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By Root 1018 0

something that all knew to be more harmful than a momentary blip in interest rates. Like ripples expanding from a stone tossed into a lake, there would be other effects still. The interest on Treasury bills would increase. These were debt instruments of the government itself. People—actually institutions for the most part, like banks and pension funds and investment firms that had to park their clients' money somewhere while waiting for a good opportunity on the stock market—would give money, electronically, to the government for a term varying from three months to thirty years, and in return for the use of that money, the government itself had to pay interest (much of it recouped in taxes, of course). The marginal increase in the Federal-funds rate would raise the interest rate the government had to pay—determined at an auction. Thus the cost of the federal deficit would also increase, forcing the government to pull in more of the domestic money supply, reducing the pool of money available to personal and business loans and further increasing interest rates for the public through market forces over and above what the Fed enforced itself. Finally, the mere fact that bank and T-Bill rates would increase made the stock market less attractive to investors because the government-guaranteed return was "safer" than the more speculative rate of return anticipated by a company whose products and/or services had to compete in the marketplace.

On Wall Street, individual investors and professional managers who monitored economic indicators took the evening news (increases in the Fed rate were usually timed for release after the close of the markets) phlegmatically and made the proper notes to "go short on" (sell) their positions in some issues. This would reduce the posted values of numerous stocks, causing the Dow Jones Industrial Average to sink. Actually, it was not an average at all, but the sum of the current market value of thirty blue-chip stocks, with Allied Signal on one end of the alphabet, Woolworth's on the other, and Merck in the middle. It was an indicator whose utility today was mainly that of giving the news media something to report to the public, which for the most part didn't know what it represented anyway. The dip in "the Dow" would make some people nervous, causing more selling, and more decline in the market until others saw opportunity in stock issues that had been depressed farther than they deserved to be. Sensing that the true value of those issues was higher than the market price indicated, they would buy in measured quantities, allowing the Dow (and other market indicators) to increase again until a point of equilibrium was reached, and confidence restored. And all these multifaceted changes were imposed on everyone's individual lives by a handful of people in an ornate boardroom in Washington, D.C., whose names few investment professionals even knew, much less the general public.

The remarkable thing was that everyone accepted the entire process, seemingly as normal as physical laws of nature, despite the fact that it was really as ethereal as a rainbow. The money did not physically exist. Even "real" money was only specially made paper printed with black ink on the front and green on the back. What backed the money was not gold or something of intrinsic value, but rather the collective belief that money had value because it had to have such value. Thus it was that the monetary system of the United States and every other country in the world was entirely an exercise in psychology, a thing of the mind, and as a result, so was every other aspect of the American economy. If money was simply a matter of communal faith, then so was everything else. What the Federal Reserve had done that afternoon was a measured exercise in first shaking that faith and then allowing it to reestablish itself of its own accord through the minds of those who held it. Holders of that faith included the governors of the Fed, because they truly understood it all-or thought that they did. Individually they might joke that nobody