Book review: Money, Whence It Came, Where It Went

There are two things with economic/finance history. One, we are just ignorant about most of these historical ideas. Two, in case we want to improve our historical understanding, we usually refer to new books written on the topic. The newer books update the narrative but the older books usually have a more detailed narrative given the shorter time. Moreover, historical training was a must earlier, leading most scholars to be really thorough with history. Knowledge of history was the key to an academic career.

Post-crisis, there have been many books written on history of money, global finance, central banking and so on. But then this book by John Galbraith on history of money gives most of these books a run for money. Galbraith was quite a writer and has written some amazing accounts on depression, affluent society and so on. He made arcane and exotic stuff look really easy and fun to read. This book on money is no different.

Starting with a more genralised account on money, the book focuses on US Dollar. Obviously, this is how the show usually begins. It starts from Europe and then moves to US. Asia and others are broadly missed from the picture despite China being seen as the original creator of paper money. The rise of the west post 15th century is still a question which most historians grapple with.

This book looks at questions like: How money began to be created and circulated, how initially banks were created just to verify the weight of different coins (like Bank of Amsterdam), the different experiments by different people under different circumstances to create paper money and so on. All chapters are fascinating to read.

The author stresses that one should be weary of men of money (women hardly played a role even in the west). They usually create enormous hype early on. People love such characters as something like money has never been understood by people. What is not understood is usually seen as important. Hence, historically, people have accorded a very high priestly kind of a role to financiers. They are seen as these magicians capable of turning things around. All the magicians do is pick some old trick and fool people into believing that something real is happening. Things like inflation or recession do not last forever and eventually end. Those who come during the time when such events are about to decline are celebrated beyond belief.

He points to many such examples after discussing life of Nicholas Biddle, once celebrated showman of Second Bank of United States (Chap 7, pg 82). He says :History of Nicholas Biddle is a moral tale. He suffered from same fate as other men who dealt in innovation fashion with money. The second Bank of  US was rechartered by Commonwealth of Pennsylvania and was declared bankrupt in 1839. He was arrested and charged with fraud. ”

Men who suffered similar fate:

  • John Law who set up a bank in France and created paper money. Died in poverty in Venice.
  • Patterson who formed Bank of England was ruined financially.
  • Robert Morris financier of American revolution went in a debtors’ prison for several years
  • Alexander Hamilton shot dead due to an affair
  • Jay Cooke who sold the bonds with the greenbacks paid for civil war met with a crash
  • Andrew Mellon successor to Hamilton escaped an income tax trap
  • Harry D White, Lauchlin Currie and Marriner Eccles who brought Keynesian economics to Washington were dubbed as communists
  • John Connally concluded the Smithsonian agreements as Treasury Secretary in 1971. He was indicted but fortunately was acquitted.

The list goes on. Add Nobel Prize founders of LTCM, Alan Greenspan, Mervyn King (much less relatively) and several other policymakers. Further add high profile fund managers and bankers to the list. Most bite the dust eventually. It is puzzling why people of money make such a show of their prowess despite these historical lessons.

The book has several anecdotes and facts which keep you engrossed from page one. The style of writing is top class.

In the end Galbraith points to 6 lessons on money:

  • The perverse usefulness of monetary policy and the frustrations and dangers from relying on it. This is one of the major lessons from the past. Monetary policy has both deepened recessions and created inflations. The management of money rewards those who manage it but its effects on general public  are usually disastrous. The best case for monetary policy/central banking is too lie low and do basic things like- cheque clearing,replacement of old notes and lender of last resort (LOLR).:-) Who would  want to be a central banker if this is what a central bank ends up doing in future? The book was written in 1975 and if updated today one can question the role of LOLR as well. He actually points out how the qualification to be a central banker in US was whether one was a neighbour to the President! In US (unlike UK), one thought really lowly of a central banker’s job. It was seen as just equal to a fire department in terms of hierarchy. How all this has changed in recent times..
  •  The balancing factor in economic management has to come from the national budget. He was a Keynesian and one can always argue with this point. Infact one does not need to as so much is already said on this.
  •  One could look at direct wage and price control where there is market power, In case there are no unions like in agri and small and medium enterprises sector, one can look at aggregate demand management. Controls are difficult to accept but a better way to control the inflationary spiral. Monetary policy applies to the whole economy and creates more problems in the process. Again it was written in 1975. Role of unions has declined in most countries.
  • Monetary and economic management eventually have social consequences as they impact income distribution. Recent thinking assumes economics to have no role with society and politics which has become problematic. Piketty for you..
  • Conservation is an important policy issue as well
  • Instability in international exchanges will recur. Till we have stable economies, any talk of international monetary order is just vacuum.

Most lessons still stand true.

Superb reading..

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