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Money
Dr. Green
Wall Street
• Lou
– Easy money creates financial instability
– Economic progress depends on fundamentals
• Investment and innovation
• Bud’s Father
– Financial speculation is parasitic on the creation of
economic value
– Yet, it destroy that very economic value upon which it
depends, symbolized by Blue Star Airlines
Speculation
• Made easier by a fiat money system
• Since the creation of our fiat money system in
1972 a series of instabilities
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Dot.com IPOs (1990s and subsequent 2000 bust)
Orange County bankruptcy (1994)
S&L Crisis and junk bonds (mid-to-late 1980s)
Oil industry (mid-1980s)
Drysdale Securities and Penn Square Bank (1981-1982)
the farm belt and LDC debt crisis (1980-1981)
Fiat Money
• Fiat money is so-called because it is not backed by
any tangible asset such as gold, silver, or even
seashells.
• The issuing government has decreed by fiat that
“this money is a legal exchange medium, and it is
worth what we say.”
• Lacking a gold backing or backing some other
precious metal, what gives the currency value?
Fiat Money
• Fiat money holds its value
– only as long as the people using that money
continue to believe it has value
– as long as they continue to find people who will
accept the currency in exchange for goods and
services.
• The value of fiat money relies on
confidence and expectation.
History
• All fiat money systems have collapsed
• It encourages levels of debt and risks that
become unsustainable
• When it becomes unsustainable, confidence
is lost in the currency
• When confidence is lost, it collapses and
becomes worthless
Fiat Currencies
• France
– Mississippi Scheme
– Became Worthless
• England
– South Sea Bubble
• Germany and Italy
– Hyperinflation
• Argentina
– Currency collapse
US Fiat Currencies
• Continental
– no solid backing and being easily counterfeited, the
continentals quickly lost their value
• Greenbacks
– The government’s paper money flooded the banks so
that by July 1864 greenback dollars were worth a mere
35 cents in gold.
• Bretton Woods
– Unstable hybrid
Federal Reserve
• Controls money supply by
– Open market operations
• Buying government securities increases supply
• Selling government securities decreases supply
– Discount rate
• The rate at which member banks may borrow short term funds
directly from a Federal Reserve Bank
• Lower rates makes credit cheaper
– Reserve requirement (fractional reserve system)
• Amount of money and liquid assets that Federal Reserve
System member banks must hold in cash or on deposit with the
Federal Reserve System
– Lender of last resort
Consequences
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Undermines sound banking practices
Asset Bubbles
Business Cycle
Transfer of wealth to
– Government
– Big banks
– Big contractors
• War
• Rising costs of living
What kind of people does a
system of easy money create?
• Speculators (Using Aristotle’s Virtues)
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Rashness
Self-indulgent
Tastelessness and vulgarity
Empty vanity
Destructive ambitiousness
Untruthful
Envious