In Us We Trust

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.

20 Comments

  1. ansonburlingame

     /  April 13, 2013

    Duane,

    You are waxing philosophical herein, it seems to me. There is so much history and “science” (a lot of which is the guess work of personal preferences or “art”) behind the subject of money that it takes a lifetime of study to be able to begin to grasp all the nuances.

    Figure out the right way to use money is like trying to apply the Theory or Relativity to the modern world.

    Any “idiot” knows that government, regulation of banks and corporations, creating various forms of national (or personal) defense, and the list goes on is needed. The challenge of course is how much of that “stuff” is needed.

    America was formed with the idea that personal freedom and liberty should prevail to the greatest extent and only let government take on the really big things that only the “collective” could manage. So today we argue over what exactly are the “big things” today and proceed to spend too much money when that definition gets too big.

    Money may well only be an “idea”, but that idea will bring down individuals, businesses of all sorts, states and nations if we use money in the wrong way or try to obtain it in the wrong way as well.

    Economics is the means that men have created to facilitate trade, the exhange of goods and services in a local market and around the world. Money is just like “chickens” (when used in barter trade) and has been around for a very long time. No one, no nation has gotten it exactly right in all that time, as well. But many have failed miserably, as well and look what happened then. Now what caused that downfall, money or GREED, and how does anyone define greed today?

    Anson

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  2. middlechildwoman

     /  April 13, 2013

    AB, the Koch brothers are synonymous with “greed”. Not a definition, but merely a synonym.

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    • ansonburlingame

       /  April 15, 2013

      And for George Sorous???? I don’t know any of them personally and thus do not make value judgments of their “sins”, all 7 of them. But I can read about their politics and make judgments on such counts.

      Anson

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  3. Duane,

    There is another aspect here and that is the notion that all money is green. That is, we don’t have red money that goes for groceries and blue money that goes for utilities and brown money that goes for clothes, etc. (Instead of colors, some people use jars or tin cans or cigar boxes.) This is a simple way of allocating limited funds to (1) set priorities, (3) determine if a credit facility is needed, and (3) combine those factors into a meaningful budget for now and into the future.

    In the case of the federal government, “needs” are determined by Congress and funds allocated to meet those needs are based on some kind of priority system. Of course, these functions are the primary source of political conflict. Conservatives like strong defense at the expense of the social safety net (entitlement programs.) Liberals tend to be, well, liberal when it comes to government involvement in people’s lives. Conservatives measure success based on the accumulation of wealth; they are materialists. Liberals measure success based on achievement; they are idealists. An easier way to say it is that Conservatives prefer profits over people, whereas liberals prefer people over profits.

    At its core, economics is an organized method of making the most efficient use of limited resources. That would be easier to do if money was in different colors so you couldn’t use red money to make up for a shortage of blue money, etc. No, the fight over our monetary (and fiscal) systems today is between the materialists and the idealists. There will never be agreement by these two extremes. But maybe there can be a middle road — a compromise if you will. Sadly, even that is becoming more and more difficult.

    Herb

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    • I think I’d think of a conservative at best as being pro-people, but weary of the ability of people running the state to not turn high minded goals for ‘society’ into mean to serve the interest of smaller more well defined groups that further their interests. In fact most conservative now don’t adhere to that, they mostly are I think serving the interests of narrow groups more than liberals. They’re not pro-free market; they’re pro-business and the rich. The corruption of consevatism is a tragic thing, or maybe I’m deluded and its never existed.

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      • You put your finger on the problem with conservatism, Bruce. However high-minded it might begin in theory, in practice it is doomed to devolve into a protection racket for the wealthy because its philosophy is advanced by the wealthy.

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    • As I re-read this, it’s not very clear, is it? I was really just riffing on a couple of themes and they all just kind of banged into each other. Anyways, my bad. You may now go back to sleep.

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    • You said,

      At its core, economics is an organized method of making the most efficient use of limited resources.

      Isn’t whether economics should be “organized” pretty close to defining the debate between Keynes and Hayek?

      I know people who would argue with you that calling economics an “organized method” is exactly what is wrong with people like you (and me).

      And by the way, I enjoyed your excellent column on guns in the Globe.

      Duane

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      • OK, well, yes, “organized method” is probably not the best description for economics. But I didn’t want to call it science because if it is science, it’s terrible at predicting outcomes.

        And there is certainly more to economic thought than the Keynes/Hayek dichotomy. Don’t forget Milton Friedman and Ludwig von Mises, not to mention Adam Smith. And these days we have expanded the extremes with the likes of Ben Bernanke and Joesph Stiglitz.

        George Bernard Shaw famously said, “If all economists were laid end to end, they would not reach a conclusion.” I say, if all the economists were laid, they wouldn’t care about reaching a conclusion.

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  4. “money truly is an idea rather than a thing.”

    Just so. Money is an accounting method through which agreeable parties accept obligations and incur debts for some sort of productivity, whether that be some hours of labor or something of value. Government seems to be required to make the concept work, unless the medium of exchange is something precious in and of itself, like gold. And at it’s core is the principle of fairness, something never successfully arbitrated except for the singular mechanism of capitalism, something dependent on survivalist qualities.

    As correctly stated in Duane’s post, money truly is an idea rather than a thing. An experiment in the concept of money has recently appeared in human affairs. It is the bitcoin. I submit that the bitcoin is instructive of the concept, and interestingly it is backed by no government whatsoever.

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  5. Managed Fiat Money (The Fed) or a gold standard are both nothing more than a promise to adhere to some behavior. For fiat money to manage the quantity of money to match the demand for it at a predictable path for the price level. For the gold standard to trade the dollar for a fixed amount of gold. The latter means that the price can go hither and yon but the dollar price of the currency is stable. It doesn’t seem to hard to me to see the former has better characteristics than the latter, and the promise underlying the gold is always subject to being broken, just like for fiat money. I vote for the fed.

    By the way I quibble with calling money physical, much of the money supply is nothing but accounting entries kept in computers – anything but tangible.

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    • I vote for the fed, too, since it represents an attempt to bring some rationality into the economy. In fact, it puts the “policy” in monetary policy.

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  6. I’m at loss on the bankers main point, other than that were all really bad children.

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    • It’s as if he just sat down and jotted down whatever came into his mind and then said to hell with editing. Why the Joplin Globe printed it without editing it or asking him to edit it is beyond me. Well, it’s not really beyond me, but I’m being polite.

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  7. scott eastman

     /  April 14, 2013

    I found that Globe article and read it. I found it amusing that Konrad spent the entire piece basically explaining that we shouldn’t get too worked up about the debt… but he just couldn’t break completely free from his gold standard mentality.. at the end he sounds a bit of an alarm. thought it was somewhat funny.

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    • I’m glad I wasn’t the only who the piece was strange, especially coming from someone who in the past has sounded the alarm about debt and deficits.

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  8. scott eastman

     /  April 14, 2013

    Bruce, that last point is a good one. This really is about ideology and behavior. My real feeling about it all is that this whole idea of being so fiscally responsible is really meant for the little guy. The big guys don’t play by these same rules they hand down to everyone else. And that is what keeps the game the way it is… maintains the status quo.

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    • Yes, that’s it. “Fiscal responsibility” always seems to fall on the working stiff or his future retirement benefits.

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  9. ansonburlingame

     /  April 15, 2013

    Not a bad discussion, at all, except, HERB on one point, where he tried again to define liberals and conservatives. He wrote:

    “Conservatives measure success based on the accumulation of wealth; they are materialists. Liberals measure success based on achievement; they are idealists. An easier way to say it is that Conservatives prefer profits over people, whereas liberals prefer people over profits.”

    Well I am a conservative, for sure but I value real achievement over money in MANY cases. Hell my whole naval career was based on achieving things and NOT the money I was paid. I would have left the Navy in a flash if money was my objective.

    As well, in all my attempts to work professionally I was a “people person” first and foremost if you can believe that one. The success of any organization, Navy or civilian depended on the PEOPLE, people doing their jobs for which they were paid to do, correctly, efficiently and “humanely” as well.

    In any organization good people produce good profits and bad people drain the profits for only themselves or their group. Society needs both, good people and good profits. Find the right people and inspire them to achieve good things and the rest will follow, in my view.

    Anson

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