The Goose that Laid the Federal Reserve Note
The current argument for new MMF "remedies" seems implicitly to be based on the assumption that runs cannot be anticipated and on the notion that the run that followed Reserve's action sprung unexpectedly and without warning from the Lehman filing.
This newly discovered, expanded version of Aesop's most famous fable bears an eerie resemblance to the modern day and sheds new light on its tragic moral.
One day a countryman checking his goose's nest found there an egg all green and flattened. When he picked it up, it was as light as air and he was about to throw it away, because he thought a trick had been played on him. But he changed his mind and took it home and soon found to his dismay that it was a pure Federal Reserve note.
His wife had discovered at the same time an unusual egg from her own goose, an egg all yellow and glittering. When she picked it up it was as heavy as lead and she too was going to throw it away, also thinking it was a trick, for their country was apparently as rife in practical jokes as it was in mutated geese. But she took it home on second thought, and soon found to her delight that it was an egg of pure gold.
Every morning the same miracle occurred. The man was distraught; what to do with the pile of greenbacks? But the woman was overjoyed and soon became rich by selling the eggs at the town market. Also rich from his wife's bounty, but still bursting with jealousy, the man tried peddling his own paper, but the merchants did not fall for that trick. Eventually the woman died and the man was left with both geese. As he grew rich beyond measure, he grew greedy; and thinking to get at once all the gold the goose could give, he killed it and opened it – only to find nothing. Despairing, he rent his clothes and wailed until he collapsed in exhaustion.
A vision woke him and he obeyed. He attached some of the Federal Reserve notes to a sparse tree in his yard and brought the notes to market instead of his dwindling hoard of gold. The merchants remembered he had tried peddling paper before but he explained that these were different. He said these Federal Reserve notes were leaves from a Magical Money Tree (which he called "MMT" for short) that could not be duplicated anywhere on earth, and that whosoever wished to exchange them for an egg of pure gold need only bring them to his farm.
Not wanting to lose his business, the merchants reluctantly accepted his notes. When some of them attempted to make the exchange into gold, he cheerfully met them at his farm, showed them his magical money tree, and gave them one golden egg for each greenback. As news spread of the easy exchange, merchants stopped making the voyage up to the farm, and began exchanging the currency with one another. After all, it wasn't just as good as gold, it was better. Each note was lighter, more uniform, unfakeable, and individually numbered, with a handsome picture of someone's head.
The townspeople thrived with the new currency, and its popularity spread to neighboring towns. In time, as more people than ever wanted his funny paper, and fewer than ever actually exchanged it into gold, the countryman, thinking this time might be different, killed his remaining goose – the note-bearing one – and opened it too …only to again find nothing. Again he wailed and slept, and awoke with another startling vision: to create a virtual goose.
Instead of letting notes be exchanged into gold, he created a bank that increased by the stroke of a pen the account of anyone who deposited notes there. Each night, he snuck unseen into his bank's vaults and took some Federal Reserve notes. He spent them on lavish luxuries the next morning, and the happy but ignorant merchants deposited their proceeds right back into his bank. What else would they do with them?
To this day, those townspeople continue to trade with paper backed by nothing and exchangeable into nothing. No one ever asks by what sorcery their paper wealth grows every night, or why it seems the banker who used to be a countryman accumulates more and more of their possessions over time. As their bank accounts grow effortlessly, they feel secretly guilty because they think they must be tricking someone, and so they do not speak out.
But they are only tricking themselves.
"GREED OFT O'ERREACHES ITSELF."
Philip Maymin is an assistant professor of finance and risk engineering at NYU-Polytechnic Institute.