A former banker writing in the Joplin Globe a few days ago (“Devaluing currency to offset spending is risky” ), spent 827 words trying to tell us something about inflation and debt and, well, lots of stuff, but very little of it made much sense to me. Bankers often don’t make much sense to me.
But the column reminded me of something I have always wondered about: How does money itself work?
Turns out the great Wonkblog posted a piece on Friday about that very subject, about “the nature of money.” And it turns out that, just as I suspected,
Money really is just a symbolic, mutually shared illusion.
We can hold dollars in our hands. They are real physical things. But they aren’t “money” unless they can buy stuff. Thus, although dollars are real things, “money truly is an idea rather than a thing.” The Wonkblog piece points out:
…what makes money money is what you can do with it. If you can purchase the goods and services that you want and need with it, it is money; if you can’t, it isn’t. Money is memory, said Narayana Kocherlakota in an important 1996 paper (he is now president of the Minneapolis Fed). It is the way we as a society record how much capacity to buy stuff each of us possess.
I broached this subject for one simple reason, which Wonkblog’s Neil Irwin put very well:
Once you accept that money truly is an idea rather than a thing, it becomes clearer that there is no single “right” way to run a monetary system. It is merely trying to figure out, through trial and error (and mankind has had plenty of error over our history), what system works best.
You see? As human beings, who presumably are trying to find ways to improve our individual and collective well-being, we are always experimenting, hopefully always learning from our successes and failures. And that doesn’t just apply to our monetary system. In all aspects of our culture, particularly regarding those things that require collective consideration and action, we should be getting better at figuring out what to do and what not to do as we address the inevitable change we see around us. Progress not regress.
But these days we see so many powerful forces around us that respond to the changes the modern world presents to us by demanding we go backwards—like, for instance, returning to the gold standard—rather than building on the advances we have made.
Neil Irwin ends his piece with what he calls a “fundamental truth”:
To function in a modern economy, you’re always putting your faith in something, whether you like it or not. And you may not like putting that faith in a powerful, independent central bank imbued with power from the state, but the alternatives may just be a lot worse.
And I will end this piece with my own related fundamental truth:
To function in the modern world, we’re always putting our faith in something. And we may not like putting our faith in a large and powerful government, but the alternatives, like just letting corporations and banks operate without oversight, or just letting folks starve in the streets, may just be a lot worse.