place then. Wasn't one of the big problems with the panics the run on banks? The Fed did jack all to stop that from happening.
posted by ryoshu at 2:18 PM on October 3, 2009


In 1929 there was the mother of all panics called The Great Depression. The Fed caused it (don't take my word for it, Bernanke admitted it).

OK, let's understand why the Fed is partly responsible for The Great Depression.

They did nothing. They let the banks fail. And as the banks failed, confidence in banks dropped, leading people to withdraw their money from the banks, leading banks to fail, confidence in banks dropped... you get the picture.

The Fed's attitude was this was part of the normal capitalist system, that things were going to fail and it's best to just get out of the way. Unfortunately, this wasn't some normal capitalist process but a cascading set of systemic failures that fed itself.

Here's a good timeline of the (non-)interventions.

This time out, Bernanke, a student of the Great Depression, went the opposite way. Aggressive intervention, almost in a kitchen sink sort of way. But given that the markets are far, far more integrated into everyday American life, just standing by and letting it fail was simply not an option. It took three years for unemployment to go from 3.2% to 25%. Without intervention we'd probably already be at 20% now. The interventions, even though they lined the pockets of the rich banks, calmed a roiling capital market that was scared even their money market accounts were going to be belly up. The stimulus has blunted unemployment and helped to slow the foreclosure crisis. The global economy is weaker than it was, but other than Austrian School sorts and anti-Obama types cheering for the end of the global economy, everyone seems to feel like, for the moment, things are stable and it's worth investing again.

Will the interventions ultimately work? Who knows. I worry about the inflationary side effects that could be coming as early as next year (part of the reason why gold and platinum prices are up), but at least right now I don't feel like it's last October when I was worrying whether the money I had in a money market was going to be gone tomorrow.
posted by dw at 2:33 PM on October 3, 2009 [1 favorite]


Wasn't one of the big problems with the panics the run on banks? The Fed did jack all to stop that from happening.

Yes, and that's why there's the FDIC. End of the day, banks answer to the FDIC, not the Fed.

If the FDIC had been around in the 19th century, the bank runs would have been much less gruesome.
posted by dw at 2:36 PM on October 3, 2009


How do you define money?
posted by up in the old hotel at 3:12 PM on October 3, 2009 [1 favorite]


It took three years for unemployment to go from 3.2% to 25%. Without intervention we'd probably already be at 20% now.

Come on now — you can't compare Depression-era unemployment rates with the official unemployment rates of today; the BLS has tightened the criteria for being counted several times since the 1930s. The broader U-6 is at 17%.

at least right now I don't feel like it's last October when I was worrying whether the money I had in a money market was going to be gone tomorrow

Unemployment's up over 50% since then, but hey, as long as investors are OK, fuck workers, I guess.

End of the day, banks answer to the FDIC

Which agency, having depleted its reserves, is planning to fund itself by going into hock to those very banks in a plan which could not possibly go wrong.
posted by enn at 4:38 PM on October 3, 2009


I'm not agreeing with either Malor or Mutant, yet. But it seems to me, over-simply, that the Banks have been in control of the monetary supply by default through the extension of vast, vast amounts of credit (and i'm looking at the securitization of real estate just as much as the 'do you have a pulse then here have a loan' mentality).

They did so with 'irrational exuberance,' (was that an apology Greenspan, or were you throwing rocks?) and now Dad has to come in and clean up the mess. With a credit card. And a printing press. Which I'm not convinced aren't really the same thing.

A bit cynically, I think the kids will just keep playing the game until they break it... it's not like they paid for it (and then you add the quip about how "in the long run we are all dead," so no worries about kicking that can-'o-debt down the road just a bit farther). It's got us this far and we're still playing.

I mean, is it not the government's position to even still not reinstate Glass Steagall? (WTF government?)

So I'm stuck unable to take either position (pro central bank or no) for lack of faith. I lean towards the central bank because the alternative is just too much unknown, but I think the system is not able to be entirely controlled. Even by the best and brightest. I also have some serious current misgivings about Neo-classical economics which seems to have seriously screwed the pooch in the last year.

slightly of topic - I will use this commercial break to re-introduce the concept of the Paranoid Style in American politics (Linked to with no irony meant whatsoever.). It seems relevant to me for this thread, given the link to Mr. Paul's new book there at the end. While I like some of the positions that RP takes, I am tempted to dismiss as a straw man many of his arguments as a matter of course.
posted by ilovemytoaster at 4:47 PM on October 3, 2009


Trying to reimpose the gold standard is like trying to re-establish a heliocentric universe. It won't happen no matter how many websites lunatics put up. Modern banking has evolved beyond gold. It is just a commodity. Money is just a thing we invented. We might as well fix our economy to unobtanium. Glass-Stegall died bacause it is incompatible with global banking. It hardly stopped the s&l fiasco or the Latin American debt crisis or the asian economic flu.
posted by humanfont at 5:59 PM on October 3, 2009 [2 favorites]


Any mefi-financial people have any comment on the Canadian banking system? Canadian politicians (PM Harper for one) crow endlessly about how glorious and stable the banks are up here. Any insight as to why, or whether that's mostly luck/B.S.?
posted by Decimask at 6:49 PM on October 3, 2009


The FDIC is funded by premiums paid by the banks whose deposits it insures. Pursuant to the Deposit Insurance Act of 1996, the FDIC collected no premiums from 90% of all insured banks until the passage of the Federal Deposit Insurance Reform Act of 2005. These banks were still insured from 1996 to 2006, they just didn't pay for it. (here) Now, banks are failing and the FDIC is spending billions to protect the failed banks' depositors. But the banks think it unfair that they should be asked to pay a large premium assessment, and hoi polloi flop their heads and drop their jaws and agree what a stupid idea that is.

I dunno. Works for me.
posted by carping demon at 8:52 PM on October 3, 2009


How do you define money?

Money is what's left over when you have an uneven exchange of goods or services.
posted by empath at 9:51 PM on October 3, 2009


I'll elaborate a bit.

If 4 chickens are as valuable as a sheep, and I give you 4 chickens in exchange for a sheep, there's no need for money. A fair exchange was made and that's the end of it.

If I give you 3 chickens plus a promise to give you one more at a later date for the sheep, then the IOU is essentially money, especially if the IOU is transferrable.

Now, a situation where everyone is handing out IOU's for various products from various vendors is kind of a disaster. So traditionally, money systems have standardized around IOUs for a particular commodity that has a few qualities -- it's portable, it has a certain value that everyone agrees on, etc. Gold happens to possess a lot of those qualities, but it's not the only commodoty one can use.

In the US what you essentially have is labor. Because all workers are required by law to accept US dollars for their wages(if you work for 2 weeks, your employer has a debt to you -- the law is that all debts must be able to be paid with US dollars), everyone else will accept us dollars for exchange of goods and services -- they know that ultimately, they can hire someone to work for them with the money, which is something that has value.

What you're essentially doing when you buy a big mac is paying someone with an IOU for $5 worth of American labor, whatever the going rate for it is at the time.

That's money. Or at least how I think of it. But I'm no economist.
posted by empath at 10:00 PM on October 3, 2009 [1 favorite]


(Do you know why haunted houses are always Victorian houses? Because the foreclosure rate was so high in the aftermath of the Panic that people were walking away from homes left and right -- and those houses sat vacant for decades, giving rise to neighbor kid myths about the scary old house.)

Does that mean, in about 50 years kids will tell ghost stories about that rickety old McMansion down the street?
posted by krinklyfig at 11:07 PM on October 3, 2009


What you're essentially doing when you buy a big mac is paying someone with an IOU for $5 worth of American labor, whatever the going rate for it is at the time.

Money can mean different things. When it was based on gold it represented gold at a fundamental level. Now it's not, but the dollar has been the de facto currency for oil pricing for a long time, so in a very tangible way the dollar is pegged to oil, or "petrodollar." There has been a move towards the euro as the global oil currency, so the dollar may become decoupled from oil.

Money often does come down to energy costs, which is labor of a sort, just not involving salaries or beasts of burden. But concentrated energy resources like oil are the largest source of "labor" for people today.
posted by krinklyfig at 11:18 PM on October 3, 2009


Thank you, carping demon. This piece of the information keeps being left out of nearly all reporting about this new FDIC development, and it is making me tired. The banks convinced the FDIC that, since the economy was doing so well, they shouldn't be required to pay their premiums for a decade, and Congress went along with it. The members of Congress who allowed that to happen should have to answer for that decision in front of the full membership, if for nothing else, to have a bit of public shaming for making such a fucking stupid decision.
posted by hippybear at 12:02 AM on October 4, 2009 [1 favorite]


Extreme deflation would be a death blow for the American government, the interest from the national debt alone would be unmanageable.

The government depends on a consistent level of inflation to make sure they can keep up with their almost overwhelming debt. The government wants inflation. Whether this policy will work out or not remains to be seen.
posted by chlorus at 12:17 AM on October 4, 2009


In response to questions up thread regarding stability provided by The Fed (and to support previous responses), there are academic studies about recessions and Central Bank's impact these economic cycles. Romer (1999)1 mentions [ .pdf ] (as a freely available example).

"Major real macroeconomic indicators have not become dramatically more stable between the pre-World War I and post-World War II eras, and recessions have become only slightly less severe on average. Recessions have, however, become less frequent and more uniform over time."

however she goes on later to note the mitigating source

"Increasing government control of aggregate demand in the postwar era has served to dampen many recessions and counteract some shocks entirely. Thus, the advent of effective aggregate demand management after World War II explains why cycles have become less frequent and less likely to mushroom."

She also quotes Arthur Burns - whose record as Fed Chairman we've previously discussed here, having started the 1970's inflation cycle - “[T]he business cycle is unlikely to be as disturbing or troublesome to our children as it once was to our fathers.”

The paper is an interesting read, and fairly accessible.

Regardless, I have to admit I'm still not comfortable with calls to eliminate The Fed's role, putting management of the money supply squarely into the private sector.

It seems Ron Paul's legislation is really more of a way to put pressure on The Fed than something intended to privatise monetary policy - or one can only hope.


1Romer, C., D. 1999, Changes in Business Cycles: Evidence and Explanations, The Journal of Economic Perspectives, Volume 13, Number 2, Pages 23–44

posted by Mutant at 4:55 AM on October 4, 2009 [2 favorites]


(Do you know why haunted houses are always Victorian houses? Because the foreclosure rate was so high in the aftermath of the Panic that people were walking away from homes left and right -- and those houses sat vacant for decades, giving rise to neighbor kid myths about the scary old house.)

Does that mean, in about 50 years kids will tell ghost stories about that rickety old McMansion down the street?


In fifty years? I'd be surprised if kids aren't telling stories about the abandoned subdivisions right now. Those places are creepy.
posted by dinty_moore at 5:29 AM on October 4, 2009


Most of the world's precious metal reserves have been played out, so putting more capital into the market would be impossible with the gold standard. It would only make capital so precious that it would encourage those at the top to hoard and not distribute it to keep the wheels of capitalism moving.

It always seems interesting to me that there doesn't seem to be an adequate explanation of how we'd avoid economies becoming a zero-sum game based purely on asset seizure. If your pile of gold is ten times the size of my pile of gold, you've got ten times my wealth. The only meaningful way to get richer is to dig holes in the ground or take someone else's gold. Since the amount of gold in the world is effectively fixed (on any non-geological time scale) the amount of wealth is, too. I can easily picture a spiral into the world's intellects being bent to ways of extracting more gold from hitherto untapped sources as the only real way to increase wealth, while things like, say, developing better medicines or ways of cutting silicon fall by the wayside.

How do you define money?

It's a useful consensual hallucination that lets me abstract away having to constantly renegotiate how to turn my computer expertise into food and shelter, in much they same way property rights are a convenient fiction that stop me having to stand on my section with a club and defend it against all-comers.
posted by rodgerd at 1:37 PM on October 4, 2009


Excellent points rodgerd. Of course there isn't exactly consensus about how fixed the overall supply of gold is. Like all industrial materials a substitute may take demand away from industrial uses freeing more for horsding. A decline in usage in jewelry by changing amalgums could also impact supplies. One Goldfinger incident nuking zone country's stockpile and you'd have chaos. One big discovery in Antarctica or on a near earth asteroid and you might have inflation like the Spanish saw post discovery of the Americas.
posted by humanfont at 2:02 PM on October 4, 2009


Does that mean, in about 50 years kids will tell ghost stories about that rickety old McMansion down the street?

Given the way they're constructed, in 50 years they'll have long ago collapsed into a pile of mushy, rotten drywall and granite countertops.
posted by dw at 2:43 PM on October 4, 2009


Do you know why haunted houses are always Victorian houses? Because the foreclosure rate was so high in the aftermath of the Panic that people were walking away from homes left and right -- and those houses sat vacant for decades, giving rise to neighbor kid myths about the scary old house.
Lovely. Thanks for an illustrative example; now I understand the whole foreclosure thing perfectly!
posted by the cydonian at 6:17 AM on October 5, 2009


Money is exactly what it says right there in print on the face of the currency: a government issued debt note that's considered legal tender for all debts public and private.

What's that mean?

It means, we all agree that when you fix my plumbing, I owe you something in return. Theoretically, I owe you or--and this is the crucial point--someone else that you owe or will owe in turn, services or goods equal in economic value to those you delivered to me.

Luckily, I also do some kind of work that society considers to have economic value. But since you don't really need me to write you a PL/SQL package for migrating data into your data warehouse, it's lucky that someone else did, because as a result, I already have in my possession a number of state-authorized debt notes that some other party issued to me. So now, I can tender you a mutually agreed upon number of those debt notes on the spot instead of tendering actual services or goods to square our transaction.

Money let's us transact exchanges of goods and services with greater flexibility, because it provides a relatively stable mechanism we can all use to perform economic transactions without necessarily having to deliver real goods or services at the same time as we conduct our transactions.

That's what money is, and that's all it is. Everything else is speculation.
posted by saulgoodman at 7:30 AM on October 5, 2009 [1 favorite]


anotherpanacea said: "the Fed sees the world through the eyes of the executives at large banks."

In the decade to come, after the Fed has been audited by congressional legislation, and after the presumed shocking exposes of the Fed committing what amounts to dangerous embezzlement on a national and global scale, but just right before economists and academics reconstruct the historical crime scene and explain it for the pop-journalists to regurgitate to the public, maybe, just maybe, Americans will get around to asking "what went wrong at the Fed to cause them to be the core cause of the bubble that wiped out the country?"

I have a theory. What if the Fed got blindsided by relying too much on its member bank's financial data, in order to be the designated oracle of what the economy is doing at any given moment? The Fed has long has the same cache as the NSA for having sheer access to sensitive intelligence. Google it. After decades of total secrecy, at least some of the NSA's workings were published (by Bamford). I don't know that has happened for the Fed yet. The Fed is renowned for having canonical financial data about the entire economy, and then some; which they kind of have to do to comply with their congressional charter. So the really interesting question is "just how is the Fed getting it's own data?"

The Fed is a fraction of the NSA's size, obviously, and it's not like they have armies of specialized tiger teams ready to go gather intelligence while monitoring everyone else's intelligence at the same time. I bet they have arrangements with every single member bank for access to literally everything. To what extent this is public knowledge, I have no idea. In order to have the entire economy on tap, this is pretty much the only way to go about it—measure and record everything! But what if the Fed got caught in a weird feedback loop, where the data they were relying on from banks was not giving them an accurate model of the economy, but instead was giving them the banks inaccurate economic models?

One big hallmark in this bubble was how so many checks and balances got eliminated throughout the financial industry, with parties having direct financial incentives in the deals they were supposed to be supervising. Now what if this trend went all the way to the top—inside the Fed itself? The Fed can never reveal if and to what extent at all this happened. That would cause a true panic in the dollar, and lead to the rare yet inevitable flood-of-the-century political shifts!
posted by archae at 9:08 PM on October 5, 2009 [1 favorite]


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