Money: Understandings and Misunderstandings

292 Pages·2020·3.913 MB·English

by  Mohammad Ashraf

Mohammad Ashraf
Money

Understandings and
Misunderstandings
Money
Mohammad Ashraf
Money
Understandings and Misunderstandings
Mohammad Ashraf
Department of Economics and Decision Sciences
The University of North Carolina at Pembroke
Pembroke, NC, USA
ISBN 978-3-030-50377-2 ISBN 978-3-030-50378-9 (eBook)
https://doi.org/10.1007/978-3-030-50378-9
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To those who set out for Ithaka.
Preface
I wrote this book to clarify the concept of money and how money facili-
tatesasmoothfunctioningoftheeconomy.Dependinguponone’slackof
understanding,oftentheconductofmonetarypolicy—changesinmoney
supply by the Federal Reserve System (the Fed), central bank of the
UnitedStates—isconsideredshadyifnotoutrightillegal.Intheaftermath
of the 2007–2009 financial crisis and the Great Recession that followed,
the Fed significantly increased money supply. The terms “quantitative
easing”becameubiquitousinthemediaandeverydaydiscourse.Critiques
of the Fed’s actions followed.
MovementsthatcallfortheFedtocloseitsdoorresurfaced.RonPaul,
formerCongressmanfromTexas,wroteabookin2009titledEndtheFed.
Mr.Pauldedicatedhisbookto“theyoungpeoplewho…areattheheart
of the anti-Fed movement.”1 Rick Perry, who was governor of Texas at
the time, was seeking the Republican nomination for the 2012 presiden-
tialelection.HecalledtheactionsoftheChairmanoftheFedatthetime,
Mr. Ben Bernanke, “treasonous.” In a campaign stop in Iowa on August
16,2011,hereiteratedhisoppositiontothe Fed’sstance.“Idon’tknow
what y’all would do to him in Iowa, but we would treat him pretty ugly
1Ron Paul’s book dedication. Ron Paul. End the Fed. New York, NY: Grand Central
Publishing, 2009. Print.
vii
viii PREFACE
down in Texas,” said Mr. Perry referring to Mr. Bernanke.2 Even some
professionaleconomists,academics,andfinancialmarketplayersurgedthe
Fedtoreconsideritsstance.TheyfearedthattheFed’sactionswouldlead
to “currency debasement and inflation.”3
The concept of money remains elusive to many. Worse still, misinfor-
mation abounds. From financial TV pundits, to self-help gurus, to huck-
sters of the Prosperity Gospel,4 and everyone in between, stand ready to
impart words of wisdom. Lack of expertise in economic matters is not
an impediment. All telling those seeking advice that they can get wealthy
without having to work. Or some version of it.
Jim Cramer’s CNBC Website states that, “Mad Money with Jim
Cramer takes viewers inside the mind of one of Wall Street’s most
respected and successful money managers. Cramer is your personal guide
throughtheconfusingjungleofWallStreetinvesting,navigatingthrough
opportunities and pitfalls with one goal in mind—to help you make
money.”5
Tony Robbins is a self-help guru who purports to teach you how to
be happy and realize your full potential. In his sold-out seminars, among
other acts, he teaches the attendees how to walk on fire. He also sells
physical training videos and supplements on his Website.6 The magazine,
Money, had a cover story on Tony Robbins in its May 2017 issue. John
“Jack” Bogle, the founder of Vanguard Fund interviewed Mr. Robbins.
“TONY ROBBINS WANTS TO MAKE YOU RICH,” was imprinted in
boldlettersonthecoverwithRobbins’spictureshowinghimwithahuge
smile, his teeth on full display.
Perhaps the lack of knowledge about money and monetary policy is
notexactlythefaultofpubliceither.Keepingtheactionsofcentralbanks
2Rick Perry on Ben Bernanke. https://www.nytimes.com/2011/08/17/us/politics/
17perry.html. (Accessed: May 17, 2020)
3Open letter to Ben Bernanke. https://www.hoover.org/research/open-letter-ben-ber
nanke. (Accessed: May 17, 2020)
4Prosperity Gospel. Kate Bowler. Blessed: A History of the American Prosperity Gospel.
New York: Oxford University Press, 2013. Print.
5Jim Cramer, TV pundit. https://www.cnbc.com/mad-money/. (Accessed: June 5,
2019)
6Tony Robbins. https://www.tonyrobbins.com/. (Accessed: June 5, 2019)
PREFACE ix
secret was considered a valued tool in the conduct of monetary policy,
and “mumbling with great incoherence” was a skill much valued in a
central banker.7 It was the understanding of monetary economists that
for monetary policy to take effect it has to have an unanticipated compo-
nent. It is relatively recently that this understanding in the discipline
has changed.8 Nowadays transparency is considered imperative for the
conduct of monetary policy and the smoothfunctioning of the economy.
A lot changed over the course of writing this book. The Fed increased
and decreased money supply, and then increased it again. When the
manuscriptwasinitsfinalstages,theCoronavirus(COVID-19)engulfed
the globe. Due to the COVID-19 the world economy practically shut
down. To provide support to the US economy the Fed had to increase
money supply. This world event renewed public’s interest in the Fed’s
andothercentralbanks’actions,makingthetopicofthisbookevermore
relevant.
In this book I use the terms “pecunia” and its plural “pecunae” to
represent money. This is as opposed to using dollar, pound, the euro, or
anyothernameforcurrency.Thepurposebehindcoiningthesetermswas
to start the reader afresh and baggage-free. During the spring semester
of 2020 one of the classes I taught was International Trade. I used the
Krugman,Obstfeld,andMelitztextbookforthiscourse.9 Iwasreviewing
this textbook during the fall semester of 2019 and over the Holidays
before the spring 2020 semester. To my surprise Krugman et al. had
already used pecunia, as in the “Bank of Pecunia” in Chapter 18. And
I thought I was an original in coining these terms.
Finally, to all my friends and colleagues, please know that I remain
evergratefulforyourhelpandencouragementthroughouttheprocessof
writing this book. Usually authors provide a list of names of individuals
7Alan Greenspan quote. Alan S. Blinder, et al. “Central Bank Communication and
Monetary Policy: A Survey of Theory and Evidence.” Journal of Economic Literature
46.4 (2008): 910–945. JSTOR. Web.
8Secrecy in central banks. Alan S. Blinder, et al. “Central Bank Communication and
MonetaryPolicy:ASurveyofTheoryandEvidence.”JournalofEconomicLiterature 46.4
(2008): 910–945. JSTOR. Web., Alan S. Blinder. The Quiet Revolution: Central Banking
Goes Modern. New Haven, Conn.; London: Yale University Press, 2004, 2004. Web.
9Krugman, et al. textbook. Paul R. Krugman, Maurice Obstfeld, and Marc J. Melitz.
InternationalEconomics:TheoryandPolicy.11thed.NewYork,NY:Pearson,2018.Print.
x PREFACE
who have been helpful during the writing of a manuscript. I will avoid
providing such a list for fear of leaving someone out.
Sincerely,
Mohammad Ashraf
May 2020
Contents
1 Why Another Book About Money? 1
1.1 From Bands of Hunter-Gatherers to Farmers 2
1.2 The Need to Invent a Numeraire: The Functional
Limits of Barter Exchange 4
1.3 Overcoming Brain Limitations 7
1.4 Misunderstandings Run Deep 9
1.5 Our Reptilian Brains 13
1.6 The Desire to Hold onto Something Solid 18
1.7 What to Expect in Chapters to Come 21
Works Cited 25
2 Imagine a World Without Money 27
2.1 A Scene from Downtown Modelville 27
2.2 Barter, Again 30
2.3 Enter Money! 35
3 A Brief History of Money 41
3.1 Categories of Money 41
3.2 About 11,000 Years Ago 43
3.3 Modelville in the 1500s 53
3.4 Paper Currency in the United States 58
3.5 The Creation of the Federal Reserve System 61
Works Cited 68
xi