That Fateful Year

You may or may not have been reading the transcripts released Friday of the 2008 Federal Open Market Committee meetings – 1,865 pages detailing what was said on the record in the course of the eight regularly-scheduled and six emergency meetings of the Federal Reserve System’s top policy-makers during that fateful year. Certainly I have.

They add context and human color to Gary Gorton’s timely black-and-white explanations of the crisis, first in Slapped By the Invisible Hand: The Panic of 2007 (Oxford, 2010), then in Misunderstanding Financial Crises: Why We Don’t See Them Coming  (Oxford, 2012)., and most recently, with Andrew Metrick,  in The Federal Reserve and Panic Prevention: the Roles of Regulation and Lender of Last Resort in the Journal of Economic Perspectives. (Both Gorton and Metrick are professors at Yale University’s School of Management). The transcripts will doubtless spark a second round of books about what happened in those years.

So it is just as well that this week I spent my free time reading the last really interesting specimen of the first generation of crisis books,  Money: The Unauthorized Biography, by Felix Martin (Knopf, 2014 ) —  re-reading it, actually, since I had seen the British edition, which appeared last year.

And at some point, I finally I realized who it was Martin so persistently reminded me. Not David Graeber, the prolix London anthropologist whose book Debt: The First 5000 Years helped inspire the Occupy Wall Street movement. Like him, Martin attaches inordinate significance to a chicken-and-egg theory of the primordial ancient origins of credit The two are convinced that no barter economy ever existed,  that symbolic money, or at least ledger debt, preceded trade. Whatever.

Nor was it John Lanchester, the British novelist pressed into service to make sense of the crisis by the London Review of Books. IOU: Why Everyone Owes Everyone and No One Can Pay (titled Whoops in Great Britain) came out too early to contribute much understanding, but Capital: A Novel, is a wonderful evocation of London in the crisis, upstairs and downstairs. It’s a book that might properly be called Dickensian.

It is Jane Jacobs whom Martin calls to mind, mainly by his determination to think matters through for himself, starting with first principles. Jacobs, perhaps the best economic journalist of the second half of the twentieth century, parlayed an article for Architectural Forum in 1956 into a famous book, The Death and Life of Great American Cities (Random House, 1961). She followed up with a series of equally interesting (but less prominent books over a period of forty years following her ideas where they led.  In fact Money: The Unauthorized Biography begins and ends as a dialogue, the form Jacobs ultimately chose for herself in Systems of Survival: A Dialogue on the Moral Foundations of Commerce and Politics. (Random House, 1992).

It’s not that Martin’s book is anything like Death and Life. That book reads just as well today as when it first appeared. As noted, The Unauthorized Biography was rendered substantially out of date by the appearance of those Fed transcripts on the eve of its US publication. Martin has a deft chapter on what happened in the last great British banking panic, the crisis that took down the London banking firm of Overend, Gurney and Co., the J.P. Morgan of its day, in 1866, but virtually nothing on what happened in New York in 2008.

More important, Martin, 39, has a certain amount of unlearning to do.  Not so much the Oxford University PhD in economics; he already put behind him that laborious indoctrination in the faith by working for the World Bank for ten years, mostly on the problems of the Balkans, and then going to work as a money manager. I mean the contemporary movement known as Institute for New Economic Thinking, or  INET, the George Soros-backed program that has created and furthered a network of critics of mainstream economics.

Martin seems to have been embedded in INET at some point, so The Unauthorized Biography displays some of the usual genuflections: John Maynard Keynes is still “the man who “revolutionise[d] the world’s understanding of money and finance;” former Obama economic advisor Lawrence Summers, speaking at the second annual INET conference, at Bretton Woods, N.H., summoning the shades of Charles P. Kindleberger and Hyman Minsky, in April 2011, is the hero of its climactic chapter; and so on. I expect Martin to grow out of this. The Unauthorized Biography made the long list for the Guardian first book award, and that seems just right to me. You are going to hear more from him.

The book itself is a high-spirited romp, showcasing Martin’s undergraduate degree in classics and his omnivorous reading habits.  He aims to show that money is a transferable credit, a social convention, like language, the property of neither governments nor private interests, but malleable by each. He starts in with the invention of accounting and forward planning in ancient Mesopotamia, “the Silicon Valley of the ancient world.”  He moves on to the appearance of the concept of abstract universal economic value in Greece, coins, ritual sacrifice and all that, social obligations transformed into financial relationships, 500 drachmas for a champion at the Olympics instead of the laurel wreath.

The “monetary Maquis,” meaning the legions who discover ways to lever against the sovereign’s mint privileges to create private money of their own (named after the “army of shadows” that conducted guerrilla war against France’s puppet Vichy regime during World War II), makes its appearance – operating with food stamps in modern Argentina, with Continental dollars in revolutionary North America, with privately-minted coins in ancient China.

Soon the Maquis invents the new technologies necessary to become “the Vampire Squid” – that is, the institution of private banking, with its offer of “credit,” first to kings, and in due course to everybody else. And so on, until the appearance of  John Locke, the seventeenth-century philosopher who is the arch-villain of the book.

According to Martin, it was Locke who, by persuasively insisting that money should be defined in terms of precious metals instead of having its value negotiated by society’s leaders (whoever they happened to be), successfully removed a previous flexibility in which the fairness of things – of the distribution of wealth and income – weighed equally in the governmental balance along with the responsibility for maintaining the integrity of the standard of value. His discussion sent me scurrying for my copy of 1688: The First Modern Revolution, by Steve Pincus (Yale, 2009), trying to remember what that fracas was all about.  Sure enough, it turns out to have been about the successful enfranchisement, in England, of the bourgeoisie, or, as we call it now, the middle class – the biggest development in the division of labor in a thousand years.

The trouble is that Martin, in his fascination with money, routinely leaves out this other side of the story, meaning that for which money is needed, namely trade, or “the economy” as we now call it.  Late in the book, discussing the failure of present-day macroeconomics to make sense of what happened in 2008, Martin says that economics without money is Hamlet without the prince. That’s surely true. But the history of money without the history of the division of labor is Macbeth without the Lady.

There will be many other opportunities to discuss these matters, here and elsewhere. At first glance they may seem to have little to do with the events of 2007-08.  Look closely at Martin’s book, however, and you’ll find it ends with a plea for the introduction of a reform called narrow banking. So what is narrow banking?  For now, see the link. There’s a case to be made for it, at least for introducing some new variant of it into the system, but Martin doesn’t make it in the course of thinking things through from the start. Perhaps he will take it up in will be his next book.

So why not get in on the ground floor? Martin writes regularly for New Statesman.  He is a habit worth making.

.                                xxx

James W. Fox is an economic consultant who was formerly chief economist for Latin America at the US Agency for International Development (here is a Brookings Institution paper). Fox writes up what he sees at the Allied Social Science Association meetings every year for a circle of like-minded friends. He goes to sessions I don’t; I’ve always found his a useful parallax view, especially his asides. I’m grateful for his willingness to share his reporting here.

One response to “That Fateful Year”

  1. You write, “According to Martin, it was Locke who, by persuasively insisting that money should be defined in terms of precious metals … it turns out to have been about the successful enfranchisement, in England, of the bourgeoisie, or, as we call it now, the middle class …”

    It would make sense if the rise of the political power of a class of traders caused an increase in the political demand for a system that would maintain the value of money over long time periods.

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