12/29/2014 04:38 pm ET Updated Feb 28, 2015

Thinking About Money

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When the stock market crashed in 1929, I was four years old, too young to take notice. That changed in a few years' time. My father was a banker in a small town on the border between Tennessee and Virginia in the foothills of the Appalachian mountains. The town had a few light industries and was surrounded by truck farming. I was eight years old when the banks were closed by President Franklin D. Roosevelt to prevent a "run" on them. There was a danger that eveerybody might want to take their money out of banks at the same time, in which case the banks would collapse. So Roosevelt (FDR) closed them temporarily to let panic cool down.

It was at that young age that I began to learn about money, of which our family did not have very much. My father, himself the son of a family doctor who made house calls using a horse and buggy, had started out as a bank teller and worked his way up eventually to become the bank's president. The depression, money, and banking were dinner conversation at our house.

By about 1934 or so the money supply in Bristol and its environs, as in many other parts of the country, dried up. Commerce in Bristol came to a virtual stop because people had so little cash and didn't want to spend what little they had. My father and other business people, working through the Chamber of Commerce, decided they needed to stimulate the economy by issuing a local currency, which became known as "script." It was paper money, easily distinguished from greenbacks, and it bore my father's signature. Local stores and banks accepted it as legal tender for several years, until the national money supply increased enough to make it unnecessary.

From this experience and from my father's tutelage, I learned that all money is one or another form of 'credit.' That is, its worth is what people believe it to be because other people have 'promised' to or can be believed to give you something for it. This is true even if the money is gold or another precious metal, because you can't eat gold. Its value lies in the market, which is itself a form of credit and will collapse if people's trust in it goes down.

Some people today are saying that America should return to backing its paper money with gold. They fear runaway inflation, and they dislike what they call money "by fiat," meaning paper money backed by the "full faith and credit" of the Government. But gold can't prevent inflation unless you eliminate paper money altogether. If the United States were to return to the gold standard, it would simply reduce the money supply, since the amount of gold in the world is finite. Or else the paper money which the gold backs would be revalued, which would have the same result as that of money by fiat. In other words, even gold-backed currency is a form of credit and has a value given by fiat. The only alternative to that is barter.

In any case, if a monetized economy is to flourish there has to be a way to regulate the money supply, so the question is not whether this should be done but rather by whom it should be done. My father the small town banker taught me early along the value of its being done by the Federal Reserve system. Although I don't always agree with specific actions the Fed takes or fails to take, I have not yet heard of a better way to regulate the money supply.

God knows the system is not perfect. Inflation is indeed a risk, but all money transactions, whether in gold or in paper, or risky. The most important factor is not the amount of money in circulation, considered in and of itself, but the relation of that money not to gold but to the underlying economy. If we are to have a national monetary system rather than a narrowly local one, there is no getting around the fact that at the end of the day the responsible parties are the taxpayers. Left entirely to itself, capitalism flourishes briefly, then devours its own markets and leads to catastrophe.