Money was back in the news these last few weeks, and since the US monetary system is such a specialized and difficult topic, I thought I’d write this little primer on money.

First things first: money is a medium of exchange. It’s an energy field, created by every living thing that surrounds us and binds us all together so that we don’t waste our time bartering for everything. Instead of trying to trade my columns and articles at Big Y for groceries, I beg my parents for money so I can buy them.

A long time ago people settled on precious metals as money—they were pretty to look at, easy to turn into coins, gold doesn’t rust or tarnish, and it was rare but not impossible to find. Eventually, out of expediency and sometimes sheer fraud governments and banks began setting up programs that allowed people to turn their stock of precious metals over to the government or bank for pieces of paper. The paper was just a certificate saying you could get that much gold from the bank. Being a naturally unscrupulous lot, the bankers had the idea of printing more certificates than they had gold and loaning those out, on the theory that as long as most people used certificates instead of gold they would be fine and no one would know the difference.

Already you can see the flaw in the plan: any sort of economic uncertainty caused people to run to the bank and get their gold, and since they didn’t have enough gold to equal the certificates they had printed the bank had to close down when they ran out. The people left holding the certificates ended up with nothing and had to liquidate their assets, causing a depression.

When they discovered this process that was causing economic chaos, ruining the lives of millions and upsetting the body’s natural balance of iron and anti-oxidants, the government stepped in and passed strict regulations protecting the depositor and making sure that bankers caught in the act were prosecuted for fraud. Of course they didn’t. What the government did do was create the Federal Reserve System, which provides jobs for economics majors and Ron Paul.  

Among the Federal Reserve’s various duties is this same overprinting scheme, except that there is no gold involved anymore. Basically, banks are required to keep a certain amount of “cash on hand” for people to make withdraws from. When the amount of cash the banks have dips below that amount, Ben Bernanke summons the Fed Fairy with the traditional incantation, “Ph’nguli mglw’nafh Cthulhu R’lyeh wgah’nagl fhtagn,” and she replenishes it. They don’t actually print new money. The Fed writes a check to itself on its own account and loans that money to the bank. The amount of money is determined by the various interest rates that the Fed sets. Generally the lower the rate the more money the Feds are loaning out

Then comes the funny part: you’d think that since the gold is long gone people wouldn’t have to worry about their paper becoming worthless overnight. Well, in a way they do, but we’ll get to that later. Mainly the thing people have to worry about is the things they invest in becoming worthless overnight.

Imagine, for the sake of Google optimization, that you run the company that makes Chia Pets. Because Lady Gaga and Barack Obama are popular, their Chia-selves sell rapidly and you start expanding your enterprise by taking out a loan to build a new Chia factory and develop more designs. The expansion pays off beyond all expectations: Chia Pets are enormously popular. Everyone wants one. Every A-list celebrity is calling you up to discuss licensing her likeness to you for Chia purposes. Other entrepreneurs notice this phenomenon, as do investment banks, and soon enormous sums of money are being loaned and spent to produce Chia Pets and similar products. They’re still selling very well and because everyone is sticking to their interest payments, the banks are happy and paying off their loans from the Fed and so they lower their interest rates, and the banks lower theirs.

A real boom is on now and soon the sketchy guys without a kiln and only a vague idea of what Chia is are getting $10 million loans for a Chia footware idea they came up with on acid. Not only can they not sell a single pair, you’ve run out of A-list celebrities, and the Justin Beiber Chia Pets frightened children. Everyone has more Chia Pets than they will ever need and no one wants to buy more. The bubble bursts when the loans can’t be paid and only the financially strongest Chia Pet makers survive the great liquidation, plunging the Chia Pet market into a depression that persists until the manufacturers have gotten production back in line with demand.

That’s basically what happened with the housing market and dot-com booms, as well as the Great Depression and Tulip Mania.

Now, about the paper becoming worthless overnight: the government gave the Federal Reserve System an important job when the United States began going off the gold standard during Franklin D. Roosevelt’s administration: it was thought at the time that going off gold would make the dollar worthless, so they decided to spice things up by creating an alternative to gold: mystery. They redesigned the dollar to be more mysterious and shrouded the Fed in secrecy and misinformation to make it a target for conspiracy theorists. They came up with all sorts of things, from the Fed arranging the JFK assassination to the chair of the system’s Board of Governors running the world economy. All the governors are probably shape shifting, blood-drinking reptiles from Sigma Draconis, too. It works, too! It makes international finance interesting and money valuable because you’re never quite sure if there isn’t a coded message leading to Nazi gold hidden in Alexander Hamilton’s cravat.

This column is available upon request in a signed and authenticated edition suitable for framing if you’ll trade me a package of 12 frozen hamburger patties.

Matthew M. Robare is a Collegian columnist. He can be reached at [email protected].