Social Constructs, Self Constraints & Monetary Myths

I really liked this piece by Paul Krugman on money in general.  Of particular importance is this paragraph:

“For people like me, on the other hand, the economy is a social system, created by and for people. Money is a social contrivance and convenience that makes this social system work better — and should be adjusted, both in quantity and in characteristics, whenever there is compelling evidence that this would lead to better outcomes. It often makes sense to put constraints on our actions, e.g. by pegging to another currency or granting the central bank a high degree of independence, but these are things done for operational convenience or to improve policy credibility, not moral commitments — and they are always up for reconsideration when circumstances change.”

Boy, that almost sounds like MR verbatim.  Money is most certainly a social construct.  It is something we create primarily for efficiency as a medium of exchange.  Money has other characteristics, but this is the root of the tool that is money.  The aspect of the monetary system as a “social system” requires some elaboration because I think it’s easy to confuse the balance of private sector and public sector.  The monetary system exists primarily to facilitate private sector exchanges.  It does not exist primarily to facilitate public exchanges.  Another way of saying this is that we leverage the strength of our private sector to move resources into the public sphere.  Resources precede taxation.  So the stronger the private sector the stronger the public sector can be.  As I like to say, government is designed to facilitate, not to lead.  Of course, this doesn’t mean government is bad or even mostly bad.  Not at all.  But like money, it is a tool that we create to achieve a certain social goal.  It can be abused, misunderstood and counterproductive.  But that is generally because its users allow it to be corrupted.  Not because government is an inherently evil institution.  Understanding this is all about maintaining a sense of balance.  Too often these discussions fall on deaf ears due to the extremist position taken by one side or the other.  That doesn’t help anyone better understand any of this.

I think Dr. Krugman’s comments on self imposed constraints are equally important.  The USA is a government and monetary system that is designed around checks and balances. No single entity has a monopoly on any sort of power.  One of the most confused notions in the USA is the fact that we have privatized money creation to private banks.  In other words, private corporations compete for the demand of loans in a market based money creation system.  Further, we have designed a Federal Reserve system that facilitates and supports this design primarily through an efficient payments system that brings interbank settlement into one market.  I’m no Fed apologist (I think their powers are at times abused), but I think it’s crucial to understand the institutional design of the Fed and its rather rational existence (as a support mechanism for a market based money system that is inherently unstable).

There’s a lot more to add to these points, but that’s a good starting point for discussion….As always, I highly recommend reading the MR recommended readings on these subjects as they provide, what I believe is the single best publicly available description of the monetary system that currently exists.  To me, this is about studying history, understanding our system and understanding why certain institutions exist the way they do.  It’s not entirely irrational though it’s also not perfect.   But it’s imperative that we better understand why we have what we have because there is a dangerous amount of mythology circulating about all of this resulting in deeply misguided policy responses….