When life gives you lemons you intend to make lemonade, but in days long gone they often had to make due only with what was on hand. Some of the greatest scientific discoveries were by pure accident, though I doubt many (or any) were as plain unsanitary as Hennig Brand’s discovery. He had been looking to find gold in urine, which made sense only when understanding he was alchemist by trade. The idea of elements had been around since ancient times, of course, but the identification of them was extremely limited. Gold being one, alchemists were convinced that material in the right combination of steps could be distilled into those basic compounds, even, apparently, from our literal insides.

Brand had the good fortune of actually being quite rich with gold, having twice married into wealth. But whereas he, through his wives, had loads of bullion, he also at one point was keeping up to 1,500 gallons of pee. Not just any would do, as Hennig, apparently, particularly prized that which was freshly micturated from especially beer-drinkers. He would “evaporate it gently to the consistency of honey.”

What he eventually found in 1649 was not gold but a substance that was instead white, waxy, and tended to glow in the dark. Though it wasn’t money, it was to make many men rich in the future, as well as explosively redistribute a great deal of wealth by war. It was phosphorus, and it was the first step in chemistry toward finding atoms and elements by scientific processes.

Having seen the list of elements greatly expand in years since the contributions of urine, Johann Dobereiner began to organize the nascent list into groups or triads. He had observed in 1817 that the atomic weight of strontium was always in the middle between calcium and barium, those of similar chemical properties. And so it was for others, as scientists throughout the 19th century began to find organization and definition. By 1864, we had the periodic table and the framework by which chemists and others could more easily understand and discover elemental nature.

I often feel that we are on a similar cusp if only upon a subject that doesn’t lend itself to much if any straightforward analysis. Money is, after all, a social construct rather than fundamental to nature. Though it is a human creation, it still bears a great deal of similar properties if not its own elementary conditions.

The problem with developing the periodic table up until 1864 was imprecision; namely that precise atomic weights were difficult to measure and match up. In money, we face a similar impediment to discovery. In truth, however, the biggest factor holding everything back is the religious dogma of economics that seeks nothing more than to keep everything as it is.


The problem with that is, of course, that even monetary economists (some of them, anyway) know that position has already been invalidated; long ago, in fact. Their solution was to simply ignore these discoveries because they believed them irrelevant to controlling the whole economy through a single interest rate. This was and is a particularly odd approach, not just from the perspective of basic logic and common sense but also of recent history.

The 1970’s is known as the Great Inflation but also as the age of “missing money.” The term was coined by the aptly named Princeton economist Stephen Goldfeld who wrote in words what had already been recognized in policy. Monetary evolution was proceeding even if economists preferred it didn’t. Ignoring new discoveries only had the effect of making the Great Inflation that much more “great.” Interest rate targeting was the preferred method of recognizing monetary change without having to fully appreciate or understand it. Like alchemists, policymakers just assumed that single interest rate lever would lead them to a stable system of economic gold.


But monetary evolution didn’t stop with the “missing money”; in many ways it has only continued and in increasingly strange and different forms just as the elements that go further down and across the periodic table. It started with derivatives that had been around for a century or more (gold swaps long predated a great deal of what we might consider “modern” finance) transformed into everyday usage by the banks themselves. As these new monetary “elements” became more common, they became more integral to the monetary system’s fundamental behavior and operative conditions. The fact that the Federal Reserve, as all other central banks, chose not to appreciate them does not end the matter; it simply left them undiscovered.


Rather than face how the monetary table was expanding, the Fed retreated into dogma; discontinuing M3 in March 2006 because it didn’t to the Fed “convey any additional information about economic activity that is not already embodied in M2.” To the real world, that was hysterical nonsense since the full table mattered – as the Fed would be forced to face just seventeen months later.

The analogy of the periodic table is apt, I believe, because it represents a logical grouping for the various chemical elements but also conveying the ways in which they interact because the surely do. Monetary “elements” do the same, as then-Open Market Desk manager Bill Dudley found out in September 2007:

First, the turmoil in money markets did impair the functioning of the foreign exchange swap market. This made it more difficult for banks in Europe that are structurally short of dollars to obtain the dollar funding needed to fund their assets.

The FOMC at the time, as discussed earlier this week, felt that alleviating this problem could be accomplished by a large cut in the federal funds rate; 50 bps at that meeting. The problem with that thinking is that it was the same rationale that they used to ditch M3, a linear monetary progression where their own M0 is at the center of everything. Thus, more “accommodative” federal funds was supposed to aid especially European banks with their dollar short.

The view from this periodic table representation, even highly stylized as shown here, might have suggested it wasn’t nearly so simple as that. Not only was the Fed having difficulty maintaining any target for federal funds, let alone one that was supposed to be more “accommodative”, there was a very real possibility that was so because of what was happening in the other monetary “elements.” Causation might not have been linear at all, as Dudley struggled to describe.


I actually have little doubt that was the case, as what was taking place in federal funds was a reaction not a cause. And if the Fed had taken the time, as was its statutorily-defined job, to try to understand this system as a dynamic one that could operate up or down as well as across, it might have been far less of an abject, embarrassing, perhaps criminal failure for them. People far smarter than me could have put together an actual working model where authorities might not have been so blind, and the global economy irreconcilably blind-sided.

Instead, it has been left for others to discover these monetary “elements” and put together if but pieces of the working model for what has really gone wrong; and continues to. Had Bill Dudley realized in September 2007 that he had it backward, that the turmoil in the foreign exchange swap market did impair the functioning of other elements, who then reacted with still others to form a multi-faceted breakdown, maybe, just maybe much of the pain of that era could have been avoided. I doubt that would have meant side-stepping the Great “Recession” itself as it was quite likely too late by then, but it is possible that from a more appreciative stance money would not have been a persisting drag which has caused the Great “Recession” to have yet to end.

I have no doubt that there are still monetary elements left to discover, and they might even point the way out of this mess. Hopefully before it’s too late.


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