It makes the world go round

Published in The Observer (June 9th, 2013)

Money: The Unauthorised Biography by Felix Martin (Bodley Head)

When an American explorer named William Henry Furness III arrived on the remote Pacific island of Yap at the start of the last century, he found a scarcely touched place that made his previous destination of Borneo look almost developed. Yet despite having only a few thousand inhabitants and a market encompassing just three products – fish, coconuts and sea cucumber – he was amazed to discover an advanced system of money.

This revolved around an unwieldy coinage called fei, created from hefty stone wheels up to 12 feet in diameter. These were rarely handed over, perhaps unsurprisingly given their size; indeed, following a shipwreck the considerable wealth of one family relied on a huge stone on the sea bed under several hundred feet of water. Instead, there was a sophisticated system of credit management. “The noteworthy feature of this stone currency is that it is not necessary for its owner to reduce it to possession,” wrote the adventurer.

After Furness’s travelogue was published in 1910, a copy found its way to John Maynard Keynes  – and the man who was to become the century’s most influential economist proclaimed that modern experts had much to learn from the Pacific islanders’ philosophical approach to currency. One other leading economist extolled the wisdom of Yap some eight decades later: Milton Friedman, far from Keynes’s ideological soulmate. And now Felix Martin, an economist and City fund manager, has seized upon their story for the foundation stone of his enjoyable exploration of money.

He uses the discovery on Yap to debunk standard textbook theories that money evolved from societies frustrated by the obvious limitations of barter. Here was an economy so simple it would have been easier to simply swap some fish or coconuts when wanting a nice sea cucumber. Indeed, Martin claims a consensus is emerging among anthropologists that there is little evidence any society ever relied on barter, for all the long-standing claims to the contrary.

The author believes Yap does not simply challenge conventional theories of money’s origins, however. Far more profoundly, he says it should challenge our conception of what money actually is – for it is not something tangible, based on precious metals such as gold and silver. This, he argues, gives too much weight to the surviving historical evidence of metal-based coins and the views of muddle-headed economists and philosophers. Chief villain in his eyes appears to be John Locke, who may have provided intellectual ballast for modern liberal democracy but misunderstood money with devastating consequences.

Martin sees it as based upon a system of credit and clearing from the start. Giving it a suitably modern twist, he says we should view money as a social technology, a set of ideas and practices for organising society. It was created after the collision of Mesopotamian inventions of literacy, numeracy and accounting with Greek notions of equality, and evolved amid struggles for supremacy between sovereigns and their subjects. Ultimately, it was a liberating force for individuals against the state – but also something prone to near-ceaseless speculation and financial crises.

Given that 25 countries have experienced major banking meltdowns in the most recent crisis, and that we seem to have socialised risk while privatising vast profit in the financial sector, this is clearly a good time to grapple with our understanding of money. As Martin shows, economic theory persistently lags behind practice – and many might find it fitting that one of the most prescient figures in the book is Walter Bagehot, a journalist with no formal training in economics.

To prove his core point – that money is not currency – Martin reminds readers of a previous crisis 43 years ago in Ireland. Following an industrial dispute, the nation’s banking system shut down for nearly seven months, with customers unable to withdraw or deposit money. Yet instead of the country grinding to a halt as anticipated, people began accepting cheques or IOUs based on their own assessments of risk. So in a rich and developed economy, albeit one with strong communal links, institutionalised banking was replaced by a personalised credit system – proving, he says, “the official paraphernalia” of banks, credit cards and notes, can disappear “and yet money still remains”.

The author is clearly an erudite fellow with degrees in classics and international relations as well as economics, giving him the confidence to sweep with great gusto through history from King Midas to Keynes. Like a thriller writer, Martin inserts little hooks at the end of his chapters for the next section – and he deserves, dare I say, credit for creating a readable work on such a potentially bone-dry subject.

He is at his best when he sticks to the snappy title, discussing tales such as that of Bernard Mandeville, a Dutch doctor who wrote a satirical poem effectively arguing that personal greed is to the greater good of society and ended up a serious political economist whose idea was adopted by the great Adam Smith. Or that of the Scotsman John Law, a brilliant mathematician who escaped jail having been convicted of murder and ended up advising the king of France, for whom he devised inventive strategies to salvage the public finances of Europe’s wealthiest nation.

And he demonstrates well that while capitalism is a comparatively modern invention, our current concerns over its failings and flaws date back far further. “The tensions and dissonances that we feel today are not new at all: they have flexed and echoed down the centuries ever since money’s first invention more than two and a half thousand years ago on the shores of the Greek Aegean.”

Yet curiously, where the author is least interesting and original is when he moulds his theories to the current financial crisis, arguing the Volcker Reforms in the United States and our own Vickers Proposals are too timid in their segregation of banking activities. His disappointing solution is “narrow banking”, in which only banks offering the most basic services would be offered state protection for failure. This has a cold logic to it, but fails to rein in risk while leaving so many financial activities unregulated and uncontrolled. Perhaps Martin simply has too much faith in his vision of money.

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