Trust Me, Money Is About More Than Currency
STEVE INSKEEP, host:
It's Morning Edition from NPR News. Good morning, I'm Steve Inskeep. The trillions of dollars - and it is trillions of dollars now that the federal government is committing to the bailout - raise a question. Where does all this money come from? NPR's Adam Davidson has spent the last few weeks exploring that question, and he joins us now. Adam, good morning.
ADAM DAVIDSON: Good morning, Steve.
INSKEEP: We're going to try to understand where money comes from and especially, this much money, so let's take a concrete example, if we can. Earlier this week, the federal government, the Treasury department, in particular, said it was giving $20 billion, lending it to Citibank, the giant bank that was in trouble. So, where's the federal government suddenly get an extra $20 billion?
DAVIDSON: Well, the Treasury makes money and it spends money, just like GM does, just like anyone does. And a lot like GM, the Treasury or the federal government makes less money than it spends. And when it spends more than makes, it has to borrow it. You and I use a credit card; they use treasury bonds.
INSKEEP: They sell bonds, that's it?
DAVIDSON: They sell bonds.
INSKEEP: OK. So, if the Treasury department wants to spend a bunch of extra money, they're going to borrow it. There's a deeper question, though, which is, where money comes from at all?
DAVIDSON: Right, what is the value of money? I actually wanted to get to the bottom of this question, and I asked a guy named Peter Fisher, he used to run the open-market trading operation of the Fed, which is basically where money is born. And I took him to the corner of 52nd Street and Madison Avenue in Manhattan, and I did something simple, I bought him a hot dog.
DAVIDSON: Do you want anything? Are you hungry?
Mr. PETER FISHER (Former Market Trading Operator, Federal Government): I'll have a Coke and a hotdog.
Mr. ASHRAPH JUNDI (Hot Dog Seller): That's 2.25, please.
DAVIDSON: So I'm going to pay you with this piece of paper. You're willing to accept that?
Mr. JUNDI: Sure. It is money, it's not a piece of paper.
DAVIDSON: That, by the way, was Ashraf Jundi(ph), the hot dog salesman. And what Peter Fisher explained to me is that that piece of paper - you and I know that piece of paper as a $5 bill - is a claim on the U.S. Federal Reserve Bank.
INSKEEP: A claim for what?
DAVIDSON: Well, that's the weird thing. Up until the early '70s, and for most of banking history, it would have been a claim for a certain weight of gold or silver. But now that $5 is a claim for five dollars, for five units of what the Federal Reserve calls a dollar.
INSKEEP: Wait a minute. In the past, that $5 bill was a sort of IOU, you can carry it around, it's lighter than gold, but at some point if you needed gold, you could go to the government and get gold for it. And you're saying that you get nothing for it now?
DAVIDSON: Well, you get five dollars for it now. And this week, we talked to Neil Fergusson; he's this wonderful historian of money at Harvard. He says he used to be really confused about all of this, and one day he was at the British Museum in London, and he saw this clay tablet from ancient Mesopotamia that basically said this tablet represents the fact that one guy owes another guy a whole bunch of wheat. He said that is one of the first instances of money.
Mr. NEIL FERGUSSON (Historian, Harvard University): Money, I suddenly realized, is a relationship. It's a relationship between the lender and a borrower, crystallized in some tangible object that is based on trust.
INSKEEP: Adam, is Neil Fergusson essentially telling you that money is an agreement?
DAVIDSON: Yeah. The main thing we're trusting is that the Federal Reserve Bank will keep on doing the kind of stuff that they should do to keep a $5 bill, or that number on your bank statement, to keep that having value. Basically, a $5 bill is five units of faith in Ben Bernanke and his eventual successors not to screw things up all that much. When people fundamentally lose trust in their government, in their financial institutions, money really has no value.
INSKEEP: Well, let me ask another question, Adam Davidson. When the U.S. economy grows, when we hear that it used to be $12 trillion and now it's worth $13 or $14 trillion. Where did that extra couple of trillion come from?
DAVIDSON: Some of it is, the Federal Reserve continuously puts more money into the economy to keep pace with that growth. But also, every day, people like you and me are creating new money. So, if I go into a Starbucks and I buy a hot chocolate for $4, if I give him four singles, I'm just moving around money that already exists. But if I give my credit card, something totally different is happening. There's a whole series of relationships. Starbucks now has a relationship with my bank, let's say Bank of America, that they trust that Bank of America will pay them $5. Bank of America is saying, we trust Adam, that he will eventually pay us back this $5. The Federal Reserve Bank is trusting Bank of America to be well-run enough to make this creation and basically, all these networks of trust have brought five more dollars into the world. Basically, when the economy grows, the amount of trust grows. And when the economy shrinks, as it is right now, there's less faith and trust in our future.
INSKEEP: NPR's Adam Davidson, I trust you'll have a nice holiday weekend.
DAVIDSON: Thank you, Steve, I hope you do, too. And do you trust me? Can you lend me a thousand dollars?
(Soundbite of laughter)
INSKEEP: Let me go create some first.
DAVIDSON: All right, take care.