Red-Blooded Risk: The Secret History of Wall Street

CHAPTER 8

The Story of Money: The Past

Most people think of money as pieces of paper issued by the government that can be used to buy things. They know there is a lot of stuff that view doesn't explain. How is the value of the money determined, and why does the value sometimes seem to change uncontrollably? What is paper money's relationship to precious metal? Why are there different monies in different countries, with relative values that also seem to change uncontrollably? How are banks and central banks and treasuries involved? Why is money covered with mystic symbols? Is money in a wallet the same thing as money in a bank?

Some people think they know all the answers to these and other questions about the basics of money. These people are called macroeconomists. These people are wrong. You don't have to take my word for it; just ask them. There are many conflicting theories of money, and none of them seem of much use in making real decisions. There are always macroeconomists who think interest rates should be higher and those who think they should be lower, and neither group has a better-than-random track record of predicting the effects of interest rate changes. If you want to guess a macroeconomist's opinion about current economic policy, you have a much better chance guessing from their political views than by reading the journal articles they write.

We are going to talk about money now because money is essential to managing risk. Once you realize that, plus a few other self-evident ...