Where Money Comes From, Part 3

This is the third and final blog in the series regarding where money comes from. I will be talking about the possible futures of the Federal Reserve, money, and our entire monetary system. In the previous blogs, I talked about where money is created and how, a brief history of the Federal reserve (the Fed), what the Fed does and how it has not fulfilled its mission. I also teased the best and worst case scenario’s for dealing with the Fed in the future.

There are very few people who think that the Fed is going away anytime soon. So what can we do with the Fed to ensure that does a better job of fulfilling its goals of stabilizing the economy, maximum employment rates and stabilize prices? While I believe we would be better off without it, there can be a world with the Fed still in it. It would have to begin with a massive audit to root out corruption and identify just how monetary policy is set. From there create hard and fast, publicly available rules governing what the Fed can do based on how the economy is doing. For instance, if the economy changes by x amount in a particular sector, there is a preset action that the fed must take that anyone with an interest can read about beforehand in the rules of monetary policy. No surprises, no whims of fancy that may benefit friends while hurting everyone else. Having predictable rules would reduce some of the panic for investors.

Another action that could be taken without getting rid of the Fed entirely would be to untie the world’s currency to the US dollar. This would create competing currency throughout the world. When currencies are not tied to each other, there could be several different types of currency to choose from when doing business. Many countries might tie their currency to what they produce like sugar or wheat, or oil. Some might be backed by gold and silver, other could be “fiat” currency, meaning not backed by anything at all, (which is what we have now). Some countries might elect to keep their national banks and others may go to a private banking system. The beauty of this system would be that competition would keep each system honest. If someone doesn’t like one countries monetary system, they could easily move their money to another. This makes bad monetary decisions more painful and therefore less abundant. This type of system could work with or without the Fed, so in my opinion, which is worth exactly what you are paying for it, is the most likely option for the future.

What would it be like if a miracle happened and the Fed gets abolished? Looting? Anarchy in the streets? Mass murder over the price of Twinkies? No. We might be inconvenienced by having more currency options, but we are already used to this, kind of, in the form of gift cards. When you get a Wal-Mart gift card, what you essentially have is currency that can only be used at Wal-Mart, basically Wal-Mart bucks. That gift card is exchanged for US dollars at the cash register. Each bank might be able to issue its own currency. So maybe instead of that gift card being backed by Federal Reserve Notes, it’s now backed by Bank of ‘Murica bucks, or Citibucks. An exchange rate system would probably be set up privately to see how the value of each currency compares to the other. You would still use your debit card and the store would decide which currency it takes. Your bank would automatically account for the exchange rates behind the scenes. This is not a new system, we actually had something like this before the Fed was put in place. This is not as convenient as having only one type of money, but it would make it much harder for the government to accumulate massive amounts of debt.

In the olden days, you could bring your dollar to any bank and exchange it for the corresponding amount of gold stated on the front of the bill. From the consumer’s perspective the only difference in non-Fed money would be what backs that dollar. Wal-Mart bucks would be backed by ill-fitting jeans and bicycles, McDonalds bucks would be backed by hamburgers. The business would then decide how to exchange the money we give them into currency to buy more stuff to sell. May the best money win. I can’t imagine that Visa or MasterCard would make our lives that much more difficult by only being good in one currency. They would probably want to stay in just as many retail outlets as they are now so would work it out with whatever currency becomes available. The world would keep on truckin’, normal people would keep on buyin’.

This series was in no way meant to be an in depth look at our money system. It was meant to be a very shallow overview of how things work, and what could be done to make them work better for us and our future generations. This is true partly because very few people have an actual in depth knowledge of how things work, I definitely don’t, and also it would just take way too long to write. I recommend using this information as a jumping off point to learn more about our money and banking system. I know it’s boring, but you might just be doing yourself a favor in the end. Happy New Year everyone!

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