Decades ago, my economics textbooks were acutely boring. Put off the soft science, I admit to never having read Niall Ferguson’s acclaimed The Ascent of Money: A Financial History of the World, which has gathered dust on my bookshelf for 15 years.
But a new book, Money: A Story of Humanity by Irish academic and broadcaster David McWilliams, is a worthy parallel to, or an update of, Ferguson’s work.
We take physical money — and its spin-offs and instruments such as interest, finance and credit — for granted. But think again: money is an ephemeral concept. Civilisations throughout history have prospered based on the foundation of trade, and the acceptance of a common exchange value was vital. It took successive stages of “breathtaking level[s] of abstract thinking”, McWilliams writes, to baseline a bushel of grain, called a shekel in Mesopotamia 5,000 years ago, as a weighted standard; then to mark deals on slabs as a form of contract. The Sumerians went further when, in their daily exchanges of goods and services, they incorporated a rate of interest — effectively putting a value on time. This served to animate human energy and entrepreneurship — though only as contractual arrangements, money now started to make more money. Commerce was further ramped up by the Sumerians’ successors, the Babylonians, who formalised commercial law. (Over time, the word “shekel” evolved to mean its silver equivalent. It is still the name of Israel’s and the Palestinian territories’ currency.)
McWilliams uses snapshot biographies of characters who have shaped the way the world uses or manipulates money today to brighten what might otherwise be a dull chronological narrative, and to illustrate both the leaps and the failures of innovations in credit, finance, and money as currency. We meet Scottish gambler, philanderer and convicted murderer John Law, who escaped the gallows through high-society connections, and fled to France, where in 1720 he became controller-general of finances for the regent Duke of Orléans. Ingeniously, he imagined a rapidly expanding economy stimulated by a growing supply of paper money not backed by gold. His schemes ultimately collapsed, but his core idea makes him the father of monetary economics.
A generation or so later, with Law’s changes a contributory factor to the discontent seeding the French Revolution, the bishop-turned-politician Talleyrand conceived the assignats as a funding source for the revolution. An assignat was a paper promise from the state that the buyer had the right to bid for assets that would come onto the market at some unspecified future date. How did the new French state tempt citizens to purchase assignats? What did it promise they could acquire down the line? Land confiscated from the Church.
The former clergyman’s stark duplicity was matched by smartness and sharp survival instincts: as the Reign of Terror took hold a few years later, he realised that an insistence on land as a backing of assignats would be political and real-life suicide. He let the printing presses whirr — and kept his head.
Contemporaneously, across the Atlantic, a friend of Talleyrand’s, founding father Alexander Hamilton, steadied America’s post-revolution finances, and in 1792 created the decimalised dollar — initially coins only — to replace the Spanish peso as the new nation’s legal tender.
“The hand of money is never far from momentous events,” is McWilliams’ summation of these and other disruptive periods in history.
Occasionally, though, there are odd mentions. The chapter on the entrepreneurship of literary genius James Joyce, for instance, is a sidetrack, its inclusion more a form of McWilliams’ homage to a fellow Irishman.
Creditably, he includes stories involving episodes not just of deflations and depressions, but also of the horrors money can cause. The rising demand for rubber in the late 1890s, with surging commodity prices, led Belgium’s King Leopold II to claim the Congo. Estimates are that about half the region’s population — between 5-million and 10-million Congolese — died to feed his personal moneymaking machine. The author doesn’t detail the genocide, but the chapter is enough to understand that the flip side of capitalism’s coin was, as Lenin later said, the brutality that underpinned colonialism.
A criticism of Money as a series of linked histories is that, apart from China being cursorily mentioned as birthing paper money, the book has nothing about parts of the world other than Europe and the US. For instance, as much as the German Weimar Republic in the 1920s is a template of hyperinflation, and, as a contributing factor to the rise of Nazism, merits inclusion in McWilliams’ narrative, it was not the world’s worst instance of hyperinflation. The book makes no mention of Zimbabwe in November 2008, during which prices doubled every 24 hours, and the official monthly inflation rate was 79.6-billion percent.
Amazingly, Zimbabwe isn’t even the worst example of hyperinflation, being outranked by Hungary in 1945/46, during which inflation peaked at the unfathomable 13.6-quadrillion percent. This episode, too, is not mentioned — which seems a lost opportunity for an interesting comparison.
Challenging concepts
The book’s shorter, second element is an attempt to explain the workings of monetary economics and the interrelated systems of payments and finance. This peaks in the last part of the book, called “Money Unbound”, which becomes an increasingly challenging read as McWilliams critiques the 21st century global financial architecture and unveils some of its consequences. Still, Business Day readers will no doubt relish his dissection of the 2008 financial crisis, discussion about why deflation is more problematic than inflation, an explanation as to what is happening when central banks buy their governments’ treasury bonds, and a “secret” revealed about the Eurodollar (no further spoilers).
And he doesn’t shy away from difficult or controversial questions. One day, will coins no longer exist? Maybe notes, too, will be scrapped, all physical money replaced by digital wallets and transactions that happen through mobile phone taps or mouse clicks.
This is, of course, already occurring. But the transmission technology is not the same as a wholesale change in currency, the author points out. In broad terms, referring to the underlying technology, McWilliams is scathing of the idea of cryptocurrency as fiat money — that is, state-backed and accepted by decree. In 20 years crypto has gained limited application, apart from criminal activity and gambling. Further, it serves society poorly because cryptocurrencies generally lead to net wealth transfer “from poorer punters ... to sophisticated private cartels that operate the offshore exchanges, backed incongruously by the very Wall Street firms that crypto was supposed to crush”, he writes, concluding that, for now, “crypto fails as both an investment and as money”.
He addresses another pivotal issue: are central banks doing enough to prevent crises and crashes? McWilliams used to be an Irish Central Bank economist and has worked for other major European banks. So his observations about the real-world effect of central banks’ monetary policies are interesting. Governments pull the wool over our eyes, he insists. They try to influence the money in circulation — primarily by adjusting interest rates as the price of money — but this works only partially. Supervising the price of money is not the same as controlling the amount of credit commercial banks generate, nor how that credit is deployed.
His point is that finance and its role in the globalised economy is too complicated. “Behind all the central banking pomp and ceremony there are ... humans dealing with that most incendiary of substances: money.” And money has a volatile and unpredictable element simply because, he writes, “it is less governed by rational economics and more a function of the madness of crowds”.
Here’s an economist admitting to exasperation at the mysteries of economics. Readers may mutter to themselves something to the effect of “join the club”. So Money is something of a let-down on its second, monetary economics theory aspect.
But it’s hard to disagree with the author’s assertion that money was one of humanity’s greatest inventions — a technology that has geared transformative change through the ages.
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