I heard this on NPR’s This American Life, and for the first time in my life, my eyes did not glaze over. Three stories explaining the deliberate fantasy that is money:

YAP

There was an island in the South Pacific called Yap. They had an impractical method of currency—gigantic stone disks, some taller than a person. They only used them for big purchases, like for a dowry or to ransom a warrior captured in battle. I‘m sure you can see where this is going: Pretty soon, the actual giant stone circles did not need to be physically transferred between parties; it became understood who the owner was. That was an innovation! The stone that was quarried for these giant circles was on another island, and one time, during a storm, the raft used to carry the stone was overturned. The crew survived but the stone was at the bottom of the Pacific. When they arrived on Yap, it turned out to be no problem. The islanders said, Look, we believe you. There is a giant stone at the bottom of the ocean and it still belongs to So-and-so.

That is not so different from what we do today. Since 1933, there is no gold behind our dollars, and even if there were, what good is gold? It’s only worth something because everyone agrees it is. We agree on the idea of money. Today, even currency itself is essentially gone—there are only computers firing impulses between parties. And those transfers represent…nothing tangible at all.

BRAZIL

Brazil is a poor country, and so, most everything is bought on installments, from sunglasses to cars. This is a very recent development for that country—since 1994 to be exact. Buying on installments would have been impossible previously. Before then, there was terrible inflation—80% a MONTH. It started in the 1950’s when the president of Brazil wanted to build the capital, Brazilia, in the middle of the jungle but didn’t have enough money, so he printed a bunch. 80% inflation a month means that a pair of sunglasses that costs $10 today will sell for more than $10,000 in one year.

For decades, Brazilians lived with high inflation like this, and could not figure out how to fix it. Prices changed daily. There were people who worked in large stores whose only job was to change the prices on all items every day. Housewives would go to the supermarket and run ahead of the guy changing the prices to get yesterday’s cheaper prices.  You couldn’t save any money either—it would be worth less every day. And you wouldn’t want to produce anything that took too long to get to market because the raw materials would be worth less than they cost you to buy.

They tried several things. First, a price freeze, but no one wanted to sell anything and merchants held back goods, thinking the prices would go up.  They tried confiscating everybody’s money—you can imagine how well that went over! There was almost an insurrection, and the government was impeached. Then, in 1994 the government asked four economists to help them fix this problem.

These guys understood that the very nature of money is a fiction, and they used that mass delusion to fix inflation. The government stopped printing so much money and cut spending, but every bit as important was to gain the publics’ trust in the money. People had to be tricked into thinking money had value. They invented a new currency, one that was stable, trustworthy. But this currency would not be real, would not have coins or bills. They called it “a virtual currency,” or a Unit of Real Value—a URV. People would still carry cruceros, tangible money in their pockets, but when they got their paychecks it was in URV’s, taxes were in URV’s and prices of goods and services were in URV’s. And the URV’s were stable.

When you asked how much a quart of milk was it was always One URV. Now, you still had to pay for the milk with the cruceros in your pocket. But every day, the newspapers would print the value of the URV’s relative to the crucero. Yesterday, the price of milk was One URV, which equaled 7 cruceros. Today, the price of milk was still One URV, but it took 14 cruceros from your pocket. The idea was, people would start thinking in URV’s. You were always paid your same salary in URV’s, say, 1000 URV’s. The price of milk was always One URV, regardless of the inflation of the crucero. Amazingly, people accepted that. After a while, once people trusted the URV, inflation came down and prices were in synchrony, they did away with the old currency. The “Real” (pronounced Ree-AL) became the new currency—it was the URV. The Brazilian real is equal to One URV and one US Dollar.

Everyone in Brazil tricked themselves on purpose into believing this fake currency was real. Everyone was happy—inflation was solved! BRzillIANT!

WEEKEND AT BERNANKE’S

When the US was on the gold standard, it was clear how much money we had and what it was worth. Each dollar corresponded to a dollar’s worth of gold in a vault somewhere. (Which, as I mentioned, is still a construct.) When we went off the gold standard, someone had to be entrusted to figure out how much that dollar was now worth. The Central Bank was created to do that: The Federal Reserve.

The Fed is the only institution empowered to create money. It controls the amount of money in our economy and it controls interest rates, among other things. Yet most don’t realize it is not a part of the Federal government—and this will become immensely significant. The Chairman of the Fed is appointed by the President and Congress has oversight, but it is an independent body.

The Fed conjures money out of a void. Every 6 weeks, at the Federal Reserve in DC, there’s a meeting at which there is no press, no Congress and not even the President is allowed. Members of the Fed make presentations about the economy. And then, they take a vote—should there be more, or less, money in the US economy? The ramifications are who can get loans to start businesses, create jobs, or if there is too much money, create inflation and hurt the economy. The fate of the US economy rests on these decisions made every six weeks. Since 2008, when the economy deteriorated, the Central Bank did some unprecedented stuff. The danger is that if the Fed screws up, the fiction that we call the US Dollar loses value.

How do they create money out of nothing? It’s not just about printing it although they tell the Treasury to do that too. They need to get vast amounts of money on the street fast, so they need banks. They put money into the banks’ hands by buying something from them—something safe: US Treasury Bonds. Big banks have billions of dollars of these bonds. This transaction, of course, does not involve cash; it’s all done via computer. When the banks lend that new money out, that’s how money enters our economy. And that is also the way the Fed raises or lowers interest rates—more money to banks equals lower interest rates.

What I just described was the way it had always been done—boring and safe…until 2007, when the banks had all these investments that were plunging in value and they needed someone to lend them money.

The Fed has always had special emergency powers that it can use when the banking system is on the verge of collapse. They can create a bunch of money and lend it to the banks.  In 2008 they did just that and it was revolutionary.  Revolutionary because, for one, these banks were no longer the traditional, previously regulated banks the Fed was designed to deal with. The Fed created over a TRILLION dollars that they loaned to Wall St—GS, Morgan Stanley, Bear Sterns and the like, as well as to Citigroup, B of A, and even to regular companies like Verizon and Harley Davidson. The second radical thing the Fed did was to depart from their boring, safe buying of Treasury bonds, and instead they accepted all sorts of assets for collateral—toxic assets.   Mortgages on resort hotels, and malls in Oklahoma, for example.

In 2008 the economy was still on the verge, so the Fed did something else unprecedented. Remember, they wanted to get money out there on the street as fast as possible. They created more money than ever before and made the single biggest purchase they had ever made: Home mortgages. But not the sub-prime ones the banks had on their books—the safe, high quality types in the form of mortgage-backed securities. But how many to buy? How much money needed to get circulated through these purchases? There was no economic theory to fall back on and they were guessing. They literally picked a big, round number, according to one member of the Fed who was there. They decided on $1.25 trillion. (I have to remind myself: A trillion is to a million dollars what a million is to one dollar.)

It took the four employees of the Fed, sitting in grey cubicles at PC’s, weeks and weeks to buy those mortgage-backed securities. Where did the $1.25 trillion come from? They made it. That is the nature of Central Banking around the world. Alchemy.

This is part of the story that I think very, very few people understand: That $1.25 trillion does NOT get added to the deficit. The federal deficit occurs when the government spends more money than it takes in via taxes. The Federal Reserve is not part of the federal government and thus has nothing to do with the deficit. But if the Fed loses money from all the toxic assets they bought from Goldman Sachs, et al, is that somehow going to come out of our taxes? No. Again, it’s not part of the federal government but mostly, the Fed, every single year, makes a profit. It creates money out of thin air and uses that money to buy bonds—which pay interest. (In 2009, at the height of the crisis, it made $47 billion.) And their profit is always turned over to the government so it actually reduces the deficit. The money created by the Fed has nothing to do with the TARP; it has nothing to do with the stimulus. Most economists would say, Thank God the Fed used their powers to do this– it kept us out of soup lines.

We have heard the opposite from the Right, and especially people like crazy Ron Paul. He thinks the Congress should be responsible for monetary policy. Can you imagine that!? His abolish-the-Fed campaign used to be ignored as whacky. Now he chairs the Committee which oversees the Fed.  True, there is some truth to the claim that the Fed got us in to trouble through their policies—Greenspan is infamous for helping create the housing bubble with low interest rates. But I would take a bunch of eggheads at the Fed any day over the frothing Congress.

We are now in unchartered territories. If too many people stop trusting the Fed, they lose trust in money itself (see Brazil). Simply, we trust the Fed and other countries trust the Fed, and therefore we all trust our money. The value of our money is based on that trust—not gold, or tulips. The magic of Central Banking is it works SOLELY on trust. It is an agreed-upon fiction. Once that trust is gone, our money becomes just another stone on the bottom of the ocean.

I think that’s both very cool and very strange. Like saying to Tinker Bell, “We DO believe in fairies!”

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chazmania
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Great piece…
I still find the whole thing complete LUNACY….

I mean we can go on and on about the system and how its self regulations seems logical but its full out BAT SHIT CRAZY.

your big stone story is perfect proof its ignorant and archaic thinking..

For one thing this system is NOT working in the long run and The idea does not take into account the idea of resources..the value is not on resources the value is on value itself..so what we are all supposed to go around completely duped up on our own delusions of what value money is…Personally i cant sustain that for very long a little thing called my LOGIC kicks in after a bit and says to me this is all such Bull shit….
We have to get a fucking grip already…We WILL not survive much longer living in this kind of distorted fantasy thinking no matter what kind of official seal with an eagle holding grass in its mouth we stick on it…If its based on nothing it is nothing…and its very nature is killing us..its creating nothing but the worst aberrant behavior..If we have to have money it has to be based around the worth of our resources and products not some corporspeak justification for skimming off piles of it for some wankers in high places…

And if i printed my own money i would go to jail in quick time..
how come i cant fix MY deficit this way????HUH??????FUCK!!!!!!!!!

All the best…you rock!

SueInCa
Member

And Cher that is the one problem I have with homeowners losing their homes. If the banks were actually taking those losses and trying to collect on them, that would be fine. In my opinion I don’t believe the banks are in any hurry to unload what they are responsible for because the Fed is holding the asset, however that does not stop their foreclosure process. Not to mention, that if pushed, most banks cannot even provide the note on any given loan. It is another “shell game” being played by the government and the financial community and people are passively taking it in the “you know what”. The banks are eventually going to resell those homes and no one will be made whole because the money is not really there. It was the long con brought to us by Wall Street and the Government.

bito
Member

I don’t remember all the chicken littles squawking during the fall of the dollar under Dubya?

[img]http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=480&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&ts=8&preserve_ratio=false&fo=ve&id=TWEXB&transformation=lin&scale=Left&range=Max&cosd=1995-01-04&coed=2011-01-05&line_color=%230000FF&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2011-01-18&revision_date=2011-01-18&mma=0&nd=&ost=&oet=&fml=a&fq=Weekly%2C%20Ending%20Wednesday&fam=avg&fgst=lin[/img]

Wonder if you flipped that over and it would reflect the “price” of gold?

http://krugman.blogs.nytimes.com/2011/01/18/the-recent-history-of-the-dollar/

choicelady
Member

Community Currency – perfectly legal, based on Colonial moral economic principles in barter. Very cool.

http://www.sustainable-city.org/articles/currency.htm

kesmarn
Admin

That’s a fascinating article, c’lady!

I’m curious as to how communities who develop this type of currency deal with community members who have little (of commercial value) to put into the exchange bank. Say — seriously handicapped people, or 90 year old folks. Have you ever come across any theories on this?

chazmania
Guest

good thought…what “obligation” do we have as a collective species to take care of anyone else..whats the “value”? It seems the monetary system we have all but ignores this and even has disdain for the question..

Khirad
Member

That’s the part that always got me: the philosophical question that always received a glazed look. Now mind you, economics glaze my eyes over most of the time, but I don’t think it’s that ignorant for me to make the following point.

They would say “it’s not backed on gold,” or that “gold futures this and that,” and “buy gold,” and I would ask: well, why is gold worth anything?

And thus the stare that said “by god you are a simple, stupid creature.”

What does it matter that we exchange one mass delusion for another, like, say this?

[img]http://upload.wikimedia.org/wikipedia/commons/5/54/Yap_Stone_Money.jpg[/img]

Or forget stone rais, what about units of Aishwarya Rai?

I mean if it’s based on beauty, quite frankly, I always liked silver and copper more than gold.

If it’s on scarcity, well, the population can’t sustain that anymore.

As if to prove a point check out Brazil’s first series of the new real in 1994:

http://en.wikipedia.org/wiki/Brazilian_real#First_series_.281994-2003.29

All stainless steel. They’ve gone more standard since then, but if everyone can agree that that’s money, what does it matter?

AdLib
Admin

Truly enjoyed your article, Cher!

Perhaps one might go a tiny step further to describe money as a shared delusion and those who are the wealthiest are the most insane?

It is interesting to think about those frothing at the mouth about going back to the gold standard, which, as you well describe, is just a mineral that’s given its own arbitrary value no differently than non-gold-based money.

When I was younger, I remember having a revelation that what could be a cure to many of society’s woes would be to go back to a system of barter. However, practically speaking, I wouldn’t know how many chickens to pay for a doctor’s visit but I understand that there’s a Republican in NV with a lot of time on her hands who may be able to help.

bito
Member

Very good, Cher and a more understandable than Mr. Paul’s posts. Can hardly wait until these “true patriots” begin to undermine the trust in the Fed and US dollars with Mr. Paul’s hearings and them voting to not raise the debt limit.

AdLib
Admin

I’m traveling to the UK and wondering if I can convert fruitcakes into pound cakes.

whatsthatsound
Member

I’d advise against it. You don’t want to be fruitcake wise and pound cake foolish.

Questinia
Member

Cher’s post has become a rally for “Restoring Honor to Fruitcakes”.

Forgive us Cher!

whatsthatsound
Member

Fruitcakes for Fruitcakes!

Questinia
Member

“I have a dream that one day every fruitcake shall be exalted”

whatsthatsound
Member

I just got off the phone with a guy from the Tea Party. He thinks we might go together.

Questinia
Member

I’ll give you my fruitcake when you pry it from my cold, dead hands!

whatsthatsound
Member

Abolish the Federal Preserves!

BigDogMom
Member
BigDogMom

“I want my fruitcake back!”

Kalima
Admin

“We shall over-cook, some day.”

whatsthatsound
Member

I know exactly what you’re talking about! Why, just the other day I inherited 10.5 million bucks from The Bank Of Africa as a “due wining/inheritance and contract payment” all in one! I’m of course ecstatic about this, and unsure about how I will spend my remaining days of leisure.

BigDogMom
Member
BigDogMom

Morning or Evening in your case WTS, me too! My new friend, the Prince of Nigeria, has promised me that the money will be deposited into my account very soon! Like you, I have spent hours pondering what I should with all this money….

whatsthatsound
Member

I feel truly blessed, because I haven’t really done all that much “wining” to be honest. In fact, I never wine anything!

The way it was explained to me was, the transaction is being handled by the law firm of Howell and Fudd, who have headquarters on a tiny island around three hours from Hawaii. They’re both very old and stuck in their old habits, so we’ll both just have to sit tight while they get around to it. Mr. Fudd, in particular, is vewwwy vewwwy pwecise!

Questinia
Member

I want to own a mansion, a yacht and a fruitcake.

BigDogMom
Member
BigDogMom

A Fruitcake on every table and a car in every garage!

choicelady
Member

And you can use the fruitcake instead of bondo in case of dents and dings on the car.

Questinia
Member

SUCH an interesting post, Cher! I’m one of those people who finds money vulgar and an embarrassment to have to think so much about because of just the inanity of the delusion! Can you imagine how much TIME is spent on fretting about money? How many divorces occur because of money?

Time IS money!

Let’s get rid of it and deal with another lucre.

In Katz’ Delicatessan, for instance they have tickets. But tickets are dumb too. We should deal in FOOD! Like a lean brisket sandwich will get you a new roof (OK, it would have to be awesome brisket and a year’s worth). The best cooks and bakers would be the “richest”. They could teach lesser cooks to hone their skills. Prep cooks could be the new work force and, you guessed it, sous-chefs would be middle management. The only “fiscal” crisis would occur around Christmas time when there would be an influx of bad fruitcake into the “eggconomy”. Places like McDonald’s would go out of business because they do not deal in food. It’s as faux as the money that it puts into investors’ pockets.

OMG, I am SO hungry right now.

whatsthatsound
Member

I like your idea, and think that in fact fruitcakes could be used instead of gold. Last forever, heavy, same boring brick shape. Just put them all in a vault somewhere. Fort Knotts (Berry Farm) perhaps.

Questinia
Member

Invest in fruitcakes as they could be the next currantsy.

whatsthatsound
Member

The Federal Preserves won’t be able to keep up with the demand.

BigDogMom
Member
BigDogMom

I can just see it now, Glenn Beck building a show around the need to buy and horde fruitcakes…one of his new sponsors.

(ps: Am I the only one in the world who truly likes fruitcake?)

Questinia
Member

I LOVE FRUITCAKES!! Are we the only ones? In that case we should form a coalition. We need to start managing a PR campaign to reverse the awful rep they have.

Of which I am guilty of perpetuating.

I am truly sorry for trying to fit in with the fruitcake-haters. I am not worthy of fruitcake!

BigDogMom
Member
BigDogMom

The road to recovery starts, first by admitting there is a problem…be proud, stand tall and remember that you are not alone in this…

Fruitcake Lovers Unite!

whatsthatsound
Member

(no, truth be told, I like ’em too)

Questinia
Member

Fruitcakes ROCK!

[img]http://rlv.zcache.com/mmmm_fruitcake_t_shirt-p235965666091778810trlf_400.jpg[/img]

BigDogMom
Member
BigDogMom

Lawd, I was beginning to believe I was the only one in the world who did.

I believe I’m going to start a blog or a facebook page on the glories of the fruitcake!

It has been much maligned over the years and these needs to stop….free the fruitcake!