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.