“Money – The Unauthorised Biography” by Felix Martin

Completed on 8^th of December 2017. Rated with 4 stars.

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Review: 

An interesting account of money and its role throughout the ages. 

It starts with demolishing a popular theory that people utilised barter before the money economy. It then proceeds to describe a system of public finances that operated in England between the twelfth and the late eighteenth century, and based on the wooden sticks. 

The history of money follows from its introduction around sixth century BC, till the modern era. This then leads to a discipline of economics and its founding fathers. 

One of the interesting practicians - Walter Bagehot is introduced and his views on money are discussed. 

Finally, the problems with the modern macroeconomics are identified, especially its oversight of finance, which is argued led to the 2008 crash.

 Notes:

In the first chapter the author demolishes a popular theory that people utilised barter before the money economy. First, there is no proof for this, and he uses an example of the people of the remote Pacific island of Yap, which uses doughnut shaped wheel stones, ranging in diameter from a foot to twelve feet, and called fei as a measure of ownership. They kept a record of transactions for each fei and its ownership. The economy of Yap was based on three products only: fish, coconuts and sea cucumbers. This could imply barter as being the most convenient. Instead they use fei to reflect the storage function of money. That way the author argues that money is more than just currency. It is a system of credit accounts and their clearing is represented by currency.

He then proceeds to describe a system of public finances that operated in England between the twelfth and the late eighteenth century, and based on the wooden sticks. On the stick were inscribed details of payments made to or from the Exchequer. Once the details of the payment had been recorded on the tally stick, it was split down the middle from end to end so that each party to the transaction could keep a record. The creditor’s half was called the “stock”, and the debtor’s the “foil”. Hence the English use of the term “stocks” for Treasury bonds.

Following, we get a story about the closure of the Irish banks between May and November 1970, originally due to an industrial action. This led to a system of IOU notes with the local pubs acting as the clearing houses, as they knew creditworthiness of their customers.

The earliest known coins were minted in Lydia and Ionia (today’s Turkey) in the early sixth century BC. The city states of classical Greece had become the first monetary societies. Within a few centuries money was everywhere in Rome. Big ticket items were settled using littera or nomina – promissory notes or bonds.

In the late third century AD Egypt passed into foreign hands. This led to inflation in 275 prices rose ten times.

By the mid-fourteenth century payment by cheques was becoming common in the city states of Tuscany.

By the mid-sixteen century a clearance system of “exchange by bills” was set up by the group of pan-European merchant bankers.

The Bank of England’s was set up in 1694. Adam Smith summarised its role saying that “The stability of the Bank of England is equal to that of the British government.”

In 1845 the Irish potato crop failed. The government policy was proposed by Charles Trevelyan, who argued that sending aid would reduce the Irish to a state of permanent dependency.

Walter Bagehot (1826 – 1877) was saying that trade in England was largely carried on with borrowed money. He argued that that if money was in essence transferable credit – rather than a commodity medium of exchange, then different factors explained the economy’s demand for it. In this case, the creditworthiness of the issuer and the liquidity of the liability come into play. And both these factors are determined by the general levels of trust and confidence. His prescription was that the central bank’s role as the lender or broker of last resort should be made a statutory responsibility. As there is always the risk, if a lender of last resort is waiting in the wings to assuage a panic, the emergency lending should only be made at a very high rate of interest to operate as a heavy fine on unreasonable timidity, and to prevent the greatest number of applications by those who do not require it.

The difference between Bagehot and the classical economists, like Smith and Locke was that they were teaching that money was a commodity, whose value was determined by demand and supply.

Thomas Joplin (1790? –1847), an English timber merchant and banker, stated that a demand for money in ordinary times, and a demand for it in periods of panic, were diametrically different. The one demand is for money to put into circulation; the other for money to be taken out of it.

Keynes’ “General Theory of Employment, Interest and Money” animated macroeconomic policy making for the rest of twentieth century. He argued that if the private sector’s confidence is constantly eroded as in the time of crisis, the government would need to spend, if the private sector would not. This was demonstrated in the immediate aftermath of the 2008 crash.

The problem with today’s macroeconomics is that it operates without a notion of money. This is dealt with by a separate discipline of finance. This is the reason that should answer the Queen’s question why did none of the economists see the 2008 crash coming. In essence, they did not look at the money. And by the same token, the bankers and their regulators did not realise that what they were doing was so risky. Their framework for understanding finance did not include the macroeconomics.

Global banking’s current structure generates an unjust distribution of risks, where losses are socialised – taxpayers are on the hook for bail-outs – while gains are private – the banks and their investors alone reap any profits. There are two solutions to this:

1.     all the risks should be privatised – the banking system should be restricted that investors bear all potential costs, as well as all the profits.

2.    
All the risks could be socialised, where taxpayers would keep all the downside risks – but all the profits too.

John Maynard Keynes said of the modern economy: The outstanding faults of the economic society in which we live are its failure to provide full employment and its arbitrary and inequitable distribution of wealth and incomes”.