The future of monetary policy

Interesting enough, as I study more and more of the economy, the only thing I seem to learn is how little I know. After the documentary, "Inequality for All" by Robert Reich, I realized a few striking phenomenons in the economy and politics. In short, our country is becoming too disconnected.

The creation of paper money occurred during the Civil War and followed the Panic of 1857. When Europe enlisted farmers for wartime just 5 years prior to our widespread cash printing, two significant changes took place. Europeans imported agricultural products from American farmers which caused a boom, and when war subsided there, their workers went back and our products took a massive hit in value. The Ohio Life Insurance and Mutual company, at the time a huge investor in agriculture, failed and caused thousands to lose the money they had invested. This caused the panic of 1857 where citizens did not trust spending on items that would lose value, so they saved their gold and silver coins. Commerce was halted even though the country continued to grow.

Thus, many banks began issuing their own currencies, but made loans in good faith. Banks went broke in hard times because of defaulted loans. Fundamentally, there was no central bank; each bank had its own currency, and many consumers lost money because of the same substandard risks. Just prior to the Civil War, circulation of the gold and silver was paltry, so the government saw national currency was needed. July 17, 1861: paper was printed to pay the military, purchase supplies, and to altogether stimulate the economy. With little precious metals, the government circulated paper purely on faith that it would be good, giving the paper very little value. National income taxes, national debt, and this new money all were remedies to our lack of economy, but inflation gave another hurdle. Any denomination under $5 was useless. Central Banks were created in 1863 (Lincoln) to give more substance to the national currency, which had high default risks through private banks. Inflation gave the dollar less value and continues to weaken purchasing power by 2% on average each year, with the strength of the economy to counter. Today, $541 million is printed daily (95% goes to replace money already in circulation).

Keynes said that when people hoard, terrible things happen, including depressions and wars. The Great Depression stemmed largely from an outdated inflexible currency. Hoarding also took place, since while investing was highest in the roaring 20s, consumption was low. Loans were taken out to invest in businesses at 10% down. Soon the banks ran out of money and normal accounts could not be withdrawn from. Panic ensues and everyone simultaneously makes a bank run to get cash out. Banks subsequently defaulted and spending was nonexistent. Deflation occurred because the economy suffered, which led to a higher need to save, since money was appreciating by being kept under the bed. GDP fell. Disparity of wealth is also believed to have caused the Great Depression, which is seen on a larger magnitude today.

Never a democracy before, people are in it for themselves, that's our gift and curse
Lobbyists
Internet causes laziness and disconnect
Inflation is increasing, but wages aren't
Human nature to hoard
Value is worthless and they should give back
Pay taxes on all money, not 11% on investments.