We all have an intimate relationship with money without really understanding what it is. Even experts at the Federal Reserve aren’t managing very well these days. Inflation is back, and the organization that’s supposed to prevent it isn’t doing so.
A common conspiratorial view is that if we have inflation, somebody must have planned it. And if you could plan to have inflation, you could just as easily plan to not have it.
Well, I think we have barely more control of the economy than we do of the weather. We can nudge it, but there are too many factors to manage all at once. Nobody wants inflation or recession, and yet sometimes they happen.
If we go back to the beginning, primitive people traded shells as coins. Everybody knew the shells had no value, but if we pretended shells were money, I could trade my hunting for your gathering without bartering. It’s the same today. Everybody knows that green papers with “Federal Reserve Note” printed on them only have value as long as we believe they do. And credit cards are even more imaginary. Why does anyone accept computer blips in the memory of a distant computer as evidence that I have paid for a sandwich? And yet, I get away with this scam every time I visit a restaurant.
People used to suffer from the mass delusion that gold was valuable. But you can’t eat gold. It’s not much good for making tools. It is barely considered attractive anymore. Only pimps and drug hustlers want to wear lots of it.
Have you ever seen Elon Musk wearing a big gold chain? Today, billionaires spend money on trips to space, not gold.
If gold has no more value than green paper, what does have real value? Stuff has value: wheat, steel, TVs, chocolate, cars, lumber—also, labor. My work and your work have value. Information has value. Ideas and art have value. Relationships have value. Love has value, even if you can’t put a price on it.
So a monetary system is a way to tie some artificial markers – coins, bills, checks, credit – to stuff like apples and movies. If the total value of all the stuff matches the face value of all the money, the economy works like a well-oiled machine. The officers of the Federal Reserve (and of central banks around the world) play with interest rates, reserve requirements and the discount window to keep money circulating. Congress gave them this power because they didn’t trust it to politicians (themselves). It’s like Ulysses tying himself to the mast so he wouldn’t be lured by sirens. The Federal Reserve uses its superpowers to juggle the money supply. They weigh interest rates against inflation to keep money working within a certain range. And then suddenly there’s a war or a natural disaster. Or the foolish voters elect an idiot. The controls don’t work so well. The stable economy starts swerving. Every politician and voter blames it on the Fed. That’s where Bitcoin and other cryptocurrencies were supposed to come in. Many people, especially libertarians, don’t like having a small group of unelected officials controlling the money system. One goal of cryptocurrency was to create a stable alternate money system outside of government.
Instead of the Fed playing magician, the supply of Bitcoin would be controlled by a mathematical process called data mining. The new Bitcoins would be managed through electronic connections called a blockchain. Governments would have no role, and Bitcoin would have the same value everywhere.
Well, that didn’t work out. Bitcoin has been anything but stable. It has become a subject of speculation, like stocks or gold. The price has no predictable relation to value.
The founder of Bitcoin said the new currency could solve the problem of trust. Central banks might debase the currency, but a mathematical process could be trusted. But nobody trusts Bitcoin. Few people understand cryptocurrencies enough to trust them.
Now government is trying to regulate cryptocurrencies. In fact, some governments are considering central bank digital currencies, a way for central banks to manage money with crypto technology. But a cryptocurrency run by banks controlled by the government defeats the original purpose.
In the meantime, you can’t use a Bitcoin to buy a soda from a vending machine. You can’t pay with Bitcoins because they don’t physically exist. You can own Bitcoin as a measure of value, but you can’t buy much with it, other than more Bitcoin. It isn’t really money.
It looks like we’re stuck with trust in the national money system. For now, I’ll continue to take your coins, checks and credit cards if you’ll take mine. The system is based on trust, which is in increasingly short supply. But for now, it’s all we have.