3 Groups use money in 3 different ways.

Money has three different purposes according to Barron’s Dictionary of Banking Terms:  (1) as a unit of exchange between government, businesses and people (2) as a unit of account that allows you to compare the value of different things and (3) as a store of value that lets you compare the value of an asset over time:  “Did it gain or lose value?”

There are three different groups that use money in three different ways: (1) governments use money as influence both abroad in diplomacy and at home to influence your vote or the outcome of an election; governments always want more money to give them greater influence (2) banks use money to make a profit on money exchanges that they facilitate; banks like an active money system with lots of kinds of money exchanges that happen all the time in ever greater quantities (3) individuals and small businesses use money to capture the value of their labor and production in the productive stream; these money users are the most vulnerable.  The purpose of banking regulations is to balance these three money interests; all three groups benefit from keeping a solvent banking system.

Monetary systems are the set of policies that establish the volatility or stability of currency and commodity values;  some examples include the U.K. sponsored strict gold standard (1819-1919), the U.S. sponsored Bretton Woods managed gold system (from 1944-1971), and the U.S. sponsored fiat monetary system (from 1971-present).  Imagine that all possible monetary systems utilize policies that create a continuum of risk and volatility.  On one end of the risk continuum is the least volatile and most stable monetary system that has sound money and stable currency and commodity values (like the strict gold standard); on the other end is the most volatile and least stable monetary system that has high government and private debt, and unstable currency and commodity values (like the current system).

Fiscal policy is how much debt the government carries and whether it tries to pay down the debt; also known as “tax and spend” policies.  During the classical liberal period (1776-1861) the U.S. federal government paid debts for the Revolutionary War by contibuting to the founding of the First Bank of the United States; to pay war debts from the War of 1812, the federal government helped to establish the Second Bank of the United States.  Both banks were dissolved after their charters expired.  During the modern liberal period (1861-1944), the Union side used income taxes to help pay for the Civil War (and the Sixteenth Amendment, ratified on Feb 3, 1913, established income taxes across the whole nation) and the Federal Reserve was established to oversee the banking system but it failed to prevent the Great Depression; Keynesian policies encouraged greater government debt without a formal plan for paying off the debt.  During the neoliberal period (1944-present), the monetarists imagined an infinite timeline for paying off debt by constantly increasing the money supply; monetarist economists encouraged an era of high government debt and high private debt.  The current national debt according to the debt clock at http://www.debtclock.org, is greater than 19 trillion dollars (thanks to Keynesian policies, that’s more than $57,000 per U.S. citizen) and the current private debt is close to 17 trillion dollars (thanks to the Monetarism, and that’s close to $52,000 per person).

Sources: Thomas Fitch, ed., Barrons Dictionary of Banking Terms, (Barron’s Educational Series, Inc. Huappauge, NY, 1990), 391.

Anat Admati and Martin Hellwig, The Banker’s New Clothes: What’s Wrong with Banking and What to Do About It, (Princeton University Press, New Jersey, 2013).

The Debt Clock, http://www.debtclock.org, accessed Sept 2015 and Feb 2016.

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