Money is 'A Made Up Thing' — but that doesn't change rising inflation

DAVE DAVIES, HOST:

This is FRESH AIR. I'm Dave Davies, in for Terry Gross. For generations, economists and political activists have debated the merits of capitalist versus socialist economic systems. But one feature both systems share is the need for a reliable and stable currency to execute transactions. Money is such an ingrained part of our lives that we don't think much about where it comes from or who injects it into the economy. But our guest, Jacob Goldstein, has thought about it a lot. You may remember him as co-host for 10 years of the NPR program PLANET MONEY. Goldstein has written a book about the history and meaning of money, illuminating, among other subjects, how the United States regulator of money, the Federal Reserve System, came into being and what it does.

The Fed is currently engaged in a battle to bring down the nation's inflation rate, which has been stubbornly high despite the Fed's efforts. We thought it would be a good time to bring Goldstein in to talk about the nature of money, the Fed, the battle against inflation, and how America developed a single currency and the peculiar institution that manages it. Besides his work on PLANET MONEY, Jacob Goldstein has done stories for "This American Life," Morning Edition and All Things Considered. Before his audio career, he was a staff writer for The Wall Street Journal and the Miami Herald. He's currently an executive producer at the audio production company Pushkin Industries, where he hosts the business and tech podcast, "What's Your Problem?" His book, "Money: The True Story Of A Made-Up Thing," is now out in paperback.

Jacob Goldstein, welcome to FRESH AIR.

JACOB GOLDSTEIN: Hi, Dave. Thanks for having me.

DAVIES: Let's start with a big monetary problem in the economy now - inflation, worst it's been in many years. And the Federal Reserve is acting to try and bring it under control. The Federal Reserve, of course, is an institution that kind of regulates the money supply in the United States. We'll talk more in a bit about where the Fed came from and what it does. But first, what is the Fed doing to fight inflation? How is it supposed to work?

GOLDSTEIN: The basic idea is that when inflation goes up, the Fed raises interest rates. The Fed makes it more expensive for people and businesses to borrow money. And the idea is when that happens, people will borrow less and spend less. Companies will, you know, borrow less and invest less. And it'll basically slow demand. It'll get people buying less stuff - less goods and services.

DAVIES: Right. And presumably, when you do that, then people will lower prices because they need to lure buyers, right?

GOLDSTEIN: Yeah, or at least prices stop rising so quickly, right? It's unlikely that prices are actually going to fall across the board. And the Fed doesn't even want that. What the Fed wants is for inflation to go down from where it is. Depending on how you measure it, it's, you know, 6-, 7-, 8% - go down to something like 2%.

DAVIES: You know, I have to say, it seems like kind of a blunt instrument, you know, because, you know, inflation prices are raised by hundreds of thousands of different actors acting in their own interest. You know, the idea is that you make it harder to borrow so the economy slows down. There's less money chasing goods. But this is an inflationary surge that is caused at least in part by, you know, disruptions in the supply chain and labor shortages from the pandemic - you know, people leaving the workforce - you know, not to mention this raging war in Ukraine and energy prices. Is interest rates a less effective tool in this circumstance?

GOLDSTEIN: Well, to some extent, the story you're telling is the story that the Fed itself was telling last year. I mean, that was before the war in Ukraine. But the rest of the story - right? - this idea that, well, we're just coming out of the pandemic, supply chains are still kind of janky, so this inflation we're seeing now, the Fed was saying last year, is transitory. That was the word they kept using, transitory. It was a reasonable idea last year, but it didn't prove to be correct, essentially. What we have seen this year is not only has the rate of inflation gone up, we have seen that inflation has become really broad-based. So it's not just a few things. It's not just factory shutdowns in China or, you know, ships backed up out of the port of LA. It's - across the economy, we see prices rising. And so when you see that, you think, oh, it's not just a few particular items. It is this broad monetary phenomenon that the Fed is responsible for and has the ability to fix albeit, as you say, in a somewhat blunt and potentially painful way.

DAVIES: So how do things stand now? What's the outlook for getting inflation under control?

GOLDSTEIN: It feels kind of scary right now, frankly, right? Typically, when you have inflation as high as it is, the Fed hikes interest rates and basically drives the economy into a recession, right? They don't want to do that. It's not their sort of primary intention. The intention of raising interest rates is to reduce demand, right? It is to slow economic activity. And so, you know, the sort of dream version is you slow economic activity enough to reduce demand, drive down inflation, but not to actually make the economy shrink for months and months and drive us into a recession. But as you said, monetary policy of raising interest rates is a blunt tool, and they, you know, don't know exactly what the effects are going to be. And so there is a very reasonable chance that what they are doing is going to cause a recession. And they know that, and they kind of have to do it anyway.

DAVIES: So let's talk about the nature of money, which is really what your book is about. You know, it's something that's around us all the time. We take it for granted. We never think of it as a system where somebody makes it and injects it into the economy. You say that this is really a fiction. The title of your book is it's a made-up thing. What do you mean?

GOLDSTEIN: Well, it wasn't really until I got to PLANET MONEY right after the financial crisis that I really started studying money, thinking about money. And I had always assumed that money was - I don't know. I hadn't really thought about it, but it seemed like water or something. It just seemed like something that exists in the world and is, you know, subject to the laws of physics. That is not true at all, right? Money doesn't exist in the world until people invent it. That is the fundamental idea of the made-up thing. And moreover, people didn't just invent money once. People, we, have kept reinventing money and reinventing money in different ways with different rules. And all of those rules are really interesting and have interesting sort of social contexts and social consequences.

DAVIES: All right. So, you know, if we think about money - I mean, what it does obviously, it serves the function of making our transactions easy. Because without it, the only way we could make transactions is barter, right? I mean, I'll trade you my wool for your sausage or my labor for your sheep, which is maybe fine in a subsistence farming agricultural economy. But in an industrial economy, that obviously just doesn't work. You know, in the ancient world, you know, coins of precious metal came up - kind of a logical thing 'cause you're carrying something of value that's small, and you can trade it for another good. At what point does paper money appear in human civilization?

GOLDSTEIN: So paper money doesn't show up for a long time. Coins - by the time paper money shows up, coins have been around for well over a thousand years. Paper money first shows up in China around a thousand A.D. And it shows up in a very particular place. So it shows up in Sichuan province. And in Sichuan province, they used iron coins for money. In most of China, they used bronze coins, but in Sichuan they used a lot of iron. And this is the era when the value of a coin is based on the value of the metal it contains, right? In Europe, they're using silver coins and gold coins, you know, which are obviously worth a lot. Bronze is worth a fair bit. Iron, then as now, is not worth very much, right? So you needed a lot of iron coins to buy anything. You needed, for example, a pound and a half of iron coins to buy a pound of salt. I think of think of it like if you had to go to the grocery store and you could only use pennies, right? It's just a terrible thing to use for money.

And so some merchant in Sichuan has this idea where he tells his customers, look, you know, it's terrible having to carry around all these iron coins. I tell you what let's do. You leave a bunch of your iron coins with me. Leave, say, a thousand iron coins with me, and I'll write you a receipt, like, a claim check. You know, this piece of paper is good for 1,000 iron coins at my shop. And people start doing that, and then they - you know, when they want to buy something, instead of going back to get the thousand coins from the shop, they just give that claim check, that IOU, to the person they're buying from. And that piece of paper becomes money. And everybody loves it. It's a great idea. The government sees it happening. The government soon takes over the business of printing paper money, and it comes into the world.

DAVIES: How did it affect kind of the economy, you know, of the areas where paper money was circulating?

GOLDSTEIN: Yeah, it was a huge deal. It was - you know, we don't think of money or paper money as technology, but we should. It was, right? It was a tool that made - in this case, that made a transaction, made exchange much more efficient, right? Think - there is no mechanical transport at this time, right? So you have to carry around your vast quantities of iron coins, whatever, on a cart or something, right? That's expensive. It's impractical. It's easy to get robbed. Now you can transport the same amount of purchasing power with a piece of paper. It's a crazy breakthrough. And as it happens, this breakthrough comes at this moment in Chinese history and helps to propel this moment in Chinese history that is this real economic flowering. There is more trade, in part because of paper money, and with more trade, you can have more specialization so people can, you know, grow the food that grows best where they live and then trade it across distances. You have urbanization. You have cities of over a million people growing up at a moment when, you know, cities in Europe are under 100,000. It's really this kind of like a proto-industrial revolution. You have technological advancements. It's this incredible economic flowering that is driven in part, but certainly not entirely, by the advent of paper money.

DAVIES: You know, what it really illustrates is how money - I mean, it's a convenience, but it is also this powerful economic tool because it lubricates all these transactions and allows all of it just to happen much more readily and quickly. And the result is real growth and, you know, jobs and innovation, all that stuff. How did it end in China in this stretch?

GOLDSTEIN: So everything's going great. They got their paper money, and it's going for hundreds of years, I should say. So it's a thousand - around 1000 A.D. it's invented. The next big moment in the story of China as a whole, not just paper money, is the Mongol invasion, which occurs in the 1200s. By the later part of the 1200s, you get Kublai Khan as the Great Khan, and he takes this big step. So, you know, money - paper money has been around for hundreds of years in China by this point, but it is still a claim check, right? It is still very clearly - the piece of paper is not the valuable thing. It is a claim check for the metal coins, typically bronze. And those metal coins, those are the actual valuable thing. But Kublai Khan makes this move that at the time seemed wild, which was he said, you know what? You can't trade in that paper money for coins anymore. It's just paper. And kind of amazingly, it works, right? I mean, kind of not amazingly because that's how many works today but amazing when you think of, you know, the world at that time. And the Chinese economy continued to function on this paper money.

Eventually, there was a revolution. The Mongols were driven out. And really interestingly, the new rulers of China did not like paper money. They didn't like all this, you know, this kind of urbanization and markets that had been flourishing. And, you know, partly there was a lot of inflation with paper money, which is a classic problem. But also they were just - they just really thought, you know, the agricultural self-sustaining village, that's what we like. That's what we want to get back to. And so they wound up getting rid of paper money all together. So this incredible invention that, as you say, had made life better, had made the economy work better, arose in the world, worked and then disappeared. Then it just went away.

DAVIES: Let's take a break here. Let me reintroduce you. We are speaking with Jacob Goldstein. He co-hosted NPR's Planet Money for 10 years. His book, "Money: The True Story Of A Made-Up Thing," is now out in paperback. We'll continue our conversation in just a moment. This is FRESH AIR.

(SOUNDBITE OF HOWARD FISHMAN'S "DIRTY")

DAVIES: This is FRESH AIR. And we're speaking with Jacob Goldstein. He co-hosted NPR's Planet Money for 10 years. He's currently host of the business and tech podcast "What's Your Problem?" His book, "Money: The True Story Of A Made-Up Thing," is now out in paperback.

So, you know, in Europe, as we move into - as the Industrial Revolution emerges and we have industrial economies, you know, governments are starting to issue paper money and banks are, I guess. And we have the emergence of commercial banks. And there's this fascinating phenomenon in which banks actually create money, new money, just regular banks. And, you know, I learned this in economics in college, but it is still such a mysterious thing. Explain how this works.

GOLDSTEIN: Sure. So you can see a particularly compelling version of this happening in England in the 1600s, at which time there weren't really banks in England. So you see the emergence of both banks and the phenomenon you're talking about. And it happened in the shops of London goldsmiths. So London goldsmiths had safes to store gold. And so people started storing their gold with the London goldsmiths and getting a claim check, right? So this has echoes of the story from China. But this is happening for a while. These claim checks are starting to pass for money - familiar story.

Then the London goldsmiths take another step, and this is the step that turns them into bankers and links them with this banks creating money thing that still happens. The goldsmiths start making loans to people. And the way they make loans to them is they just give them the gold claim cheque even if they don't have any gold deposited, right? You just walk in and you say, hey, I want a loan. And they're like, sure. Here's a claim cheque for whatever - this number of pieces of gold at my shop. And then you can go out into the world and buy stuff with that claim check.

Now, you know, that goldsmith has some gold in their shop, so if someone takes that one claim check back, they can get gold for it, right? So it is money. And it is again, as with paper money in China, solving a problem, right? Because this is a problem we're not used to in the modern world. But indeed oftentimes in, you know, earlier centuries, there were moments when there was not enough physical money, which is different than wealth. It wasn't a problem that they didn't have enough wealth. There just weren't enough coins to sort of do business - right? - to make exchanges happen.

And so by creating money, the goldsmiths were helping to solve that problem. But they were also creating another problem, right? Now, because they've written this claim check on gold that doesn't exist, there are more claim checks then gold, right? And if, you know, only one person comes every day and brings their claim check in, the goldsmith can work it out. They can get the gold. They can call in the loan that they made to the person who they gave the extra claim check to. The problem comes if everybody all at once says, you know what? I'm a little worried about that goldsmith shop. I'm a little nervous that my claim check isn't going to be good. And if everybody at once goes and asks for their gold back, the goldsmith isn't going to have it.

And so that is a bank run. That is what today we call a run on the bank. And any bank is going to get crushed by it because what banks do is, you know, they lend out money. They keep deposits. And if everybody with a deposit comes and asks for their money back at the same time, the bank's not going to have it.

DAVIES: It's kind of amazing. And just to dwell on this for a moment, like in a more modern context, I mean, if you have a bank that, say, collects $100,000 from hundreds of depositors, they've got $100,000 in the bank, that's money. It's $100,000 in money that all these depositors know is there whenever they need it. But because the bank knows not everyone is going to need their money at once, they actually loan out, let's say, 80% of it. There's actually a legal requirement for a reserve, but - so they loan out $80,000, which is borrowed by people who start businesses or, you know, whatever, and they use that money to buy supplies and pay rent and hire people. And so now, in addition to the original $100,000, we've now got another $80,000 of money created. It's grown to 180,000. And then...

GOLDSTEIN: It's in two places at the same time, right? The bank - you make a deposit at the bank. They lend it out to somebody else. That person puts that money in the bank, right? So that $1 is now in two places. It's in two people's bank accounts. And it's real, right? I mean, it's real money. Your money in the bank is real money. And the banks are creating money that didn't exist before when they do that.

DAVIES: Right. And then, of course, the - that 80,000 that got loaned out to borrowers - they pay people. They put it in their bank accounts where the process is repeated and multiplied. So you have this weird kind of alchemy where with banks money spreads and grows. And it really relies on faith. Everybody believing that my money will be there when I need it, and I don't have to go, all of us at once, and try and yank it out of the bank. But it is kind of a made-up thing but one in which faith is a critical element.

GOLDSTEIN: Yes. I mean, it is useful, right? It is useful. It makes credit more readily available. It makes it easier to get a loan if you need a loan. It is also inherently fragile in that you can have runs on the bank. Like, even the most honest, you know, well-run bank, if everybody goes and asks for their money at the same time, the bank will collapse. And we have to a large degree solved that problem in the modern world by having the government insure people's deposits. In the U.S. now, you know, your bank deposit is insured up to $250,000. So there is no reason to go run and demand that the bank pay you your money if you're worried about the bank's stability.

And, you know, it's worth noting here, the Nobel Prize for economics was just given to several people, two of whom got famous for sort of building a mathematical model to describe exactly what you and I are talking about - both why banks are useful and why they're fragile, why it's rational for people to go, you know, take their money out of the bank if they get nervous, and also why deposit insurance can largely solve the problem.

DAVIES: That's Douglas Diamond of the University of Chicago and Philip Dybvig from Washington University in St. Louis. Let's take another break here, and let me reintroduce you. We are speaking with Jacob Goldstein. He co-hosted NPR's Planet Money for 10 years. He currently hosts the Pushkin Industries business and tech podcast, "What's Your Problem?" His book, "Money: The True Story Of A Made Up Thing," is now out in paperback. He'll be back to talk more after this short break. I'm Dave Davies. And this is FRESH AIR.

(SOUNDBITE OF SONG, "I'VE GOT MONEY")

JAMES BROWN AND THE FAMOUS FLAMES: (Singing) I've got money, and now I need love. I've got money, and now I need love. When I get my loving, I'll be the happy one. I've got money - no more money I need. Whoa, I've got money - no more money I need. Hey...

DAVIES: This is FRESH AIR. I'm Dave Davies, in for Terry Gross. We're speaking with Jacob Goldstein whose book explores the history of money - when it emerged long ago, how paper money is created and managed in modern economies, and how its mismanagement has created economic hardship such as the Great Depression. Goldstein co-hosted NPR's PLANET MONEY for 10 years. He currently hosts the Pushkin Industries business and tech podcast, "What's Your Problem?" His book, "Money: The True Story Of A Made-Up Thing," is now out in paperback.

Let's go to the early decades of the United States when the United States had separated from Great Britain, and it was an expanding economy. And there was no national currency. There was no single, you know, dollar that everybody shared around the country. How did that work?

GOLDSTEIN: Yet, there is this amazing moment in U.S. history that kind of peaks in the, oh, 1840s or so where there are thousands of different kinds of paper money, which is so wild to think about. It's another one that I can't believe I didn't know about it before I started, you know, studying money. Like, it's such an interesting, amazing moment in our history. So what happened was there were all these - there was no central bank. There wasn't even any - there weren't even any national banks. There were lots of little banks given charters by their states, by the states they were in. And in a lot of states, any bank that followed a few rules could print its own paper money. And, you know, if you can print paper money, why wouldn't you, right? And so there was this incredible proliferation of paper money.

Now, as in ancient China, as was the case for most of the history of paper money, this paper money was clean checks, right? The idea was you could bring your paper dollars to the bank that issued them and redeem them for gold or silver whenever you wanted. But as you can imagine, this creates a lot of problems - right? - problems for people who just want to buy or sell stuff. Like, if you're a merchant and somebody walks into your store with a dollar bill from a bank you've never heard of, how do you even know it's real? How do you know that the bank is legit? How do you know that the bank is sound, right? Maybe it is a real bank, but they're going to go bankrupt, and you'll bring your piece of paper in, and they won't be able to give you, you know, your gold or silver.

And so there arose, to solve this problem, these periodicals called Bank Note Reporters that were, like, little - I don't know - like, little newsletters, basically, little magazines that listed every bank in America and what their currency looked like, what pictures it had on it, and also a recommendation for whether to take the money at face value or whether to apply a discount - right? - if the bank is far away so it's hard to, you know, take the paper back there and get the money back. Or if the bank is unsound, you might say, yeah, I'll take your $5 bill, but I'll only give you $4.50 credit for it. And this persisted for decades, kind of amazingly.

DAVIES: Yeah. It's kind of - I mean, how did we build the Erie Canal with an economic system like that?

(LAUGHTER)

GOLDSTEIN: Right? How did we do anything? Yeah, how'd you buy breakfast, right?

DAVIES: Yeah. So if you're traveling from West Virginia to Pennsylvania, you walk in, and I've got - I want to buy the flour here, but I've got two different bank bills. And so they would look it up in the book and accept it, I guess. Obviously, this was kind of weird and tricky, and there were bank panics from time to time. But it's interesting. You write in the book that when economists look back at this period, it actually was less unwieldy than maybe we thought.

GOLDSTEIN: Yeah, it sure sounds awful, right? And for a long time, the sort of conventional wisdom was what you'd think. Like, oh, that's obviously a terrible idea. But in the - well into the 20th century, people looked back in a more analytical way and tried to really analyze, well, how much money did people lose, you know, in transacting? How often did these banks go bust? And what they found was that it worked pretty well. And, you know, one big upside of it is it was a growing country. And so when a bank could just set up shop and start issuing paper money, it allowed for, you know, economic activity to take place. There was enough money, basically, to have an economy. And so it was helpful in that regard. So, yeah, I think the sort of retrospective analysis is, yes, inconvenient, but not as bad as it sounds.

DAVIES: Yeah. So, again, one of the lessons is, to have a robust economy, you need enough money in circulation to sustain all these transactions. There were all run - these bank panics when people would get worried that a bank was shaky or whatever, and too many people would try to withdraw it. And then, the bank would go out of business, and then, it would spread to other banks. And this would create terrible economic hardship when it happened, right?

GOLDSTEIN: Yeah. Yeah. And this persisted. You know, we got rid of all those state bank notes around the time of the Civil War. And in the second half of the 19th century, there was - it was still wasn't the government printing money, but it was a more uniform system of paper money. But we still had these really frequent banking crises that - you know, if you want to get the feel of it, think of the financial crisis of 2008. It wasn't exactly the same, but that was the idea. It was - the problem was that banks would blow up. And not only was that a problem for the banks, it was a problem for people who had their money in the banks, and then, other banks would blow up. So you have this suffering that is communicated from the financial system to everybody, right? And it was clearly bad, and it kept happening. And in Europe, around the time, they were sort of figuring out that you could have a central bank that had the job of trying to maintain stability in the banking system. But the U.S., for a long time, we didn't want to do that.

DAVIES: Right, because, you know, we were an independent lot. And it - you know, the objection was you would be granting an awful lot of authority to people who weren't necessarily, you know, public servants. They were, in many cases, private bankers out to maximize their gain. I mean, the suspicion had some basis, right?

GOLDSTEIN: For sure. But I think it wasn't just a wariness of the private nature of banks although that was part of it. I think there was a broader wariness of the centralization of power more generally, right? A central bank, whether it's public or private, is an incredibly powerful institution. It controls the money. And so people were wary of granting one institution that much power.

DAVIES: This finally gets resolved after another crash in 1907. What happened?

GOLDSTEIN: So as you say, it was one in a long series of banking panics. In this instance, it started in New York. And J.P. Morgan, not the bank but the man himself, was the big, powerful banker of the era. And he actually got all the bankers, you know, into a room in his library and sort of made them work it out. And they did eventually work it out. But, again, there was a lot of suffering in the broader economy of people who, you know, were kind of innocent bystanders who were harmed by a banking panic. And finally, there was a senator, Nelson Aldrich, who kind of said, this is ridiculous. Like, this should be solvable. They've, you know, kind of solved it in Europe, not entirely, but they're doing a better job than we are.

And kind of amazingly, given the, you know, wariness of banking power and federal power, what he does is he gets this little cabal of bankers basically together, and they sneak off. They dress up as duck hunters, and they sneak into a private railcar in New Jersey and go to some fancy resort called Jekyll Island, which is, like, a conspiracy theorist's dream, right? And they cook up the idea for what eventually becomes the Federal Reserve. And so a few years later, the U.S. finally has a central bank.

DAVIES: We're speaking with Jacob Goldstein. He co-hosted NPR's Planet Money for 10 years. His book, "Money: The True Story Of A Made-Up Thing," is now out in paperback. We'll continue our conversation after this short break. This is FRESH AIR.

(SOUNDBITE OF AMY WINEHOUSE SONG, "YOU KNOW I'M NO GOOD")

DAVIES: This is FRESH AIR. And we're speaking with Jacob Goldstein. His book explores the history of money - when it emerged from barter systems, how paper money is created and managed and how its mismanagement can create hardship. His book is "Money: The True Story Of A Made-Up Thing." It's now out in paperback.

So what strikes me as I - you know, as I go over the story, is that you have this institution with a lot of power. And the Federal Reserve is - of course, is an institution that kind of regulates the money supply in the United States. But its leaders don't exactly understand how it all works. And we see that in the Great Depression, when after the stock market crash, you know, they could have acted in ways that might have made a difference and probably did exactly the wrong thing, right?

GOLDSTEIN: Yes. It is perhaps the worst error in the history of the Federal Reserve. And it happens around 1931, right? So the crash is in '29. And, you know, again, the story I learned before I started diving into this was it was really about the crash of '29, right? And it was this, you know, the stock market bubble and then it crashed. And, of course, you have a stock market crash. But that by itself was not enough to cause the Great Depression, right? What happens is that happens and, you know, there is a recession, and the economy is doing badly. And, you know, kind of analogous to what you and I were talking about at the beginning of the conversation in the same way today, if we think of today, when the Fed wants to cool the economy, it raises interest rates to make it more expensive to borrow money.

Today, when the Fed wants to help the economy, when, say, unemployment is going up, we want more economic activity to get, you know, more jobs, the Fed lowers interest rates so that people will borrow and spend more and companies will borrow and invest, and you kind of get the economy humming. And that is what the Fed should have done in 1931. But it was a different world then. I think we understood the world less well then, though we still don't understand it that well today. And we were on the gold standard, and people were scared. And, you know, the rule of the gold standard is you can turn in your paper money for gold for a fixed amount of gold. That's the basic meaning of the gold standard. And so people were starting to do that, which is scary. It's kind of like a bank run on the currency itself.

And so there's a way to fix that under the gold standard, and that is you raise interest rates, right? You make it more valuable for people to leave their money in the bank than to pull out their money and turn it into gold. So the Fed did that in 1931. But, of course, that's the exact opposite of what they should have done to help the economy, right? They should have been lowering interest rates, and they raised it. So they made it even harder for people to survive, for businesses to survive, for people to buy stuff. And that pushed the economy into the complete collapse of the depression.

DAVIES: Right. So at a time when what they needed to do was to inject more money, more credit into the economy, make it - just lubricate all those transactions more, instead, it tightened everything up. And what a disaster. You know, it's interesting that the person who won the Nobel Economics Prize this week, along with Douglas Diamond and Philip Dybvig, is Ben Bernanke, who was the former Fed chairman, who - he wrote about the Great Depression and this very thing, didn't he?

GOLDSTEIN: He did. Before he was the chairman of the Fed, he was a professor of economics, and he was perhaps most famous for his work on the Great Depression. And he wrote about not just the Fed but banks. So, you know, to sort of continue the story forward from 1931 where we were, you see this wave after wave of bank failures. You know, there was not deposit insurance yet, or at least not federal deposit insurance. So there were - it was common for there to be runs on the banks. Also there were lots of - you know, banks tended to be very local then. So if there was a bank in a town or in a rural county where all the farmers were getting hammered and the bank had made loans to all of those farmers and the farmers couldn't pay the loans back, the bank would go bust, right? And so there were lots of bank failures.

And what Bernanke figured out was that those bank failures themselves further amplified the crisis. They added to the trouble because now not only was it harder to get a loan because interest rates were higher, it was harder to get a loan because the bank just went out of business, right? And so it was another step in which the financial system itself had problems that radiated out and harmed real people.

DAVIES: You know, libertarians love to condemn the Fed - a lot of people do - I mean, these powerful, unelected, you know, moguls who have this enormous influence on our lives. Do they have a point?

GOLDSTEIN: I mean, they are certainly powerful and they are unelected. And they do have enormous influence on our lives. So all of those things are true. I mean, you have to do it some way, right? You have to manage your money somehow. So we can think, well, what are the alternatives? Well, you could have Congress do it. I'll tell you candidly, I would rather not have Congress do it. If my choices are Congress or the Fed, I will definitely take the Fed.

DAVIES: Right. And I guess, you know, we began the show by saying, you know, there are a lot of different economic systems, but all of them need a stable, credible source of money. And so, like, somebody's got to provide this central organizing and management function, right?

GOLDSTEIN: Yeah, it's a hard job, but somebody has to do it, right? And, you know, we, like most developed economies, have chosen to give our central bank a large degree of independence, right? And that is a really interesting choice. You don't have to do it that way. You could have more democratic control. I mean, fundamentally, it's still democratic. But you could have more political control, say, of the central bank. But, you know, the belief is - and I think it's based on reasonable experience - is it is helpful to separate the central bank from people with sort of day-to-day political jobs, actually, for moments like we're in right now - right? - moments when inflation is going up and up. And in the long run, it's reasonable to think we'll be better off with some amount of short-term pain now that comes from raising interest rates if we get inflation under control. And the belief is that politicians, who have to answer to voters in a month, won't be able to make those trade-offs of short-term pain for long-term gain. And I think that's a reasonable belief. I think I buy it.

DAVIES: Well, Jacob Goldstein, thank you so much for speaking with us.

GOLDSTEIN: Oh, it was great to talk with you. Thanks so much for having me.

DAVIES: Jacob Goldstein co-hosted NPR's PLANET MONEY for 10 years. He currently hosts the Pushkin Industries business and tech podcast, "What's Your Problem?" His book, "Money: The True Story Of A Made-Up Thing," is now out in paperback.

(SOUNDBITE OF SONG, "WITH PLENTY OF MONEY AND YOU")

MARTY GROSZ AND DESTINY'S TOTS: (Singing) Baby, what I couldn't do with plenty of money and you. In spite of the evil that money brings, just a little filthy lucre buys a whole lot of things. And I could take you to places that you'd like to go. But outside of that, I've no use for dough. It's the root of all evil, of strife and upheaval. But I'm certain, honey, life could be sunny with plenty of money and you. Oh, baby, what I couldn't do with a credit card and little old you. In spite of the stigma that attaches to wealth, just a little folding money moves those goods off the shelf. And I could take you to places you'd like to go. Outside of that, I've no use for dough. It's the root of all evil, of strife and upheaval. But I'm certain, honey, life could be sunny with plenty of money and you.

DAVIES: Coming up, Ken Tucker reviews "Ashley McBryde Presents: Lindeville," a new album of songs about folks scraping by in a small rural town. This is FRESH AIR.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.