Money is not as simple as the coins or notes in your pocket.
It has a history; it has constantly evolved, together with related social technologies like credit, banking, accountancy and the state;
It is very different to even fifty years ago ; a world system of fixed exchange rates and restricted capital flows has changed into an unstable interlinked, complex web;
We are not very good at understanding its nature, as shown by inflation - the cancer of money- asset bubbles and financial disasters.
Money depend on institutions and trust and confidence.
If the whole economy is changing, the nature of money inevitably is too.
We use money to keep the score ... But what is it for?
Showing posts with label Money. Show all posts
Showing posts with label Money. Show all posts
Sunday, August 21, 2011
Saturday, August 20, 2011
As the nature of the economy changes, the nature of money changes
Let's put history on fast forward. The feudal system dissolved. The trading empires arose, and soon in the great centers of trade like Florence and Genoa banking develops.
Government debt - and bankruptcy - are invented. ( See A History of Florence 1200-1575
for how Florence consolidated its government debt in 1343 and how the "Monte" - mountain of debt - dominated politics for decades.)
Philip II's Spain imports fleets of gold from the new world, squanders it in Habsburg dynastic wars, and then serially defaults on its debt starting in 1557.
The Dutch and then the English strengthen their empires with the invention of central banking, including the Bank of England in 1694, and careful management of a national debt.
Finance strengthens the sinews of war. Or destroys them. Spain disappears as a great power. England's Royal Navy comes to rule the waves.
France impoverishes itself with John Law's Bank disaster. The South Sea bubble causes wild swings of optimism and despair in England in 1720. Bank notes begin to circulate. Stock exchanges begin in coffee houses.
Alexander Hamilton transforms the future of the United States when he does a deal with Thomas Jefferson in 1790. He agrees southern states will get the new national capital, instead of the current location and his own home of New York City. In return Jefferson agrees the federal government will assume state revolutionary war debts and create a national debt. America would not just be a nation of yeoman farmers, as in Jefferson's vision. It would be a financial and industrial and military power. New York City eventually becomes the largest, richest city on the planet, while Washington D.C. remains a small empty southern town right up to the New Deal in the 1930s.
Inflation, sovereign default, credit booms and busts, vast wealth and sudden indigence come and go. Money becomes abstract, related to confidence, sovereign power, property, prudence and ideas of liberty.
The world starts becoming one interlinked, globalized economy. Money turns into an international system, most importantly the gold standard in the 19th century. Major currencies are linked together by strictly maintained values in gold. Movements of gold for settling international payments would inflate or deflate domestic economies, and increasingly causing outrage among farmers and workers. William Cullen Bryant's speech to the Democratic Party Convention in 1896 is the most famous example:
But that in a sense is just what happened well into the 1920s and 1930s. The first world war forced countries off the gold standard. The war caused immense inflation, as many governments simply printed money to pay obligations rather than raise taxes. Much of the gold reserves in the world also flowed to the safer USA.
Liaquat Ahamed tells the story in his book Lords of Finance: The Bankers Who Broke the World
of how Winton Churchill disastrously put Britain back on the gold standard in 1925. It led to worsening mass unemployment and helped cause the general strike of 1926. Before long the whole world financial and trading system collapsed.
(I will have more to say about this political change later, in reference to Karl Polanyi's bookThe Great Transformation: The Political and Economic Origins of Our Time
. Polanyi argues the gold standard soon became politically impossible after democracy meant populations would no longer accept the dislocation of deflation. The current monetary system became socially impossible.)
The interesting thing about the abortive restoration of the gold standard was the conviction among most Treasury officials, central bankers and economists that a return to the gold standard was both practically essential and morally necessary to restore the confidence of savers. ( Of course, inflation did ravage savers for much of the next seventy years.)
The gold standard meant governments could not interfere with or debase the currency. But economic aims alone are no longer sustainable in the twentieth century. The public will not accept the insecurity and volatility and u employment the link to gold apparently brings.
So governments loosen the system, effectively turning it into a dollar standard. Countries settle their accounts in US dollars (or in theory IMF special drawing rights). There is a residual link to gold, but it no longer automatically determines a country's money supply.
The Bretton Woods system of fixed exchange rates, as it is known, remains largely stable for thirty years. This is partly because international financial markets are hobbled. Capital flows are restricted, and exchange controls even apply to ordinary tourists in many countries. There are strict limits on how many pounds sterling a person can exchange for US dollars, for example. Currencies are not fully convertible.
But the Bretton Woods system breaks down in 1971 when Nixon breaks the dollar's link to gold. Currencies float freely, which helps countries adjust to the oil shocks of the 1970s and 1980s. Inflation breaks out. Currencies swing dramatically, despite international efforts like the Plaza accord in 1985.
Soon politicians want to use the monetary system for political ends again. The European Union links the DM, Franc and other currencies into an exchange-rate mechanism. It then evolves into a full-scale currency, the euro, in 1999 and its own banknotes in 2002. China links its currency to the US dollar. It purchases vast amounts of US treasury debt to keep the yuan's value from rising and its exports competitive.
And so to this week, when the euro is tearing itself apart and China is in an unsustainable boom. American consumers are overindebted and underspending. Markets are fragile. People are nervous. The monetary system is at the very heart of the problems.
Our ideas of money and the mechanisms and values money represent can upend society. And so we must be careful to neither stick to an outdated, rigid conception of money, nor allow it to be so flexible that soaring debt, sovereign default and depression are the result.
And here's the real point: our current problems - sovereign debt, recession, economic slowdown - are not just a matter of arithmetic. It is not just a matter of taxes and revenues and spending and credit and demand. It is not just a matter of the size of government.
It is a problem with our conception of money, its functions and limits and boundaries, just as so many times in the past.
As the nature of the economy changes, the nature of money changes. And vice versa.
Government debt - and bankruptcy - are invented. ( See A History of Florence 1200-1575
for how Florence consolidated its government debt in 1343 and how the "Monte" - mountain of debt - dominated politics for decades.) Philip II's Spain imports fleets of gold from the new world, squanders it in Habsburg dynastic wars, and then serially defaults on its debt starting in 1557.
The Dutch and then the English strengthen their empires with the invention of central banking, including the Bank of England in 1694, and careful management of a national debt.
Finance strengthens the sinews of war. Or destroys them. Spain disappears as a great power. England's Royal Navy comes to rule the waves.
France impoverishes itself with John Law's Bank disaster. The South Sea bubble causes wild swings of optimism and despair in England in 1720. Bank notes begin to circulate. Stock exchanges begin in coffee houses.
Alexander Hamilton transforms the future of the United States when he does a deal with Thomas Jefferson in 1790. He agrees southern states will get the new national capital, instead of the current location and his own home of New York City. In return Jefferson agrees the federal government will assume state revolutionary war debts and create a national debt. America would not just be a nation of yeoman farmers, as in Jefferson's vision. It would be a financial and industrial and military power. New York City eventually becomes the largest, richest city on the planet, while Washington D.C. remains a small empty southern town right up to the New Deal in the 1930s.
Inflation, sovereign default, credit booms and busts, vast wealth and sudden indigence come and go. Money becomes abstract, related to confidence, sovereign power, property, prudence and ideas of liberty.
The world starts becoming one interlinked, globalized economy. Money turns into an international system, most importantly the gold standard in the 19th century. Major currencies are linked together by strictly maintained values in gold. Movements of gold for settling international payments would inflate or deflate domestic economies, and increasingly causing outrage among farmers and workers. William Cullen Bryant's speech to the Democratic Party Convention in 1896 is the most famous example:
"Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold."
But that in a sense is just what happened well into the 1920s and 1930s. The first world war forced countries off the gold standard. The war caused immense inflation, as many governments simply printed money to pay obligations rather than raise taxes. Much of the gold reserves in the world also flowed to the safer USA.
Liaquat Ahamed tells the story in his book Lords of Finance: The Bankers Who Broke the World
of how Winton Churchill disastrously put Britain back on the gold standard in 1925. It led to worsening mass unemployment and helped cause the general strike of 1926. Before long the whole world financial and trading system collapsed.(I will have more to say about this political change later, in reference to Karl Polanyi's bookThe Great Transformation: The Political and Economic Origins of Our Time
. Polanyi argues the gold standard soon became politically impossible after democracy meant populations would no longer accept the dislocation of deflation. The current monetary system became socially impossible.)The interesting thing about the abortive restoration of the gold standard was the conviction among most Treasury officials, central bankers and economists that a return to the gold standard was both practically essential and morally necessary to restore the confidence of savers. ( Of course, inflation did ravage savers for much of the next seventy years.)
The gold standard meant governments could not interfere with or debase the currency. But economic aims alone are no longer sustainable in the twentieth century. The public will not accept the insecurity and volatility and u employment the link to gold apparently brings.
So governments loosen the system, effectively turning it into a dollar standard. Countries settle their accounts in US dollars (or in theory IMF special drawing rights). There is a residual link to gold, but it no longer automatically determines a country's money supply.
The Bretton Woods system of fixed exchange rates, as it is known, remains largely stable for thirty years. This is partly because international financial markets are hobbled. Capital flows are restricted, and exchange controls even apply to ordinary tourists in many countries. There are strict limits on how many pounds sterling a person can exchange for US dollars, for example. Currencies are not fully convertible.
But the Bretton Woods system breaks down in 1971 when Nixon breaks the dollar's link to gold. Currencies float freely, which helps countries adjust to the oil shocks of the 1970s and 1980s. Inflation breaks out. Currencies swing dramatically, despite international efforts like the Plaza accord in 1985.
Soon politicians want to use the monetary system for political ends again. The European Union links the DM, Franc and other currencies into an exchange-rate mechanism. It then evolves into a full-scale currency, the euro, in 1999 and its own banknotes in 2002. China links its currency to the US dollar. It purchases vast amounts of US treasury debt to keep the yuan's value from rising and its exports competitive.
And so to this week, when the euro is tearing itself apart and China is in an unsustainable boom. American consumers are overindebted and underspending. Markets are fragile. People are nervous. The monetary system is at the very heart of the problems.
Our ideas of money and the mechanisms and values money represent can upend society. And so we must be careful to neither stick to an outdated, rigid conception of money, nor allow it to be so flexible that soaring debt, sovereign default and depression are the result.
And here's the real point: our current problems - sovereign debt, recession, economic slowdown - are not just a matter of arithmetic. It is not just a matter of taxes and revenues and spending and credit and demand. It is not just a matter of the size of government.
It is a problem with our conception of money, its functions and limits and boundaries, just as so many times in the past.
As the nature of the economy changes, the nature of money changes. And vice versa.
Money dissolves social ties
Buchan also talks in his book( Frozen Desire: Meaning of Money
, below) about how money dissolved the feudal order (p56).
Other social technologies soon evolved to change the nature of money. Buchan talks about the invention, or at least publication of double-entry bookkeeping by Luca Pacioli in 1494. ( It may have been used by Venetian and Genoese merchant houses long before.) It was a rational system of debits and credits, much more sophisticated than simply amassing gold in storehouses. That first system of accountancy eventually led to modern large-scale business accounts and objectives, outside ownership by shareholders, and eventually the foreign trade, national accounts and GDP measures of our own day. Says Buchan,
Even land itself was no longer just land. Much of medieval Europe was owned by great monastic estates and feudal lords tied to the land. Before long the land was mortgaged and alienable property and subject to money rents, culminating in the enclosure of common land in 18th century England.
Money replaces social reciprocity and obligation. It changes the nature of ownership and property.
, below) about how money dissolved the feudal order (p56).Feudal services have none of the precision of a sale or purchase for money; they might be as specific as a spring campaign or as vague ad loyalty of you or yours until death. Money, which extinguished the sensation of obligation - you may wish to return to the bookshop where you bought this book, but you do not have to - would appear to be fatal to this world of enduring interconnections; and that is indeed what happened. Money gnawed at the foundations of feudalism in Europe from the end of the twelfth century, Japan from the seventeenth , and the Arabian sheikhdoms from the twentieth.
Other social technologies soon evolved to change the nature of money. Buchan talks about the invention, or at least publication of double-entry bookkeeping by Luca Pacioli in 1494. ( It may have been used by Venetian and Genoese merchant houses long before.) It was a rational system of debits and credits, much more sophisticated than simply amassing gold in storehouses. That first system of accountancy eventually led to modern large-scale business accounts and objectives, outside ownership by shareholders, and eventually the foreign trade, national accounts and GDP measures of our own day. Says Buchan,
Above all , Luca laid the foundation of the modern conception of profit, not as some vague increase in possession, but as something hard, even crystalline, mathematical and open to empirical test at any to e whatever through an interlocking system of books.
Even land itself was no longer just land. Much of medieval Europe was owned by great monastic estates and feudal lords tied to the land. Before long the land was mortgaged and alienable property and subject to money rents, culminating in the enclosure of common land in 18th century England.
Money replaces social reciprocity and obligation. It changes the nature of ownership and property.
Money as a tool
We are so surrounded and accustomed to money defining many of the boundaries and choices of our lives, so used to it being the hard edge of reality, that we forget that money has a history and has changed over time.
Indeed, many of the biggest mistakes in the economy in the last three hundred years have been to do with problems or diseases of money, such as inflation or credit bubbles.
All the same, money is perhaps the most powerful social tool that humanity has ever invented. It is a remarkable social technology, as I discussed here.
It enables transactions. It is a store of value. It coordinates extraordinarily complex webs of production, conveying information in the form of changing prices.
It is an impersonal, dispassionate way to allocate and distribute resources to people, to motivate them to do things, a mechanism to give and take away that seems automatic.
And it is entwined in a hundred ways with our social system. In the modern world, it is usually connected to status -although of course in the past merchant classes were looked down upon by an aristocracy whose wealth was in land.
It loosens or dissolves many social ties and changes values. It represents security or freedom or independence.
James Buchan, a former FT correspondent, wrote an unorthodox but beautifully written and original history of money named Frozen Desire: Meaning of Money. He starts by saying
He quotes Aristotle's Politics on the invention of money. Aristotle believed money came into being to bring into being an international division of labor:
But Aristotle also hated money as wealth or profit, and that was one of the roots of the centuries-long prohibition of usury. Wealth arising from exchange
Right from the beginnning, money has evolved in surprising ways that surprise or worry us. And right from the beginning, money has been tangled with many moral convictions that structure it.
Indeed, many of the biggest mistakes in the economy in the last three hundred years have been to do with problems or diseases of money, such as inflation or credit bubbles.
All the same, money is perhaps the most powerful social tool that humanity has ever invented. It is a remarkable social technology, as I discussed here.
It enables transactions. It is a store of value. It coordinates extraordinarily complex webs of production, conveying information in the form of changing prices.
It is an impersonal, dispassionate way to allocate and distribute resources to people, to motivate them to do things, a mechanism to give and take away that seems automatic.
And it is entwined in a hundred ways with our social system. In the modern world, it is usually connected to status -although of course in the past merchant classes were looked down upon by an aristocracy whose wealth was in land.
It loosens or dissolves many social ties and changes values. It represents security or freedom or independence.
James Buchan, a former FT correspondent, wrote an unorthodox but beautifully written and original history of money named Frozen Desire: Meaning of Money
. He starts by sayingMoney, which we hope to see and hold every day, is diabolically hard to comprehend with words.
For money is incarnate desire. Money takes wishes, however vague or trivial or atrocious,and broadcasts them to the world, like the Mayday of a ship in difficulties.
He quotes Aristotle's Politics on the invention of money. Aristotle believed money came into being to bring into being an international division of labor:
When the inhabitants of one country become more dependent on those of another, and they imported what they needed, and exported what they had too much of, money necessarily came into use.
But Aristotle also hated money as wealth or profit, and that was one of the roots of the centuries-long prohibition of usury. Wealth arising from exchange
Is justly censured;for it is unnatural, and a mode by which men gain from each other. The most hated sort, and with the greatest reason, is interest, and not from that or which money was devised. For money came into being for the sake of exchange, but interest makes the money itself greater.
Right from the beginnning, money has evolved in surprising ways that surprise or worry us. And right from the beginning, money has been tangled with many moral convictions that structure it.
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