This post introduces a series of articles on the subject category of Money & Banking. Within the overarching subject of free markets, no other subject category has the importance of Money & Banking. This subject deals with our primary medium of indirect exchange and the banking system which creates and transmits money.
If you think I overstate the importance of Money & Banking consider this:
Nearly all economic transactions use money.
- You (probably) get paid with money.
- Money connects all financial transactions.
- Money represents the primary component of most prices.
- Economists & governments state early all economic data in terms of money.
- Governments use money in virtually all transactions.
- International transactions occur in terms of money.
- And this list could go on for three pages…
Any time you engage in a transaction for economic good using money, you only understand half the transaction, if you do not fully understand the nature of money, how it’s created, the role it plays in the economy, and the information that money prices transmit.
We tend to believe, since money plays a ubiquitous role in economic transactions, that we already understand the meaning of money and what role it plays. Many of the erroneous economic decisions we make as individuals, organizations, and government entities, result from misunderstanding money.
Even if we admit that we don’t understand money, we tend to have confidence that economists and people who influence the money supply really do understand money. But don’t believe it. Evidence of the misunderstanding of money can be seen everywhere. Let me give one specific example that I believe demonstrates my point.
One might think that the chairman of the Federal Reserve System, our central banking system, would know the answer to the simple question, “What is the definition of a dollar?” Yet, read the response that Ben Bernanke gave in a hearing before the House Financial Services Committee to the question asked by Rep. Ron Paul, “What is the definition of a dollar?”
“My definition of the dollar is what it can buy. Consumers don’t want to buy gold; they want to buy food, and gasoline, and clothes and all the other things that are in the consumer basket. It is the buying power of the dollar in terms of those goods and services that is what is important, and that’s what I call price stability.”
Ben Bernanke, Chairman, Federal Reserve System
Wednesday, March 2, 2011
House Financial Services Committee
[View the portion of the house financial services testimony in which this quotation occurred.]
In a series of articles, which I will post in this space every Wednesday, I will clear up Mr. Ben Bernanke’s confusion, or at least the confusion of those who believe his comments. I will also address the topics that I listed above and much more.
Although I have made a basic outline of the topics that I wish to cover in this series of articles, I want to respond to questions which come up about the subject of Money & Banking as they arise from news articles, web posts, and—most importantly—comments and questions that you post in the comments section below. Please feel free to add your comments, questions, and corrections.
Please return next Wednesday.
Neither one of these gentlemen receives high marks for eloquence, but you would think that the Fed chairman could rattle off a more precise definition of the dollar.