Let’s all please cease calling {dollars} ‘fiat cash’

Sometimes it is possible to oversimplify something. More than a decade ago, Ben Bernanke, then chairman of the Federal Reserve Board of Governors, sat down for an interview with 60 Minutes, the television show important Americans call when they have important things to say.

Bernanke explained how the Fed reacted to the financial crisis. When he got to the asset purchase programs, the host asked if the Fed would spend taxpayers’ money.

“It’s not tax money,” Bernanke said. “The banks have accounts with the Fed, much like you have an account with a commercial bank. To make loans to a bank, we just use the computer to mark the size of the account they have with the Fed. ”The host asked him if the Fed had printed any money. “Well,” said Bernanke, “effectively.”

He wasn’t wrong, of course. He is Ben Bernanke. You may disagree with his political choices, but he certainly knows how money is made.

However, this quote from 60 Minutes often appears more than a decade later. By simplifying what the Fed is doing, Bernanke confirmed for many people the deeply mistaken notion that the Fed can just conjure dollars out of nothing and then say via Fiat, “There. That is money. ”

There is a problem with the word “Fiat”. We use it to describe our current monetary system. Then we teach the students that the word for decree or edict comes from Italian. We tell them that fiat money is a social convention. It has value because the government says it is and everyone agrees. Cameron Winklevoss, Co-Founder of Gemini Crypto Exchange, says that “all money is a meme”. He was taught that at Harvard while he was doing the other thing he is famous to the.

Unfortunately, that’s not how money works at all. The first description I could find of money as “fiat” came from John Stuart Mill, the English philosopher, in Principles of Political Economy. Mill proposed a hypothesis: suppose a government began paying salaries in paper money that could not be converted into silver or gold when needed. The value of this money, he wrote, would “depend on the authority of the authority”.

Good yes. If the US Treasury Department printed up Mardi Gras tickets, spent them on the economy, and called them dollars, the value of those dollars would depend on the law of Congress. But that’s not what the Treasury Department does, and that’s not what a dollar is.

If you live in the United States, the dollars that you use the most in your daily life are bank dollars. Your bank creates them when they lend you money and then deposit them into your account.

Bank dollars have no value just because your bank says so. Your bank has regulators who rummage through their books to make sure these loans are solid assets with decent returns. And your bank pays premiums to the Federal Deposit Insurance Corporation to protect your deposits in case it fails. If bank dollars is just a social convention – a meme – then your mortgage is just a meme too.

Take the Fed now. It’s just a special bank. As Bernanke said, commercial banks have deposit accounts with the Fed. When the Fed lends them money, it adds dollars to their accounts, which we call reserves. And just like when the commercial banks lend you money, those reserves are a liability on the Fed. But there’s one crucial part of the process that didn’t get it done in 60 minutes: when the Fed tags those accounts, it is buying assets too. It swaps one for one: reserves for assets.

When we say the Fed is printing money, we are implying that there was nothing and now there is something. Ta there! But that doesn’t happen at all either. The Fed has to buy something. Usually it’s a treasury bill, but in an emergency it can be a more questionable asset. Then the Fed writes back the reserves. To believe that these reserves are just a meme, you have to believe that the assets are just a meme. But they are not. Don’t take my word for it. The Fed’s assets bring a return every year, in lean years and in rich years, without exception.

OK. Now we come to the Treasury. She also has an account with the Fed, but she can’t just pull dollars out of her account. The Treasury Department can deposit dollars into its account by collecting taxes or selling Treasury bills. There is no Fiat, no decree. There is no money printer anywhere. There are all transactions on a balance sheet, assets for liabilities.

Well, you might think that all of these mortgages and credit card loans are meaningless assets. You may believe that the US government will not be able to collect enough taxes to transfer these treasury bills. If you are right then yes, the dollar has no value. But we’re still not talking about trusting anyone. We are talking about credit analysis. So please: let’s stop calling it fiat money. Let’s call it what it is: loan money.