BackBook Review | Money—The Unauthorised Biography
A polemical history of finance that explains events such as the great crash of 2008
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Money—The Unauthorised Biography | Felix Martin
Who moved my cash?
Addressing the graduating students of Princeton University recently, US Federal Reserve chairman Ben Bernanke expressed scepticism about the so-called meritocratic order. He pointed out that most students were able to reach the hallowed portals of the Ivy League university only because they were born with a silver spoon.
Bernanke’s comments about luck driving economic success led to speculation about what drove him to make such a “radical" speech. In a Washington Post blog post (Wonkbook: Ben Bernanke’s surprisingly excellent, radical speech), Ezra Klein and Evan Soltas suggested that Bernanke’s comments on fairness might be due to the fact that his policies over the past four years have helped precisely those rich bankers who were instrumental in causing the great financial crash of 2008, get richer. “It is enough to make anyone a radical."
Klein and Soltas’ comments underscore the troubling questions that the financial crash and post-crash rescue operations have raised about modern finance. Do bankers deserve fat bonuses when they end up creating so much instability? Why are the profits of modern finance private when the losses end up being socialized?
Money: The Unauthorised Biography by economist and fund manager Felix Martin is a provocative attempt to answer such questions. Martin revisits the history of money and finance to build a powerful argument: Inability to understand the nature of money lies at the root of our inability to govern finance.
As much as the message itself, it is the manner in which Martin derives his key arguments that makes Money stand out in the vast literature spawned by the Great Recession. A narrative style inspired by whodunnits and a lucid description of money’s complicated journey makes Martin’s account accessible to a lay reader.
Martin delves deep into the annals of history and anthropology in piecing together the jigsaw of modern finance. His unique perch allows him to draw striking parallels between historical and current events, such as the eerie resemblance between the current credit crisis and the one that struck ancient Rome in AD 33, and led to a bailout by emperor Tiberius. Money is only nominally a tale of financial evolution. In effect, it is a stinging attack on mainstream economics.
Money, economists have always maintained, replaced barter to emerge as the more convenient facilitator of exchange and a universal measure of value. Martin disputes that view by showing that even in the ancient world, there were no barter economies of the kind economists envisage. Goods and services have been exchanged habitually on credit. Money only served as a system of clearing accounts. As the monetary society evolved, requiring more complex transactions, IOUs increasingly came to be accepted by third parties. Money evolved into its modern form as “transferable debt".
If money is transferable debt, it is natural that money issued by the most credit-worthy institution will be the most liquid. So, sovereigns came to enjoy a natural monopoly over money. All along, Martin shows, the ancients knew that economic value was a social contrivance rather than a natural property, and hence had no qualms in tinkering with the value of money.
The earliest Chinese thinkers, for instance, understood that if money’s value is lowered through inflation, debtors will benefit while creditors stand to lose. Kings in medieval Europe, however, took monetary tinkering too far, in barely disguised efforts to enrich themselves at the expense of their subjects.
The backlash came from a growing mercantile class. The modern bank was born, and with it the first shadowy monetary system emerged. With a large part of the economy slipping away from the purview of the sovereign, a grand bargain was struck, giving birth to the English central bank. Bank money gained legitimacy and the sovereign was saved from bankruptcy at one stroke.
The modern discipline of economics also took birth at the same time but it buried the lessons of monetary history under the elegant dust of mathematically precise models. Money’s political role was ignored despite warnings from the rebels in the profession, such as the 19th century financial journalist Walter Bagehot and the great 20th century thinker John Maynard Keynes. The Bagehot-Keynes tradition must be revived, and the moral underpinning of economics must be restored if we are to rescue ourselves from the current financial mess, Martin persuasively argues.
Financial stability, in Martin’s worldview, means nothing if not a just and fair social order. The value of money must therefore be calibrated by the sovereign, keeping democratic interests in mind. Bernanke’s explicit goal must be political justice rather than a 2% inflation target. If it leads to greater oversight of central banking by democratically elected representatives, so be it, Martin suggests.
One may or may not agree with Martin’s polemics or his advocacy of narrow banking and high inflation to save the world. But Money will be a refreshing and entertaining read for anyone curious about the great crash, or about the world of finance and economics.
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