Happy to see that my colleague, Bert Ely, has started a conversation about “Money and the Constitution” (the topic for the National Lawyers Convention panel, sponsored by the Financial Services and E-Commerce Practice Group), I’m happy to chime in with a couple preliminary thoughts of my own.  The first is, while we all think that we know what money is, have fun trying to define it.  Even though we use money every day, how much do we really understand it.  Almost every definition of money I come across leaves out something important.

Add to that the question of who gets to decide, at least for the United States, what money is?  Bert’s blog post presents some very important foundational points.  There is a lot to build on top of those. 

Bert focuses on cash and coin, issued by government agencies.  He explains how that money would fit in with the authority found in the Constitution (though I have heard arguments casting doubt on the authority of the Federal Reserve to issue “money”).

I will confess that most of my monetary payments are not made with cash and coin, which I save for minor transactions.  I write checks for some of my larger transactions, and my wife, by mutual division of labor, makes sure that our monthly bills are paid by going to the computer and giving instructions to our bank to forward payments to our creditors.  That all seems to involve money, too, but who created that “money”?

That is not an idle question.  I would agree with Bert’s point that it is hard to create inflation in the United States through issuing physical cash and coin, as those are subject to demand, the federal supply precisely tied to demand.  Yet inflation is created, and the Federal Reserve seems desperate to create more than we have.  They seek to do it with “money” that is beyond cash and coin.  Where do they get the authority, or more fundamentally the right, to do that?

I ask, because as I approach retirement, I’m not too excited about the idea that the Federal Reserve wants to maintain a 2% inflation rate in perpetuity.  Should I live the 20 or more years in retirement as I hope, that could mean that 2% annual inflation, compounded, could eat up a sizable portion of my retirement income, such that what seemed adequate at the start of my retirement could appear scanty in the later years.