From the most ancient of times governments have dealt with the issue of having a medium of exchange–money. From earliest Babylonian times to the long ago Chinese empires to the Romans and the Hanseatic League, kings, emperors and rulers of one stripe or another have tried to manipulate the currency in use to their advantage. The common man and thieves have always been active also trying to figure a way to counterfeit the currency of choice or gain a profit on the fluctuations of the perceived value of any currency. Various tokens and coins have been used from the earliest of times. One of the problems was that the currency or money usually only had value within the jurisdiction of a particular state or empire unless it was made from a precious metal that had universal recognition as a store of worth.
That is why from the earliest times money was supported by some underlying comodity if the coins were not of gold or silver. Sometimes if an empire was large enough or strong enough then it could have coins from non precious metals. This was true with the Roman empire. The paper or metal money had to represent the ability to get something you wanted to have any exchangeable value. The coins themselves had insignificant value in and of themselves. It was what you could exchange it for that gave it value. You could buy an ox or pay the carpenter to build a cabinet with it and that is what gave it value. There had to be a consensus that the value was there. Doubt and hesitation would diminish the value of the money overnight. To protect the integrity of the coins they would have images and embosed features to make it more difficult to counterfeit. Plus it boosted the ego of the current ruler. More than one favorite of a king or emperor was felled by the temptation to alter the mix of the currency by blending in more copper with the gold. Sometimes that wasn’t really true but the accusation could result in a lost head. Read English or French history for examples of this.
This country remained on the gold standard longer than it has been off the gold standard. There have been a few calls recently for the return to that standard so that confidence in our money and thus our economy will be restored. Probably not a bad idea but it will not happen because then the Government could not create as much money as was convenient whenever it wanted. Power of the coin is the ultimate power once we became more than hunter-gatherers. This is true in any economic system. The politicians will never cede that power voluntarily.
We made an attempt to remove politics from the monetary system almost a century ago with the creation of the Federal Reserve Bank in 1913. The whole point of that bank was to make it independent of politics. It was designed specifically not to be a branch of the Treasury or subject to the whims of any particular Administration. It has the power to print the money. Congress can authorize the amount of debt that can be incurred by the US and has the power to authorize the use of the funds. It doesn’t have the power under current law to determine the amount of money in the system, the Fed does that. Article One of the Constitution has two provisions dealing with money and coins. You should read both of them for yourself. The history of our nation is replete with examples over the last 100 years of the Fed demonstrating its independence and there being conflict and disagreement betwee a particular Administration and the Fed. Often a sitting President who wants a second term will want the Fed to prime the pump as it were and put more money into circulation in an election year to boost economic activity or take other action they deem useful for the short term to enhance their political aims. Almost every President has had difficulties and disagreements with the Fed at one time or the other. That is a good thing, not a bad thing. That tension between a current Administration and the Fed represents the difference between a long term view and a short term feel good solution to real or perceived troubles.
I am very worried about the relationship of the current Fed and the new Administration. The Fed chief is never, never supposed to be a spokesman for any Administration. His job is strictly monetary policy to insure a sound banking system to prop up or increase our economic growth or well-being. Bernacke is being rolled out too often now. He may have disagreements with the current Administration but he is talking the party line. His recent TV interview was not a good idea regardless of what he said. Regrettably he is giving the appearance of doing the bidding of the Treasury department. That might not be true but the appearance can’t be denied. Appearances matter. Ask any bride or groom. The recent stimulus bill is a grave concern. It is not his job to support that or to implement it or make it work. His job is the overall economy. That stimulus bill is pure politics and for a short term goal. That is not the precept of the Fed. I have the impression that the Treasury at the instigation of the President can give a call to Bernacke and seek his support for just about anything they want. I don’t care for his approach as you can tell but I do hope he fulfills his full term and doesn’t resign early to allow the new administration to appoint another Fed chief “friendly’ to their views. Again that would give the wrong impression. We are drowning in politics now as it is. We don’t need politics to invade the realm of the Fed’s domain. Once that camel’s nose is in the tent the whole camel will follow and I don’t believe any of us will like the result. Let’s at least keep the dung outside the tent.
The Fed is printing up over 1.2 trillion more dollars in the next several months to purchase the Treasury bills and mortgage backed securities. This was announced yesterday. There is nothing to support that money in terms of comodity value. The Congress will authorize the Treasury issuance then the Fed will buy them. Gold soared over $50 on the news and Treasuries dropped over 1/2 a point. You may think these are arcane matters that don’t affect you. They do. You best make the effort to learn something about it.