Probably the most misunderstood entity that exists today is money, currency, what it is and all the ways it works in the existing societies. The problem with money is its history, what it was and is, and how the concept is generally understood by most people today.
Originally money was an object of value like gold, silver, or some other precious entity. Presumably, in places like early Phoenicia, well over two thousand years ago, goods were traded for precious metals. This was done with scales; gold or silver would have a fixed value and an equal value of goods would be traded for a set amount of the precious metal. Eventually someone or a group of someones came up with the idea of stamping a set weight on the gold and coins came into existence. They were gradually refined, as time went on, with stamped pictures of the rulers profile and with these specific coins with set amounts of money came into existence. From this, over the centuries, with occasional breaks in the sequence, the concept and use of money, set amounts of gold or silver, developed. It was until the end of the first third of the 20th Century an exchange of value for value, the goods and services for the coins (money). Money was as good as gold because it was gold.
The problem that developed over time was that the amount of gold and silver available for currency was dependent upon mining discoveries or exploitations of different parts of the world. For example in the 16th Century Spain gutted the New World of its gold supply causing a 90 year period of inflation in Europe that lasted through most of the fifteen hundreds. By the 17th Century there was again a shortage of the gold supply in Europe and not enough money (gold coins) available to supply all the monetary needs for economic growth on the Continent. Consequently the value of gold rose and periods of deflation occurred, the value of the gold coins increased.
The problem here was that there were two totally different processes which were supposed to balance each other but never did. Precious metals had to be discovered and mined at the same rate that business between and within nations expanded. This never happened. Added to this were economic systems like mercantilism, which hoarded gold by creating royal monopolies within European nations. Economically much was not understood then. And the amount of gold was never enough to cover all the needs for monetary growth.
The use of paper came into existence largely during the Renaissance with letters of credit, which allowed simple transfers of large amounts of currency. This would eventually become paper money and checks. Paper money was initially issued by banks and could, presumably, always be exchanged for gold or silver. Of course if everyone decided to exchange their paper money for gold at the same time there would be a run on the bank and it would go bankrupt since generally they issued a lot more paper than they had gold.
Paper money was also issued by governments during times of crises when gold was in short supply, like the United States government did during the Revolutionary War or the Northern and Southern Governments during the American Civil War. They did not have adequate gold or silver supplies to pay the cost of the wars. Since the South lost the Civil War its money became worthless while the Northern greenbacks were eventually redeemed for gold coins.
Up until 1933, when Franklin D. Roosevelt had assumed office as President, money was mostly gold and silver. Other metals like nickel and copper were used for smaller coins. The paper one and five dollar bills could be redeemed for silver; they were silver certificates. The larger denominations were presumably redeemable for gold; they were Federal Reserve Notes.
Actually after 1933, the use of large bills being exchanged for gold ceased. In the U.S. the Roosevelt administration collected all gold coins, melted them down into gold bars, issued paper gold certificates that were held by the Federal Government, and issued paper money starting with the ten dollar bill and going up. These were Federal Reserve Notes which the banks distributed then and thereafter. They were used in place of the gold coins.
The gold standard was essentially a fiction. In 1933 the money supplied was doubled as the value of gold was legally doubled, going from $16 an ounce to $36 an ounce. This essentially paid for Roosevelt’s New Deal. Similar actions would also be done in other industrial nations. The problem that existed was that there still was not enough money in circulation to meet the actual needs of most nations. There would not be enough money available until World War II when it tended to be freely printed by the various governments. During the war, since most production was going toward the war effort, there was more money available than the goods and services that could be purchased. People worked double shifts in the factories and earned lots of currency, far more than they could spend. At the end of the war there would be a large buying splurge that would create jobs for a good percentage of the returning veterans.
In 1969, under President Richard M. Nixon, the last limited amount of stored gold behind the dollar would be removed and the Federal Government would sell a large percentage of its gold supply. It would cease to legally buy all gold mined within the country. Gold would within a relatively short period of time, several years, go from $36 an ounce to $800 an ounce. It would later go to well over $1,000 an ounce and eventually rise to $1,800 an ounce. At this time one of the agencies in Texas would buy gold and set up its own depository. Later, gold would drop down to around $1,100 an ounce, where, with continued slight oscillations in price, it would remain in 2016.
This entire process has been going on for the last 46 years. The value of gold is determined by the economic laws of supply and demand. The value of gold, silver, platinum, titanium, and other precious metals are determined by the amount of supply and the demand for that supply.
In 1969 the silver would also be removed from new coins and all money would become tokens, generally copper sandwiches, having almost no value within themselves. All money became a valueless instrument for the exchange of goods and services, having no real innate value in itself except that of the word of the nation issuing it.
Today money of one country has to be exchanged for that of another when one visits Europe or Asia or, for that matter anyplace else that isn’t part of one’s country. With very few exception it has no relevance in another country but it does have an exchange value in the banks of other countries, where generally, for a small fee, it can be exchanged for the currency of that particular nation.
Money is no longer as good as gold, there is no longer any gold behind it. The metal has become too expensive and its supply is too limited to be used for a base for currency.
This in a nutshell is a short simplified history of money and its uses.
Now, in terms of the modern world what is money and what are it uses? Today money serves a myriad of purposes. While it is no longer an object of intrinsic value it still serves as an object of inherent value. It is, first of all, a form of score-card which demonstrates ones’ standing in the overall society, like Donald J. Trump the billionaire. Mainly it allows the traditional exchange of goods and services within the society and between nations. But in addition to this money also functions within the nation in relatively new ways.
According to most economists there are various forms of economics. For our purposes the two more important ones are Microeconomics (small) and Macroeconomics (large). Everything that has so far been considered falls into the area of Microeconomics (small economics). In essence an individual has so much wealth (gold) or earnings that comprises what he/she possesses and earns. That can be spent to satisfy needs and wants or saved for a future time of need or desire. Some of it can be used as a commodity and invested in income gaining property or stocks and bonds or anything that will pay an income.
Virtually every individual or family unit fits into this category. So also do government entities like municipalities and individual states. Their incomes would be comprised of taxes and fines. If any of these people or entities need more money than they are taking in or have then they can borrow. For individuals and families there are banks and credit unit loans or credit cards. For municipalities and states there are short and long term bond issues. These eventually must be paid off with interest. This is usually tax free for state and local governments and ridiculously high for credit cards.
Of course the object with individuals and families is to live within their incomes. There are big-ticket purchases like automobiles and homes that generally do require long term payments or occasional emergencies like a large auto repair bill or a sick child. With cities and states the taxes are supposed to be high enough to cover their expenses. But they also have long term expenditures like roads and bridges which are inordinately expensive and must also be paid off over the long term.
The problem that comes up with individuals and families is when too many short-term expenses are charged to credit-cards, much more than can possibly be paid off in a billing cycle. Then the recipients are paying 18 or more percent interest on these loans and life becomes an uncomfortable struggle to survive. Particularly since the standard of living for many people will continually exceed their incomes. This is not unusual with many families.
With municipalities and states the same pattern can occur. The entities income does not match their expenditures. This can be caused by a large number of reasons besides irresponsibility on the part of the city fathers. Industry can move out of the area drastically reducing the tax base or other changes that drastically affect the tax base such as a natural disaster or a recession or depression.
All this, prior to 1933, would also include the individual nations. They would also be funded by their incomes in taxes and fines. But from that point on, by changing from money being precious metals to printed paper, the situation became different for all the industrial nations that had switched to paper money. And in the United States, particularly since 1969, all printed money is just that, official paper with numbers stamped upon it which in itself has no real value; it has become merely a means of trading goods and services for goods and services.
Federal or Central Governments still follow the age old practice of Microeconomics, collecting taxes and issuing fines for different forms of misbehavior. But, more importantly, now in addition they also practice Macroeconomics, wherein they attempt to control the amount of money continually present within the nation. They tend to try to keep inflation low and economic growth at a steady pace of about 3 to 4%. Countries like modern China prefer a growth rate of 8% which they are no longer able to maintain.
Economics is concerned chiefly with the description and analysis of the production, distribution, and consumption of goods and services. What we have mainly looked at so far has been Microeconomics, dealing with individuals, families, local and state governments. Macroeconomics deals with the National or Federal Government and applies these principles to the entire economy of the nation. Its ultimate purpose is to use this knowledge to positively regulate the economy of the entire state in order to avoid economic downturns and keep the nation at its level of highest efficiency.
Consequently Macroeconomics (Big Economics) is now, in addition to collecting, controlling revenue, and attempting to maintain a regular level of growth a regulatory device, attempting to even out the overall incomes of the majority of the population. Income taxes are graduated, that is, the more the individual earns the higher is his/her tax rate. This is truer in European and Asian nations than in the United States where the graduated income tax rate is currently toped-off at $400,000 and the percentage of income paid at that amount stops rising regardless of how high the income is beyond that amount.
It would seem that the bulk of the Congressional Legislators, particularly the Republican legislators, have no real knowledge of modern economics and are still functioning with only an awareness of Microeconomics. Some of the far-right, Tea Party, legislators have publically stated that they totally understand economics because they have raised families. Consequently their reaction to economic downturns is to use a “common sense” approach which, in turn, worsens conditions.
It would seem that in the United States the one occupation that requires no knowledge of economics or government is that of a Republican Congressman. Since taking over the House of Representatives in 2011 they have just passed one bill in 2015 that applied Fiscal Policy; and that was a continuation of a law that expired which added a small tax to the purchase of gasoline that has been used for road maintenance. Every other bill dealing directly or indirectly with employment actually decreased it, adding to the level of unemployment within the nation. One can safely say they have been penny wise and dollar stupid. They have favored government economizing over growing employment. And even here they have not been consistent, going on mad spending splurges like the 1.145 Trillion Dollar Funding Bill of 2015.
Basically the Central Governments issues paper money as it is needed by their particular society. The National Debt is itself partly a fiction since the Government owns the majority of its own National Debt and will use it at times to adjust conditions within the nation. The amount of money in circulation within the society is supposed to be the full amount needed for the nation to operate at its highest level of efficiency.
The Agency, in the United States, that does this is the Federal Reserve. It continually monitors the entire economy throughout the fifty states and territories belonging to the nation. On a constant basis it is supposed to continually fine tune the overall economy. The Federal Reserve has twelve districts that cover the entire nation. To a certain extent its powers are limited. It can make adjustments to the economy but the changes or corrections it makes generally are slow in coming about. Even though its’ Board of Directors meet once a month and carefully considers what is happening in the overall economy it can miss or misconstrue important economic changes within the society.
The Democrats, the political party begun by Thomas Jefferson in the late 18th Century which still persists, during the Great Depression of 1929 took control of the Federal Government in 1933. They tended to totally dedicate themselves to helping the public pull out of the Great Depression. They dedicated or rededicated themselves to helping the ‘forgotten men” survive in what had become almost overnight an alien world. They became responsible for the welfare of all their citizens, creating what Franklin D. Roosevelt called a “New Deal” for everyone, caring for those who could no longer properly care for themselves.
Freedom to the Democrats meant freedom from want and need. President Barack Obama’s Affordable Health Care (Obamacare) meant an extension of these rights. To the Republicans, on the other hand, freedom means government withdrawal from the public lives, giving them, among other things, the right to starve, freeze, and die.
In solving societal problems the Federal Government in 2009 and 2010, with the Democrats controlling both Houses of Congress and the Presidency, saved the banks and the United States auto industry by extending them massive loans and the Public by enacting Affordable Health Care.
According to Mitt Romney, speaking for the Republicans during his 2012 Presidential Campaign, he would have done neither of these. It should be noted that the Affordable Health Care Law was modeled after a similar law which Romney had signed into law during his one term as governor of Massachusetts.
The probability would have been in 2009, if Republican actions were taken by the Republican candidate, John McCain that the United States and the industrial world would have fallen into a depression far greater than that of 1929.
What we are dealing with here is Macroeconomics (Big Economics). The application of vast amounts of money to parts of the economy to avoid an economic disaster that would affect everybody in the U.S. society. President Obama did this upon assuming office over a two year period. At the end of that time two important events occurred: first, for various reasons during the Midterm Election of 2010 the Republicans achieved a majority in the House of Representatives and second, 2010 was a census year in which the seats in the House of Representatives were reapportioned to adjust for the increase in the national population. In those states which the Republicans controlled they gerrymandered the new voting districts to their advantage whereby they were able to get enough seats in the House to maintain control of that body. In fact they were able to get and keep their majority in the House even though more votes were cast for Democrats throughout the United States in the next Midterm Election.
What followed from 2011 on was that no fiscal policy bills were passed. In fact what the Republicans did in Congress was to shrink the size of the Federal Government when possible and actually increase the unemployment problem by decreasing funding for both federal and state governments. The chairman of the Federal Reserve at this time was Ben S. Bernanke. After unsuccessfully requesting that Congress pass Fiscal Policy laws numerous times he came up with Creative Monetary (Money) Policy.
Both Bernanke and Obama were able to work through the Great Recession and point the country toward recovery by the use of massive blocks of spending, adding large amounts of currency to the National Cash Flow. What was being dealt with here is called Macroeconomic (Big Economics), the Federal Government controlling the economics of the nation and freely spending money in order to avert disaster.
The question arises: How much currency can the Federal Government print and distribute without destroying the economy? That’s an interesting question? Remember the money itself has no inherent value. Theoretically any amount can be printed and issued. But if it is done endlessly growing inflation will occur and the value of the currency will systematically decrease until it becomes valueless.
The limitation in terms of the amount issued would be determined then by the rate of inflation. Once inflation reaches some single digit point, say 5 or 6%, then the limit would be reached. But this limit was never reached. Inflation stayed at 2 to 3%. In 2009 President Obama added well over a trillion dollars through bank and auto loans, plus other forms of expenditure and the inflation rate stayed at its original level. Later in the Presidency the FED for a period of well over two years added 85 billion dollars a month to the Nation Cash Flow, $45 billion buying up pieces of mortgage paper and adding $40 billion directly to the National Cash Flow. The FED added well over a trillion dollars. Again there was no change to the inflation rate.
Interestingly, with all this cash being added the indication was that the country had a phenomenal need for additional money to circulate so that economic growth could occur. Congress should have been the agency applying most of these funds. If they had the monies could have been more focused on upgrading the dated infrastructure of the United States. Instead over half the funds resolved the Housing Dilemma created by the deregulated banks from the 1980s on.
It should be noted that the money spent on mortgage paper, unlike the bank and auto loans which were repaid with interest, was never directly recovered. The mortgages in all 50 states had been fractionalized into well over a hundred parts each and applied to many different Hedge Funds. The record-keeping that the banks had set up to expedite the financing and refinancing was unbelievably sloppy.
In essence no one owned a fair percentage of those houses because it was almost impossible to put enough pieces of mortgage paper together to make up over 50% of the ownership in these properties. Consequently how could anyone foreclose on any of these homes? The spread sheet or sheets that the government would need to determine when it owned enough of any property would probably cost more to generate than the properties were worth. In any event the Federal Government was more interested in solving the Housing Problem than in collecting on its debt.
In addition all those people would no longer be deducting their interest payments on their income taxes. And a percentage of the home owners suddenly had more disposable income which they spent on short term activities like more eating out, infusing the additional currency into the National Cash Flow which, in turn, increased productivity and employment in the nation. The government would indirectly get a good part of this money back in increased taxes across the nation. Here the Federal Government was spending vast amounts of money, which Congress refused to do, upgrading the entire nation.