Monday, July 20, 2009

Money is Tinkerbell

Money, as currently exists, is an entity whose usage is dependent on confidence, and whose value is dependent on interest rates. Interest itself isn't a trait native to money but is dependent upon the agencies responsible for the creation of money itself. In many countries, this is handled by a central bank; The Bank of England, for example, or in Germany the Bundesbank. In the United States, our central bank equivalent is the Federal Reserve, which is frequently attacked for being this shadowy, arbitrary, and impartial conspiracy unto itself. Given the nature of money, I like it for exactly those reasons.

Puzzled? You're not alone. The Nation recently authored a very thorough article discussing how to reform the Federal Reserve for the modern age, and to end the collusion between it and bankers. The article raises many valid points, and I'm still not entirely certain of my opposition to the plan it suggests.

Anyway. Here is my rough contrast between the Fed and Congress as vehicles for Money Generation in this nation.

Congress: explicit money generation (as, notably, stated in the constitution. Article 1, section 8). So what the Fed does (coin money, regulate the value thereof) are congressional powers. The traditional avenue for money expansion (growth through lending) requires that congress borrow money on the Credit of the United States, which itself seems to require a body outside the United States Government. Note: There is nothing here saying congress couldn't set the interest rate or will money into existence. Responsibilities other than money generation: the entire federal budget, as well as tax creation/other sources of federal income. Basically, all that spending that people look upon so unfavorably.

: Somewhat arcane money generation, thanks to it's backroom dealings with bankers and the inherent secrecy of its governing board. Controls interest on the dollar, can release surpluses of money that it wills into existence. There are more steps to the process, but the Fed, as the controller of dollar creation, can spontaneously have $80 billion to distribute into banks. Responsibilities other than money generation: regulation of banks, sort of. Which it has totally failed at. But it still does money generation fine.

On paper, there is no reason congress shouldn't generate money. But since money is confidence-based, and since it's explicit value (interest) is also tied to confidence, I am hesitant to put the money supply directly under congressional control. Congress, as a body, is not terribly confidence inspiring. It's like asking the audience to clap so that Captain Hook can live - it makes just as much sense as clapping for Tinkerbell, but no one likes Captain Hook, and so they'd all just let him die. In that sense, I think, the Fed does wonders. By playing an abstract role at a distance from the rest of government, it gets to appear weird and fickle and impartial. While it's more vulnerable today than it has been at almost any point since existence, the dollar is not being questioned. It is, as arbitrary currencies go, okay. What usually happens with massive injections of newly made money is hyperinflation, as prices go up and dollars become worth less. Right now, it looks like the dollar is deflating. As the fed injects new money, money is actually becoming more valuable. Even though we can see it being conjured into existence. It's strange, and I attribute it to the very obtuseness and arcane workings of the Fed.

This doesn't mean that the Fed is flawless, or that money is itself worthless. But because the value of money is largely dependent upon people thinking it has value, there is something to be said for money generation to be a detached, almost magical process. You've got to convince people to clap, and we'll keep doing it for Tinkerbell.


SableHairAngel said...

So if I clap my hands...Money will appear?

- Dani

Kelsey Atherton said...

well, not really. But if you have faith, money will work