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Wednesday, July 30, 2014

Book Review - Money: The Unauthorized Biography

The book "Money: The Unauthorized Biography" by Felix Martin is a comprehensive popular history of money. Money and banking are topics of considerable interest since the end of the financial crisis, and they are also areas of great confusion. In this book, Felix Martin offers a clear history of the subject.


The book was first published in 2013, and is 309 pages long (including the comprehensive endnotes, index and bibliography). The bulk of the book describes the history of money, but it ends with some discussion of the financial crisis and potential remedies.

Felix Martin holds degrees in classics, international relations and a doctorate in economics. He worked for the World Bank and now works in fixed income at Liontrust Asset Management PLC.

My Overall Assessment

I have read a number of pre - World War II economic histories, but I am much more familiar with the postwar period. What he writes about the earlier history looks sensible, and is consistent with what I have read elsewhere. But I am not in a position to vouch for the accuracy. Instead, I will focus on the areas where I have more expertise, as well as his analytical views.

The key theme of the book is that money is a social invention – it did not arise from barter, based on gold with a fixed value. The theory that money developed from barter appears to have been a completely unsupported conjecture, but which has been mysteriously repeated by economists for centuries.

Since this is a wide history, he is forced to concentrate on certain episodes. What he wrote about the earlier episodes seems reasonable, but I imagine that some specialists could dispute parts of his version of events. But that is inherently true for any popular history of this scope.

He discusses some of the episodes with a fair amount of detail. On recent episode discussed was when the Irish banking system was shuttered as a result of labour disputes in 1970. The economy continue to function despite the closure of the official clearing system. People and businesses found workarounds. The best known example of this was the role of publicans clearing the cheques of their customers, on the theory "one does not after all serve drink to someone for years without discovering something of his liquid resources" (a great quote from the economist Antoin Murphy within the book).

The book is be a good starting point for understanding the monetary system. I do not have substantial disagreements with what he writes, rather I find that I have some disagreements with his tone at some points. This is probably because I seem to attach less importance to the distinction between "money" and "credit". (For example, see my article "Are Banks Special? Yes and No.")  But I doubt that book entitled "Money: It's Fairly Important" would sell very well, so the author's editorial stance seems sensible.

The coverage of recent history and possible reforms, although technically not too important for the overall history of money, could possibly have been expanded. These are topics of considerable current interest.

Bond Vigilantes 

One sub-theme within the book which I view as somewhat anachronistic is how the money and bond markets can discipline of governments. Of course, the James Carville bond market quote appears. It is abundantly clear that weak governments, which is what we had for much of the pre-war era, are vulnerable to market discipline. Many governments are "weak" because their taxing and spending footprints were very small, or they are dependent upon foreign imports.

This condition of weakness does not really apply to the modern developed welfare state economies with floating currencies. Writers who want to find examples of on markets disciplining such countries are stuck with repeating the same rating agency downgrade anecdotes and the James Carville quotation.

He refers to the rise of private currencies as being a "nightmare" for central bankers, for example referring to an Argentinian example. However, with all due respect to my Argentine readers, Argentina is not exactly a shining example of good governance. Private currencies only represent a threat to a government in that they make tax avoidance easier. A functioning value-added tax, or income tax system, prevents private money from being anything other than a curiosity, as all transactions generate tax obligations - which have to be settled via the official monetary clearing system.

He uses the Irish bank closure example as a proof that Chartalism (the theory that money is "a creature of the state") is a "misleading preconception". My reading of Modern Monetary Theory - which is often identified as neo-Chartalist - does not lead me to believe that that example represents a challenge to what self-described Chartalists actually believe. Chartalists are very well aware of the nature of the private banking system. But the point is that the private banking system operates in a unit of account that is determined by the government, and the private banking system would not survive its first financial crisis in the absence of government support.

It's All Locke's Fault

If you believe mainstream economics, this is yet another book that will make you unhappy. The mainstream to not exactly cover itself in glory during the financial crisis, so this treatment is somewhat to be expected. There has been a lot of writings about the failings of mainstream economics (and my writings are included in that group). But this book has a fresh new angle (to me, anyway) on the topic - it's the fault of the philosopher John Locke.

In 1695, the British parliament asked William Lowndes, the Secretary of the UK Treasury to report on the management of the British coinage. The nominal value of UK coinage was worth less than its silver content, and coinage was disappearing (due to clipping and smelting). He proposed reducing the silver content by 20%, which was normal practice throughout history. John Locke opposed this move, arguing that money was really silver, and so it made no sense to who redenominate debt. It would be as ridiculous as "to lengthen a foot by dividing it into Fifteen parts, instead of Twelve" while still "calling them Inches".

Modern economics is based upon a barter concept, where goods/services are voluntarily traded for other goods/services. Money is hard to fit into this framework, unless it has objective value. This leads us to a well-documented tendency amongst some free market purists to support things like a gold standard. Felix Martin traces this tendency back to Locke, which won over the economics profession on the basis of his influence in liberal political thought.

I cannot really judge whether Locke was as influential in economic thought as stated. But I would note that the barter framework used within economics is highly convenient for defenders of unfettered free markets. Barter transactions only occur in this theory if they raise the utility of the two parties concerned. If the government interferes with transactions, the implication is that the outcome is suboptimal. This is too useful a theoretical result for those who want to shrink government power to give up on, no matter how flawed the theoretical framework it generates is. (One could probably note for sake of balance that analysis of governmental actions by Socialists are presumably biased in the other direction.)

Felix Martin argues that Locke's conception of money as having fixed value (in precious metals) leads to the fixation on barter. My suspicion is that the desire for a barter-based system is more important for mainstream economic theory, and money has to be turned into just another commodity to fit that analytical framework.

Finance And Economics

The book’s analysis of the financial system is strong. Although he discusses the weaknesses of macroeconomic theory, he also raises the issue of weaknesses in the modern financial theory.

In chapter 13, he makes the very interesting observation:

Yet by focusing exclusively on the pricing of securities on private markets, academic finance developed an exact mirror image of the flaw of neoclassical macroeconomics. By ignoring the essential link between financial securities traded on the capital markets and the monetary system operated by the sovereign and the banks, academic finance built a theory of finance without the macroeconomy just as classical macroeconomics had built a theory of the macroeconomy without finance.

The focus on an "infinite array of substitutable claims, with no mention of sovereign money" within finance leads the true believers towards strategies that magnify leverage at every opportunity, since borrowing augments the risk premium received. Of course, without an economy (or fundamental uncertainty) in your financial model, there is no risk associated with borrowing...

Whither Reform?

At the end of the book, he discusses some possible reforms of money and banking. Things such as full reserve banking, which can be conceived of in a few ways. He also discusses the possibility of making money more flexible, so that debt repayment is less burdensome. For example, the government could you do that he and will issue debt linked to nominal GDP, which is related to the tax base.

I have not written much about banking reform, but I am highly skeptical that major banking reforms would work in the absence of a total restructuring of the economy. Almost all of the problems in the last crisis originated in the shadow banking system, although formal banks were caught up in the madness. As long as there are large pools of capital generated by the economic system – such as pension funds – there will be large amounts of money that will have to be placed by various shadow banking mechanisms (noting that bonds are a venerable shadow banking instrument). And portfolio investors have little incentive to do detailed, conservative credit analysis. All that matters is that you have less credit losses than your peers.

Correspondingly, my feeling is that the tight focus on money and banking improves the readability of the book (a book that attempted to cover the entire economic history of monetary economies would be too vast), but if one is interested in the modern economies, one needs to take a wider analytical view.

Finally, the book is available at Money: The Unauthorized Biography (affiliate link).

See Also:

(c) Brian Romanchuk 2014


  1. "The best known example of this was the role of publicans clearing the cheques of their customers"

    How did this work exactly? Did the publicans do this to make a profit? Did they charge a fee?

    1. The book did not give details, but he refers to an article by Murphy "Money in an economy without banks", 1978, The Manchester School of Economic and Social Studies. There was a study from 1970 by the Central Bank of Ireland ("Report on Economic Effects Bank Dispute 1970".)

      My guess is that publicans (pub owners) would not have charged a fee, but the idea is that they would accept cheques (originally written by a third party) as a means of motivating sales. Charging a fee would look like profiteering, but if they did it as a "favour", the customer would then feel an obligation to buy a round (or more...) of drinks. This is purely conjecture on my part, but it fits with other commercial behaviour (at least amongst businesses that run on credit relations; modern retail businesses generally don't grant credit to their customers directly any more).

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