My Review of David McWilliams' "The History of Money"

Money Makes the World go Round

 

Irish economist David McWilliams has written a very informative and entertaining book on the history of money with loads of anecdotes. McWilliams views money as one of the great innovations of human beings just behind fire and the wheel. Why? Money facilitates intra-community and inter-community transactions to the benefit of society as a whole. As the great economist Paul Samuelson noted that money is a social contrivance. McWilliams argues that puts human interactions into overdrive as the lust for it propels economic progress.

 

He takes us back in time to the Sumerian Civilization of 2000 BCE where a handful of grain equaled a shekel and where there were lending transactions calling for the payment of interest all the way up today’s quantitative easing of central banks. The first real breakthrough occurred around 1500 BCE where in Lydia the first gold coins were produced. Later Greek and Roman coinage unify the Mediterranean region as one giant free trade zone.

 

McWilliams history is not dry. He introduces us to Johannes Guttenberg of printing press fame who was quite the scoundrel. One of the original users of his new technology was the Catholic Church where the printing press automated the production of indulgences which brought in great wealth. Calligraphy was out and printing was in. He also tells us that much of the church land in Europe came from the foreclosing of mortgages of the nobility. We also witness John Law’s Mississippi Bubble in France which cratered the economy and made banking a scandalous profession where the name bank was not used for years.

 

There is also an interesting vignette on James Joyce, who while living in Trieste owned a movie theater and later owned one in Dublin. The great writer was from immune from the temptations of money.

 

Gold plays a key role in the history of money. It was widely used for centuries as the coin of the realm. For example, the Florin gold piece of the Florence Republic was widely circulated for three hundred years. However, over time gold backed paper notes were used in place of physical gold thereby creating the gold standard.

 

McWilliams is a critic of the gold standard because it places the economy in a straitjacket by limiting the supply of money which, in his opinion, slows economic progress. When money is easy, but not too easy to cause inflation, the way is open for all kinds of invention and innovation. He believes that the gold standard stifled innovation and thus progress making him a strong proponent of the central bank managed (fiat) currencies we have today. Of course, fiat currencies require a high degree of trust in the issuing authority. Without that its value craters.

 

Here, I think, he goes too far. Economist Robert Gordon makes a convincing case that the bulk of economic progress that we have today arose from 1870-1940 where for almost all of that period the gold standard reigned supreme. (See: Shulmaven: My Amazon Review of Robert J. Gordon's "The Rise and Fall of American Growth" ) Think automobiles, electricity, telephones, indoor plumbing, aircraft and radio, for example. I would note that in 1879 the year the U.S. returned to the gold standard both the incandescent light bulb and the telephone were invented and over in Germany the internal combustion engine was invented and in the 1880’s the U.S experienced a record railroad building boom. It is hard to make the case that the gold standard stifled progress. What did in the gold standard were the huge distortions caused by the financing of World War I and the subsequent battles over reparations and inter-war debts.

 

McWilliams argues that money subjugated the people under colonial rule from 1600- 1960. That was certainly true of Belgium’s barbarism in the Congo caused by the need for rubber to make bicycle tires at the turn of the 20^th Century. Those tires were invented by the Irishman John Dunlop. However, Latin America was liberated in the early 1800’s and long-term economic growth in that entire region was hardly stellar.

 

McWilliams has the U.S. leaving the gold standard in 1936; it was, in fact, 1933. He has the United States returning to the gold standard in 1873; it was 1879. In 1873 the U.S. started the process of returning to the gold standard but wasn’t fully realized until the fulfillment of the Resumption of Specie Act in 1879. My quibbles aside, McWilliams has written a very lively book on what makes the world go round.

My Amazon Review of Adam Tooze's "Crashed: How a Decade of Financial Crises Changes the World"

The World in Crisis

Columbia history professor Adam Tooze, an authority on the inter-war years, has offered up an authoritative history of the financial crises and their aftermath that have beset the world since 2008. He integrates economics, the plumbing of the interbank financial system and the politics of the major players in how and why the financial crisis of 2008 developed and the course of the very uneven recovery that followed. I must note that Tooze has some very clear biases in that he views the history through a social democratic prism and is very critical of the congressional Republican caucus and the go slow policies of the European Central Bank under Trichet. To him the banks got bailed out while millions of people suffered as collateral damage from a crisis that was largely made by the financial system. His view may very well be correct, but many readers might differ. Simply put, to save the economy policy makers had to stop the bleeding.

He starts off with the hot topic of 2005; the need for fiscal consolidation in the United States. Aside from a few dissidents, most economists saw the need for the U.S. to close its fiscal deficit and did not see the structural crisis that was developing underneath them. Although he does mention Hyman Minsky a few times in the book, he leaves out Minsky’s most important insight that “stability leads to instability” as market participants are lulled into a false sense of security. It therefore was against the backdrop of the “great moderation” that the crisis began.  And it was the seemingly calm environment that lulled all too many regulators to sleep.

The underbelly of the financial system was and still is in many respects is the wholesale funding system where too many banks are largely funded in repo and commercial paper markets. This mismatch was exacerbated by the use of asset-backed commercial paper to fund long term mortgage securities. It was problems in that market that triggered the crisis in August 2007.

The crisis explodes when Lehman Brothers files for bankruptcy in September 2008. In Tooze’s view the decision to let Lehman fail was political, not economic. After that the gates of hell are opened causing the Bush Administration and the Federal Reserve to ask for $750 billion dollar TARP bailout of the major banks. It was in the Congressional fight over this appropriation where Tooze believes the split in the Republican Party between the business conservative and social populist wing hardens. We are living with that through this day. The TARP program passes with Democratic votes. Tooze also notes that there was great continuity between the Bush and early Obama policies with respect to the banks and auto bailout. Recall that in late 2008 and early 2009 nationalization of the banks was on the table. Tooze also correctly notes that the major beneficiary of the TARP program was Citicorp, the most exposed U.S. bank to the wholesale funding system.

Concurrent with TARP the Bernanke Fed embarks on its first quantitative easing program where it buys up not only treasuries, but mortgage backed securities as well. It was with the latter Europe’s banks were bailed out. Half of the first QE went to bail out Europe’s troubled banks. When combined the dollar swap lines with QE, Europe’s central banks essentially became branches of the Fed. Now here is a problem. Where in the Federal Reserve Act does it say that the Fed is the central bank to the world? To some it maybe a stretch.

Tooze applauds Obama’s stimulus policy but rightly says it was too small. There should have been more infrastructure in it. To my view there could have been more infrastructure if only Obama was willing to deal with the Republicans by offering to waive environmental reviews and prevailing wage rules. He never tried for fear of offending his labor and environmental constituencies. Tooze also gives great credit to China with it all out monetary and fiscal policies. That triggered a revival in the energy and natural resource economies of Australia and Brazil thereby helping global recovery.

He then turns to the slow responses in Europe and the political wrangling over the tragedy that was to befall Greece. It came down to the power of Angela Merkel and her unwillingness to have the frugal German taxpayer subsidize the profligate Greeks. As they say “all politics is local”. The logjam in Europe doesn’t really break until Mario Draghi makes an off-the-cuff remark at a London speech in July 2012 by saying the ECB will do “whatever it takes” to engender European recovery.

As a byproduct of  bailing out the banks and failing to directly help the average citizen a rash of populism, mostly of the rightwing variety, breaks out all over  leading to Brexit, Orban in Hungary, a stronger rightwing in Germany and, of course, Donald Trump. But to me it wasn’t only banking policy that created this. The huge surge in immigration into Europe has a lot more to do with it. Tooze under-rates this factor. He also under-rates the risk of having a monetary policy that is too easy and too long. The same type of Minsky risk discussed earlier is now present in the global economy: witness Turkey, for example. Thus it is too early to tell whether or not the all-out monetary policy of the past decade will be judged a success from the vantage point of 2030.

Adam Tooze has written an important book and I view it as must read for a serious lay reader to get a better understanding of the economic and political policies of the past decade.

The full Amazon URL appears at: https://www.amazon.com/review/R3N14CMQU8F3OF/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

Greece Needs Merkel's Tough Love

Whether Greece knows it or not, Angela Merkel has done Greece a great favor. Simply put Greece is incapable of reforming on its own. Let's face it, since Greece achieved its independence from the Ottoman Empire in 1832 it has hardly been a paragon of good government and economic growth. Left to its own devices Greece doesn't work.

What the EU has done under Merkel's leadership is force Greece to undertake the needed labor, pension, fiscal, taxation and market reforms that are necessary for economic growth. To be sure, in the short run Greece will go through economic hell, but remember leaving the Euro would bring with it a far more difficult hell. For those who argue that Greece should return to the Drachma, I have one simple question: where are the foreign exchange reserves to support a new currency. Tspras, to his credit, understood this fact.

Of course Merkel and the EU will have to relent on debt relief. The IMF is correct in its position that the current Greek debt situation is unsustainable. Although the EU will not or cannot grant a direct haircut to Greece's debt, it is in their power to restructure Greece's debt burden by lowering interest rates and extending maturities which would be the equivalent of a direct haircut.

Greece has stepped up to the plate by accepting the EU bailout conditions, it is now up to to the EU to move on debt relief. If it all works out in 20 years Greece will build a statue to Angela Merkel in Syntagma Square.