Thursday, October 28, 2010

Monopoly Money

The other day, frequent contributer J-Lo posted a link on our Facebook page to an article her friend had sent her regarding one person's explanation of economic problems and potential fixes from a point of view of someone on the left.  (Said friend has commented here, and I hope you're still reading).  I later got a chance to read it fairly closely, and came to the conclusion that the whole thing is nonsense on stilts.  The whole thing is full of weasel words (many, much, hardly any, etc.) that don't mean anything concrete, and sometimes even mean different things in different contexts.  My favorite "weasel" is when 20-34% in one context is "only a fraction," whereas in another, 20-30% of the same figure is "much of the money."  And, as an added bonus, the whole thing is steeped rather heavily in Marxist class rhetoric, with a few "Uber-Rich"es thrown in for good measure.  If you want a fun exercise for your evening, click on over, print a copy, and black out every weasel word and gratuitous mention of class, wealth, and status.  It'll end up looking like a FOIA request about Area 51. 
Stylistic criticism aside, the whole thing is also full of contradiction and fallacy, but if you want a point-by-point rundown, I'd be happy to give one later.  But for now, I'll keep this narrow, because it's going somewhere eventually, and I'd like to still have an audience by the end.  In the article, the author makes the following assertion:
Whenever The Fed buys securities in the open market, it pays for them with money that it creates out of thin air with a keystroke.  It does not draw the money from some reserve account that is limited in size.  It is "new money" that did not exist prior to the keystroke that created it.  With any of its purchases of securities, the Fed provides loanable funds to banks that were not saved by any saver.
From a certain point of view, this is technically correct.  The cash did not exist prior to the purchase.  But cash and money are not the same thing.  Cash is just a measure of the value that money has in an economy.  But the Fed's creation of cash out of thin air did not add to the overall value of wealth in the economy.  It just changed the relative value of the ratio between cash and money.  Look at it this way:
Courtesy Hasbro
Say you're playing Monopoly on a table, with a real game set.  I know, I know, it takes so long, and everyone always fights, and there are better things to do.  It's sort of like life in that way.  But say there's a blizzard, and the TV's out, and you've worn the spots off of all the decks of cards in your house, so you're left with playing Monopoly.  After a while, the banker gets crazy, and decides to add an extra zero to some of the money.  For a while, making change might get a little tricky, but you'll keep playing.  Then say the banker adds some more, and some more, and some more, until every bill in the set has an extra zero on it.  The banker has undeniably created more cash out of thin air.  But the amount of wealth has not changed.  There are still the same number of bills, same number of cards, and same amount of property.  After a while, the game will get pretty dumb, and even staying at a hotel on Boardwalk won't hurt.  Eventually, everyone will either tire of the game, or just add an extra zero to all the bills to restore balance between cash and wealth.  What was gained by this magical creation of cash?  Not a darned thing, but a few extra hours of frustration, and damaging the resale value of the set. 
Courtesy Hasbro
Now, say you could change the game and actually affect how it plays.  What sort of rule changes could you make that would actually increase the wealth available?  First, you could tinker with the "zoning code" of the game.  You could add more houses and hotels to the available set.  You could even increase the number that can be put on a property, and correspondingly increase the amount you can charge.  Second, your mini Atlantic City could "annex" more property, increasing the size of the board and the available property to buy and charge rent on.  But perhaps the simplest hack, one that doesn't require printing a whole new board or figuring out how to build more little plastic houses, also happens to be my favorite "house rule:"  Put all of the tax money collected in the game in the middle, and whomever lands on Free Parking gets a tax refund.  What good does putting your $150 income tax in the bank do for anyone, if it can't come back to someone who can turn it around into putting houses on Connecticut and Oriental? 
Read this book.
Not that the idea of fixing the economy by toying with the value of money is a new one.  According to Amity Shlaes in The Forgotten Man, during the Great Depression, Secretary of the Treasury Henry Morgenthau, Jr. related the story of President Roosevelt deciding to increase the price of gold by 21 cents, because, in the President's words, "It's a lucky number, because it's three times seven."  Another time of economic trial, before depressions were called "depressions," was the Panic of 1893.  The Panic happened, as they often do, as a result of the bursting of a bubble, in this case a bubble that developed in overbuilding railroads.  Another major contributing factor was a long period of low inflation, and even deflation, of the currency.  The panic, combined with monetary issues, gave rise to a populist movement, of which a major goal was "Free Silver." 
Free Silver was a movement that sought to include silver in the pricing mechanism of the dollar, which to that point had been based on the price of gold.  At the time, the gold mining industry was slowing down significantly, while silver was so plentiful that many mines lay empty because it cost more to mine than you could sell the silver for.  The ultimate goal of the populist movement, of which the rural farming population was a significant portion, was inflation.  In the big picture, inflation helps debtors, while deflation helps borrowers, and folks who were still paying down land that they had bought in the rapid expansion of the nation in the previous decades definitely didn't mind any help in paying the mortgage, so to speak. 
Going back to our Monopoly example, let's say you're playing the long-form version of the game, and happen to land on Boardwalk, which the bank still owns.  The $400 price tag is a lot of scratch.  What if you could set up the purchase on an installment plan of a $20 every turn for 20 turns?  That would be a much easier decision, wouldn't it?  Three turns after this agreement, though, is when our crazy banker starts putting zeroes on the money.  Then each $20 becomes a $200 bill, and you can pay off the "mortgage" on Boardwalk in a couple turns, and be free and clear 15 turns earlier than the banker was expecting full payment.  Similarly, if the crazy banker scratched out zeroes, causing deflation, those two former-$100 bills you'd have to start paying your mortgage with would run out pretty quickly. 
William Jennings Bryan
So in the 1890s, the people who owed the most money – folks who had purchased property like farmers being a large number of them – wanted a monetary policy that included silver to inflate the currency and be out of debt that much easier.  Of course the evil "Eastern Banking Establishment" would lose a lot of money, so clearly they were behind keeping gold as the only measure of the dollar.  The Populist movement beginning in the Panic of 1893 gave voice to perhaps the most well-known populist in history, William Jennings Bryan of Nebraska.  He was noted for soaring oratory, and was even nominated to be the Democratic Party's candidate for President once in Denver, although that was 15 years after the Panic. 
In a sense, this all sounds kind of familiar, doesn't it?  Of course, nowadays, the biggest debtor in the country isn't landowners (although that's not to be discounted with the bursting of the housing bubble), and a growing global market has helped the farm economy improve with higher prices.  The biggest debtor in the country, as you may have guessed, is the US Government, of course.  So it's no wonder they'd want to tinker with the price of money, is it?  Keep that in mind next time you read about the Fed tinkering with interest rates or buying debt. 
Oh, by the way.  In the year after the Panic of 1893 was the midterm election of 1894.  As Michael Barone was quoted in the Wall Street Journal saying, during that election, the Republican Party gained 130 seats on the Democrat and Populist parties, to take a 151-seat edge in the House of Representatives, or nearly three-quarters of the total seats in the House, making that election the tsunami of all electoral tsunamis. 
Take from that what you will, and please pass the dice.  I think it's my turn to roll.  


  1. This reminds me of something I read a while back by Marian Tupy of the Cato Institute:

    "As the Austrian philosopher Friedrich von Hayek explained in his 1944 classic, The Road to Serfdom, central planning leads to massive inefficiencies and long queues outside empty shops. A state of perpetual economic crisis then leads to calls for more planning. But economic planning is inimical to freedom. As there can be no agreement on a single plan in a free society, the centralization of economic decision-making has to be accompanied by centralization of political power in the hands of a small elite."

    Not to go full-on Glenn Beck, or anything. ;

  2. Bret, you and your crazy, right-wing Austrian economics.