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The Launch of the QE2 addresses the monetary side of the Government's response to the fiscal crisis that we are still feeling the effect of. Read Dr. Tiemann's current note to get a better understanding of what is going on with our money supply and interest rates.
In The Borrower of Last Resort, Dr. Tiemann began this series by explaining the Government's fiscal response—namely its approach to taxation and public spending. Read these related notes to understand the ways that the Obama Stimulus plan reflects a careful reading of history and established economic theory.
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TIA's unique voice expresses itself in the below series of notes |
TIA's Most Current Note:
The Store of Value, Under Siege by Jonathan Tiemann, Ph.D. (July 2011)
What is Money?
What is money? You might as well as, “What is time?” It’s one of those concepts we all think we understand until we really examine them. After all, we use money in its various form to buy things every day. But where does it come from? What does it represent? And most important of all, what stands behind our confidence that if we use our money to pay for something, the seller will accept it?
To appreciate how our monetary system works, we need to go back to the time of Alexander Hamilton and examine how our banking system came into being. Then, we we’ll fast forward to the current time, to understand how much more sophisticated, complex and virtual the system has become since then. Lastly, we need to address the role of public debt, a key element in the whole monetary system. The soundness of the public debt is a major topic of current discussion. But when elected leaders raise the spectre of a default of US Treasuries, one could get the impression that they have no idea as to what fundamentally underlies the value of their own money, or how it all works. Public grandstanding or not, when a Treasury default is discussed as an option, it becomes urgent to explain how money works because a default could undermine a vital component of the system that allows our money to remain the primary store of value in our society.
The Origins of Our Banking System
In 1790, the fledgling United States, recently organized under its new 1789 Constitution, faced a series of threats difficult to imagine today. Money was scarce, and holders of debt from the Revolutionary War pressed for repayment. In Massachusetts, Shay’s Rebellion — violent popular resistance to the Commonwealth’s austerity measures in the previous decade — resulted from high land taxes that fell heavily on western farmers. Ongoing disruption to trade from attacks by the Barbary Pirates, the pressing of American merchant sailors into the British navy, and the constant threat from British troops still garrisoned near Lake Champlain showed the need for a central government strong enough “to provide for the common defense.” The new government also needed to overhaul the fragmented monetary system, under the control of the states, where local currencies fluctuated so much in value that many people continued to trade in pounds and shillings. With the country so weak both militarily and finacially, the American economy was dangerously vulnerable to control by European interests.
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