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the best solution tried so far. The value behind the taxing power is the total capital of the nation, meaning human as well as physical capital. And the dollar has proved pretty stable since Paul Volker’s tough reforms in the early 1980s. That means that government fiat money in this county is working about as well as anything we have known. But there are problems. Government tools for stabilizing government fiat money, which has no value in itself, are limited to control of its supply. The tools are monetary and financial policy. Monetary policy is mostly “open market operations” where government sells bonds to soak up excess money, and buys them back again to put money back in the system. You can also raise or lower Central Bank interest rates to get the same effects. Fiscal policy trims money supply by raising taxes and cutting government expense, and pumps money back into people’s hands by lowering taxes and raising government expense. Monetary policy is the tool of choice because it has acted must faster. But either policy, or any mix, is a tightrope walk. Too much money courts inflation by motivating people to spend rather than save. Too little courts recession by motivating the opposite. That’s why macroeconomics is said to rest on microeconomics. Are we wise to push our luck on that tightrope forever? Another problem is that our current money system may depend too much on banks. Banks buy and sell back the government bonds, for example, and create the money they lend by writing it into the borrower’s checking account and booking the promissory note as value received in return. The problem is that banks are failure- prone. I mean plain commercial banks which do nothing but accept deposits and make loans, not the still more dangerous commercial/investment hybrids which rose and fell after repeal of the Glass-Steagle Act. The danger is leverage. Depositors must be attracted at some cost, say checking services. Borrowers must be attracted at a rate covering those costs to give profit in the first place. Then equity investors must be attracted at an equity rate, generally higher because equity imposes risk. These rates and costs are market givens rather Chapter 1: Recollections 1/06/16 20 HOUSE_OVERSIGHT_010936