How much we care about money, and how little we know about it. All of us, rich or poor or in the middle, pass most of our time getting and spending it. Yet, leaving aside the elusive art of accumulating wealth, how many of us can really say what money is and how it comes to be? Probably you, like me, have harbored a vague notion that the government makes it and that although we went off the gold standard long ago our money nonetheless has something to do with Fort Knox and its cavernous rooms stacked with glistening metal bars. If so, then historian Richard Striner, who wrote our cover story, has news for you. You probably know that the Federal Reserve has some role in all of this, that it controls the money supply by some process that can’t have to do with counting those big sheets of bills that roll off the presses at the Bureau of Engraving—or can it? More news for you here. All those Federal Reserve Notes, all that legal tender, makes up only a fraction of our money supply. Where does our money come from? I know the suspense is killing you, so let me just get right to the bottom line: the banks create most of our money, by lending.
That still leaves the question of what money is. A to-me revelatory piece by the distinguished historian Gordon S. Wood in a recent New York Review of Books gives a brief history of paper money in this country. The subject of his piece is two books on counterfeiting. It turns out that an understanding of what money is grows neatly out of an understanding of how fake money works or fails to work. Because, like counterfeit money, paper money in general succeeds only to the degree that we who use it believe in it. Money equals confidence, our faith that what we hold in our hand will keep its value and that others will agree on what that value is. By increasing the money supply, counterfeit bills that were accepted as tender helped fund the rapid early expansion of the nation, Wood writes.
Knowing this won’t enlighten you about what selling short is or why it’s legal, and won’t explain why if things are going to hell in Europe the Euro hasn’t plunged enough to make a vacation there affordable. You’ll need to go elsewhere for personal finance tips. What Striner is offering is more like a national finance tip. It seems that in every major crisis in our history—the big wars going back to the Revolution, the Great Depression—the subject of greenbacks has come up. Greenbacks are dollars created by Congress without anything backing them. It’s perfectly legal. The Fed creates money out of nothing. Banks do it. Why, Striner asks, can’t we the people do it now, when an increase in the money supply could get our economy rolling again and pay for much-needed infrastructure? Aren’t we in a serious-enough crisis to warrant a new approach? Two good questions.
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