The Aporetic

Part of the recently released video of Mitt Rom­ney talk­ing to wealthy poten­tial donors includes Romney’s answer to a ques­tion on the Fed­eral Reserve buy­ing debt. Rom­ney insists that the Fed­eral Reserve is buy­ing most of America’s debt, which isn’t true. But he also says this:

So who’s giv­ing us the tril­lion? And the answer is we’re just mak­ing it up. The Fed­eral Reserve is just tak­ing it and say­ing, “Here, we’re giv­ing it.’ It’s just made up money, and this does not augur well for our eco­nomic future.

The idea that the money the Fed­eral Reserve cre­ates is just “made up” is com­mon: we hear that it’s “backed by noth­ing” or sup­ported by noth­ing but faith. None of those things are true. The money used by the United States is “backed up” by exactly the same thing that backs up the US armed forces or the courts or the farm­ing of wheat or the mak­ing of cars or pro­grams on HBO: the cre­ative labor of the cit­i­zens of the United States of Amer­ica. Who are you to call that noth­ing?  It’s true you can’t walk into a bank, hand over a twenty dol­lar bill, and ask for the “cre­ative labor of the cit­i­zens of the United States of Amer­ica” in return. But that’s because you are already hold­ing a sym­bol of that labor in your hand, in the form of a twenty dol­lar bill.

It’s not just “made up” any more than any businessman’s loan is “made up.” If I’m a banker, and I loan you $10, 000, that money is “made up” of my assess­ment of your like­li­hood of repaying–that is, my assess­ment of your labor poten­tial. I could be wrong–you might be an irre­spon­si­ble per­son. But the money is no more “made up” than the money the Fed pro­duces. Or rather, it’s every bit as made up. Every bank issues more money in loans than it holds in its vaults: in that sense, the money it loans is “made up.” Do Rom­ney and his donors want to end bank­ing? We have to assume that in fact most of the peo­ple in that room made their money by invest­ing, that is, loan­ing money in the hopes that some money would be “made up” to pay them back. And what would it be “made up” out of? Why, the labor of the borrower.

That Rom­ney is wrong about this, and that a room full of very rich men likely to be bankers would appar­ently not see any­thing wrong, or con­tra­dic­tory, in what he says in what he says is both trou­bling and not sur­pris­ing. I’ve blogged before about the rev­e­la­tion, unmis­tak­able in the tran­scripts of his con­gres­sional tes­ti­mony, that JP Mor­gan had no clear idea or under­stand­ing of what money was.

What would real, not “made up money” look like?  The con­ven­tional answer says it would be shiny yel­low metal, e.g. gold. That’s what Mor­gan tried, and failed, to argue. This tan­gi­ble phys­i­cal sub­stance, held in your hand, is much more real than what­ever it is that your neigh­bor does when he heads off to work each day.

But Rom­ney made his money mostly from Bain Cap­i­tal, which prof­ited by bor­row­ing money–“made up money” to buy other com­pa­nies, and then get­ting those com­pa­nies to bor­row more money, to pay the salaries of Bain’s man­age­ment, who would then cut the salaries, ben­e­fits and jobs of work­ers at those com­pa­nies, and use that money to fur­ther reward Bain’s man­age­ment and to pay off the ini­tial debt. Bain would call this “stream­lin­ing” or increas­ing “effi­ciency” and indeed, it increased the effi­ciency of the flow of money into the pock­ets of Bain management.

But this was clearly not “made up money:” it came directly from the salaries and ben­e­fits and work­ers at the com­pa­nies Bain acquired. It’s as if you fol­lowed your neigh­bor to work, fig­ured out what he did, and found out a way to divert the money being paid to him into your pocket.

Noth­ing made up about that.

Note: If you look at Alexan­der Hamilton’s 1791 Report of the Sub­ject of a Mint, you can see Hamil­ton lit­er­ally mak­ing up the money. He defines a dol­lar as “the dol­lar” as either “31.25 grains of pure sil­ver or 24.75 grains of pure gold.” And he com­pletely admits that he has no idea why peo­ple want it to be gold, but they do, and he’s going with it. The dol­lar itself is thus entirely “made up” and always has been: the arbi­trary ratio of two dif­fer­ent metals.