MONEY - THE UNAUTHORIZED
Alfred A. Knopp, NYC., 2014, 320 pgs., bibliography, index, end notes
This is a very important book in which the author dispels myths about money and
banking. Thus, I am all the more disappointed, when I read major mistakes that
actually confuse the very issues he is advancing. He mixes his terms by using
money and currency almost interchangeably. His descriptions of the development
of modern money are good, but his ideas about ancient Near East and especially
early Greek economies and their money are not. So chapter 3 can be ignored. But
his description of the influence of Locke - Chapter 8 and elsewhere - is very
interesting. Likewise important is the discussion on the creation of the Bank
of England, He understands (in part) the nature of money and its function in
society well . He realizes it is all about establishing relative 'values'. But
he proposes an impossible method for creating some sort of 'standard value'
that could solve the problems he identifies in the use of money. (Read On) -
Chapter 1 - What is Money?
Mr. Martin begins with description of the peculiar money of Yap Island. It
consists of huge circular stones with holes in the middle - giant stone
'donuts'. This money was discovered by Europeans around 1903 and caused a
sensation among professional economists who had elaborate theories on the
nature of money. Actually these stones were representational symbols of the
wealth of their owners, thus both stores of wealth and measures of account -
but symbols nevertheless.
The next section is: 'Great Minds Think Alike"
The author continues by describing the standard theory of money as seen by Adam
Smith, John Locke, and the establishment in general. This popular concept was
that primitive societies conducted their economic activities on the basis of
barter. As they became more complex barter did not suffice so everyone would
agree to consider some physical item(s) as a standard of value to use as a
'medium of exchange'. Thus all the items being bought and sold would be
evaluated in terms of this standard which was a physical 'thing', generally
having a value itself, such as silver or gold. He quotes Adam Smith, "Many
different commodities, it is probable were successively both thought of and
employed for this purpose." And this theory has persisted to the present
despite lack of evidence. He writes, "It was that those of us who have had
years of training regurgitate this theory, Because simple and intuitive though
it may be, there is a drawback to the conventional theory of money. It is
He notes, that of course Smith, Locke, Aristotle and the rest had no idea of
the real history of the ancient world, they were merely theorizing on the basis
of deductive logic. Well, I have another idea about Locke and Smith. They were
observing the trade conducted between Europeans and American Indians and other
similar people (such as in Africa) that was actually barter, exchange directly
of beaver pelts for knives and beads and guns, et cetera. But this was due to
there not being the same money systems in the two trading parties.
The next section is: Stone Age Economics?
Mr. Martin continues with comments about Lord Keynes' views, and those of
Caroline Humphrey and Charles Kindleberger. He quotes other economic historians
as well, who recognized in the 19th century that real trade within organized
societies was accounted for in monetary terms (but on credit ledgers rather
than in actual currency.) He writes, "To focus on the commodity payment
rather than the system of credit and clearing behind it was to get things
completely the wrong way round." I wish he would stick to this concept
throughout the book. But more fundamentally, he describes money in the
conventional terms we have all been taught - to evaluate goods and services in
terms of money rather than evaluating money in terms of goods and services.
Here is his thesis. "But currency is not itself money. Money is the
system of credit accounts and their clearing that currency represents."
This is the excellent key concept. But he sometimes uses the word 'money' when
he means currency. He continues, "Modern banknotes are quite transparently
nothing but tokens". Well, the same goes for silver and gold coins.
Further, "The vast majority of our national money - around 90 percent in
the U.S. for example, and 97 percent in the U.K. - has no physical existence at
all. It consists merely of our account balances at our banks."
He is agreeing with Geoffrey Ingham and
Ingham, whose first book he mentions in the
bibliogrphy. And many other commentators including Wray and Mehrling
and Frankel.For a much different understanding
of money see Ludwig von Mises - The Theory of
Money and Credit.
The next section is: "Monetary vandalism: The fate of the Exchequer
This is one of the excellent specific historical details that make the book so
fascinating. He uses this example as a reason so much of the public does not
know better, almost all the physical evidence of money consists of coins. The
existence and use of these 'tallies' is well known to experts, but Mr. Martin
provides the reader with much more detail. The relevant fact is that for 600
years from the 12th century on in England a shortage of coins was over come by
the use of willow wood sticks that were notched in a special way to represent
economic (monetary) transactions between the Royal Exchequer and the public.
The crucial fact was that these became bearer notes that could be exchanged
also between third parties - thus they also were symbols representing monetary
- hence economic - value. Millions of these tally sticks remained in the royal
archives until mid 19th century when eager government modernizers decided to
burn them. Thus a priceless record of medieval and early modern economic
history was lost. Well, the government vandals got their just reward because
that fire in the House of Lords set fire to the building as well and the entire
Palace of Westminster was turned to ashes. But, again this is an example of
'monetary' transactions being conducted on the basis of transferable credit.
He briefly mentions the critical concept that seems to be lost on many people
today. The sovereign establishes the 'monetary value' of credit instruments and
then issues them in exchange for goods and services he obtains. Meaning he
grants a credit and records a debt. These credit instruments are then freely
exchanged between people as symbols of the 'value' decreed by the sovereign.
This 'value is confirmed because the sovereign accepts them back at that
'value' in payment of tax - in other words to extinguish the 'debt' the
sovereign created when issuing them. We should recognize this procedure when
considering today a 'balanced budget'.
The next section is: "The Benefit of Being a Fish out of Water"
Here the author discusses one reason why the conventional theory of money
retains acceptance. It is a philosophical - psychological issue. He means that
participants inside something cannot get a clear view of what is going on
around them. In this case since coined currency and bank notes are all people
have thought of in recent times as money they have difficulty conceiving of
anything else being money. Plus, he believes "there is scant evidence in
investigating the distant past" for finding out what money really is.
I disagree with this part, as I will note in later chapters. There is much
evidence of the very point he makes, namely, that credit-debt accounted for in
records has been a - maybe the - actual form of money. There is more evidence
in history than he imagines. See Landes.)
The next section is: "Money in an Economy Without Banks".
Mr. Martin describes in detail an example of a national economy functioning for
months without banking. The event took place in Ireland in 1970 when labor
unions went on strike and all the banks in Ireland closed for months. Yet the
public managed to continue its transactions, buying and selling, on the basis
of local credit and everyone agreeing to accept checks as IOU despite that they
could not cash them for months. I believe Charles Calomiris and Stephen Haber,
authors of Fragile by Design in which
they insist that banks and 'states' (that is governments) cannot function
without each other, would object on the grounds that a regular banking system
already existed and the public knew how to continue through the usual motions
in expectation that the banking system would eventually function as before. But
Mr. Martin's real point is as he writes: "In its review of the whole
affair, the Central Bank of Ireland noted that prior to the closure, 'some
two-thirds of aggregate money holdings are in the form of credit balances on
current accounts, the remainder consisting of notes and coin'." Of course
there is also the example of 'private money' created without using banks.
The next section is: "The Heart of the Matter"
This is an important and very clearly written section.
Mr. Martin writes that the Irish bank event "provides an unusually useful
opportunity to understand more clearly the nature of money," He writes, of
the Yap example, "It showed that in a primitive economy like Yap, just as
in today's system, currency is ephemeral and cosmetic. It is the underlying
mechanism of credit accounts and clearing that is the essence of money."
and, "Money is not a commodity medium of exchange, but a social technology
composed of three fundamental elements.
The first is an abstract unit of value in which money is denominated.
The second is a system of accounts, which keeps track of the individuals' or
the institutions' credit or debt balances as they engage in trade with one
The third is the possibility that the original creditor in a relationship can
transfer his debtor's obligation to a third party in settlement of some
unrelated debt. The third element is vital. Whilst all money is credit, not all
credit is money and it is the possibility of transfer that makes the
Money, in other words, is not just credit - but transferable credit..'
Bravo. He quotes Henry Dunning Macleod "The simple considerations at once
shew the fundamental nature of a Currency. It is quite clear that its primary
use is to measure and record debts, and to facilitate their transfer from one
person to another. We may therefore lay down our fundamental Conception that
Currency and Transferable Debt are convertible terms, whatever represents
transferable debt of any sort is Currency, and whatever material the Currency
may consist of it represents Transferable Debt, and nothing else."
Mr. Martin writes much more elaborating this point. But I prefer to use the
opposite term. 'credit'. People accept the debt side as inevitable but it is
the credit side than they want. They seek credit, but dump debt when they can.
The next section is: "So What"
Mr. Martin turns to Richard Feynman for a broad example. Feynman noted that in
science a small change in perspective can result in major changes in views, but
preconceptions must be overcome. With respect to concepts about money, Martin
believes fundamental change in perspective is required for us to understand
economic reality. His belief is so very true. And it would fundamentally change
our concept of the national debt and of FED monetary policy.
Chapter 2 - Getting Money's Measure
The first section is: "The Biography of Money; A Story of Ideas"
The author discusses a new exhibit on the history of money in the British
Museum. He notes; "The problem is that money is not really a thing at all
but a social technology: a set of ideas and practices which organize what we
produce and consume, and the way we live together....- When it comes to money
itself- rather than tokens - there is nothing physical to look at. This is
right out of Ingham.
He declares he wants us to embark on a journey to find the history and
development of these ideas, practices, and institutions, and, above also, the
idea of abstract economic value, the practice of accounting, and the
institutions of decentralized transferability. "He wants to begin at a
time and place where money never existed".
He claims we can do this be study of a description of such a place - namely in
the Homeric epics - Iliad and Odyssey.
And this is where I have strong objection.
The next section is: "The Wrath of Achilles: The World Before Money".
Mr. . Martin claims that the Homeric epics are a "unique historical
record" and that they depict a world in which money did not exist. They
are NOT history but are a literary construction based on a concatenation of
real life centuries after the events depicted with mythological constructions.
He claims economic activity consisted in sharing out captured booty, the
practice of exchanging gifts between chieftains and the sharing of the meat
from sacrifice of oxen. "These three simple mechanisms for organizing
society in the absence of money - the interlocking institutions of booty
distribution, reciprocal gift exchange, and the distribution of the sacrifice
-are far from unique to Dark Age Greece." But read
Graeber and Polanyi. Those practices were common, even
standard, in primitive societies, but the Greek society that waged war on Troy
was not at all primitive.
But he continues, "comparative history has shown them to be typical of the
practices of small-scale tribal societies."
But the Homeric epics describe a society far from that of primitive tribes.
After all, Troy was a major, fortified city that withstood years of siege, and
the Greeks came from fortified cities and organized a multi-city army and NAVY
that conducted a lengthy siege with logistics that didn't depend on any of
these three simple mechanisms. They had impressive fortified cities of their
own. One also has to note the fundamental nature of oral heroic epics; the
singers don't bore their audiences with descriptions of the common facts of
daily economic living. Homeric bards didn't mention money; well, they didn't
mention latrines either, but the Greeks certainly had both: what they didn't,
yet at that point, have was coins. Yet, the activities described in these DO
include lots of more sophisticated economic transactions. And Odysseys didn't
build his own ships. But the remarkable issue is that in his very subject title
Mr. Martin reverts to the concept of money he wants to overthrow. Certainly the
Homeric world was before coined CURRENCY, but not before money. For reference
to descriptions of actual Greece, I mention - Oswyn Murray's book - Early
Greece - Harvard Univ Press - and M. I. Finley's book - Economy and
Society in Ancient Greece - Viking Press, among many others. Oswyn Murray
writes, "In some respects Homeric society is clearly an artificial
literary creation." These and other specialist studies describe the actual
social functions of the three mechanisms Mr. Martin mentions. They by no means
constituted the economic basis that enabled these Greek polities to function.
Just as the absence of physical evidence from medieval England prevents us from
understanding everything we would like to know, so also the absence of extended
descriptions of how the Greeks managed a multi-year campaign supported by a
sizable navy prevents us from understanding all the relevant details. The
reader of Jane Austen novels will learn almost nothing about the economic basis
of the society she describes so lovingly. Any book on battles in Vietnam or
Afghanistan will not tell the reader anything about how the forces in conflict
were supported logistically, let alone how they were paid. But we do have
archeological evidence of the kind of economic book keeping in ancient Greece.
The next section is: "Ancient Mesopotamia: The UR Bureaucracy"
Here Mr. Martin describes what he considers a much different civilization. He
notes it had very large populations in cities and that the governments were run
from palaces and temples by organized bureaucracies. The people invented
literacy, numerancy and accounting. This is a brief, summary account of the
basic structure of the society. But Mycenaean Greece had walled cities and
palaces also. And they had accounting for material in storage. One needs to
read Wttfogel Oriental Despotism to
see that Mesopotamia was a series of command economies with the equivalent of
wage and price controls.
The next section is: "The Silicon Valley of the Ancient World"
Well, something of an exaggeration. But the author wants to go into great
detail about how these three intellectual breakthroughs came about. This is an
excellent elaboration on the essential concept in Ingham. He provides an excellent summary. This
includes description of the decipherment of the tens of thousands of clay
tables uncovered in the 20th Century. In the description he mentions tokens 'to
keep account of numbers of animals or quantities of crops." Then these
were replaced by the symbols inscribed in clay.
He comments "the increasing complexity of the Mesopotamian economy meant
that the pressure to devise ever more efficient and flexible techniques was
unrelenting." He continues with many (but not enough) details.
"Accounting was a social technology that combined the ability to keep
records efficiently using writing and number with standardized measures of time
so that quantities could be tracked as stocks on balance sheets and flows on
That is book keeping. But then he makes the astounding comment that the
Mesopotamians had no money. Well, what were all those accountants recording?
Just what Mr. Martin has gone in the previous chapter to show - CREDIT-DEBT.
Those numbers WERE money serving its function as a unit of account.
For a discussion of Mesopotamian economy and its credit systems we go to H. W.
F. Saggs' great book - The Greatness that was Babylon - Hawthorn Books -
and the more recent chapters by Michael Hudson and Cornelia Wunsch in David
Landes, ed. The Invention of Enterprise
- Princeton Univ. Press. Both books describe in detail the elaborate
merchant trading networks centered on Babylon that spread from the
Mediterranean to India and the local markets that fed and clothed the urban
populations. Yes, these were controlled from the palaces and/or temples but
they functioned in the very same manner that Mr. Martin describes for a system
based on credit- debt accounts - even frequently using notional silver weights
as a standard of comparison to value different commodities as well as the
worker's labor. M. L. Finley in his book previously cited also discusses
Mesopotamian use of notional silver in balancing accounts, but without it being
distributed as currency. In relation to the subsequent developments of coinage
Mr. Martin should note that in this civilization the relative 'values' of labor
and things were established by the government.
The next section is: "Getting the Measure of Things"
The author begins with a few disparaging remarks about bureaucracies. In this
section Mr. Martin digresses to discuss a meeting of the General Conference on
Weights and Measures in 1960. His comment is that "for the first time in
history, a simple and universal system of units of measurement based on
internationally agreed standards "was agreed". His delight in this
accomplishment is now readily apparent. He mentions examples of the very
different units of measure for common things throughout history. One has to
mention that universal agreement by officials has not resulted in universal
results, witness the remaining differences between English-American units and
metric units. He goes into great detail about all this development of standards
that can enable measurements of various abstract ideas (like weight, and
temperature, and size) to be interchanged. It is all irrelevant to the question
of money because what is being 'measured' is totally different..
But then he concludes with this. "The invention of a universally
applicable unit of measurement: its central role in knitting together the
modern, globalized economy and its dramatic impact on the development of human
thought, Where else is this revolutionary triumvirate to be found. Where else,
but in the case of money?"
Amazing, he fails to mention (surely not to understand) that all these
"universally applicable units of measurement" such as meters and
pounds are attributes solidly fixed to real, unchangeable, physical things. A
meter can be permanently related to a yard, because they both are measurements
of attributes of unchanging physical objects. Even a non-physical concept such
as 'time' can be measured in different units because it does not change -
except for cosmologists describing the space- time relationships. Moreover, the
attributes of the units on the scales used in doing the measuring do not change
either. So fixed attributes are being measured in fixed units. And, very
significantly, the units of measurement (feet, meters, liters) do not have
'value' themselves, let along changing 'values'.
And of course there are no universal standards for monetary measurement, rather
a more elaborate daily FOREX in trading currencies in a manner like that of
ancient or medieval money changers but with technology that their predecessors
could not have imagined. But his point is to lead up to the following chapter
in which he again departs from his own agenda.
The fundamental problem with his analogy is two fold - the concept being
measured continually changes, and the standard scale used to make the
measurement also changes in unrelated ways.
Chapter 3 - The Aegean Invention of Economic Value
Well, the Aegean (that means the Greek city societies) did not 'invent'
'economic value' whatever the author may mean by that. The invention of
currency based on minted coins indeed enabled a social revolution but it was
not limited to 'economic value'. Far from it, the power of the revolution was
that it enabled the diffusion to different social groups and to individuals of
their ability to determine 'value' themselves rather than living with the
forced acceptance of 'values' decreed by a larger government, and - all 'value'
- economic, political, social was included. In the prior temple -palace
societies 'value' had been more subject to the larger government. This was the
fundamental revolutionary development by the Greek polities that constituted,
then, their freedom from the imperial governments.
The first section is: "The Invisible Dollar"
He begins with a very valid question. What actually is a dollar? - not the
physical representation called a dollar but the real thing. "It is a unit
of measurement - an arbitrary increment on an abstract scale. So like a meter
or a kilogram, a dollar itself doesn't refer to any physical thing at all -
even if the length or mass or value of some particular physical thing has been
agreed on as its standard.' He continues, "If the dollar is a unit of
measurement, what does it measure?" "It measures economic
Yes, indeed, but unlike a meter marked on a physical stick and unchanging, the
size of that dollar is continually changing. And worse yet, when the first
societies then created symbols to represent 'value' they selected metallic
coins. The result was another double mess - As I note, the relative 'value' of
the abstract unit - 'dollar' continually changes and also separately the
'value' of the metal in which the physical representation of that 'dollar' also
changes independently. Thus, for instance, the ratio of a 'dollar' versus a
bushel of wheat is changing and at the same time the ratio of the 'value' of
this 'dollar' to the 'value' of the weight of silver it contains also is
changing. Both changes are the result of different external factors. This is
most evident when trying to measure the 'value' of grain in the middle ages
But the analogy is completely wrong. Meters and kilograms do exactly measure
physical things that have unchanging attributes, which are what is being
measured. And while length and mass have been agreed on the 'value' has not.
Moreover, it measures not 'economic value' but all 'value', political and
social as well.
OK, but what is 'economic value', and how did the Greeks invent it? You mean no
one for millennia before considered 'economic values'? The author's whole
analogy of money as a measure of 'value' compared to meters and kilograms as
measures of length and weight is misleading because those measures are used
when examining physical objects that do have intrinsic length or weight. Thus
length and weight are attributes of the things measured. But nothing has
intrinsic worth or 'value'. 'Value' is not an attribute that can be fixed for
any object or service. The attempt to do so is itself a major problem. 'Value'
is a measure of human desire related to all other desires. Anything is valuable
only in relation to the other things a human desires at a given moment.
Moreover, Martin himself describes the Chinese use of currency and theories of
'value' they developed independently of the Greeks. And of course other
civilizations did likewise. But the fundamental problem remains, and that is
the misconception of 'value'.
The amazing thing is that Mr. Martin actually understands this, as he shows in
subsequent sections. He next discusses the concept of a 'standard of value' and
describes many superficial problems stemming from there not being even uniform
concepts about various 'values'. But he still misses the critical problem. He
discusses his idea of "the concept of economic value in terms of
bureaucratic conflict over who and how to establish a universal standard".
He claims "Economic 'value', has attained the last word in universality -
without any input from the bureaucrats whatsoever." He apparently believes
this because he believes that some Drivers Association objected to a specific
government evaluation of human life related to auto accidents. Amazing. He
continues, "Still, even if the bureaucrats found themselves redundant when
it came to simplification, surely standardization would still represent a
respectable agenda? After all, the concept of economic 'value' might be
uniquely universal, but its standard are still clearly national;" Again
amazing. He advocates that officials build "agreement on a single,
international standard - ideally defined in terms of universal constraints
found in nature."
If international bureaucrats were able to reach such agreement and enforce it,
society would be back to the Mesopotamian style control of life from the
palace. Then, finally, he begins to recognize one (but not the key) problem.
"The problem is that there is a fundamental difference between the concept
of economic value and the concepts measured by the SI. Economic value is a
property of the social world, whereas linear extension, mass, temperature, and
so on are properties of the physical world."
But NO again, 'value' is not a property of the social world but of the
psychological world. But he continues to think of the problem of creating this
international 'standard value'. He persists in believing that way back in
ancient times there was such a concept of universal economic 'value' that was
the missing link in the invention of money. "It is time to return to the
archaic Aegean to find out how that invention occurred." This is the lead
in to the following section.
The next section is: "Money's Missing Link"
He first reverts to his myth of the ancient Greeks versus Babylonians. We now
read a summary of early Greek philosophy and other intellectual achievements,
especially, "the emergence of abstract rational thought". He even
claims "that the modern scientific worldview was invented," at that
time. I don't think so. The rest of this section is irrelevant digression and
mostly wrong as well. But all of it relates to a time in Greek society hundreds
of years later than that of the Iliad.
The next section is: "A Rule for Anarchy"
This is Mr. Martin's theory, for which there is no proof, of the historical
process by which the concepts of what functions this 'money' now in the form of
coin as a measure of 'value' spread in the Mediterranean world. He tries to
link all this with primitive ideas about human sacrifice.
The next section is: "The Great Question Which in all Ages has Disturbed
He begins with another remarkable idea. "The tensions created by the
spread of monetary society and the imperialism of markets are deeply familiar
to us today. The extent to which monetary thinking has become second nature,
and the dominance of the concept of 'universal economic value', are remarkable
- even frightening."
I have never witnessed nor read about any of this "tensions' or
'imperialism' or especially this notion of 'concept of universal economic
value'. He appears to have some problem with the fact that individuals can
exchange assets relatively freely. He continues with further expressions of
concerns that he claims are wide spread and blames all of it on "the
social technology of money".
He elaborates thusly, "And 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.". Do you know anyone who is experiencing
'tensions and dissonances' about something related to money, apart from wishing
to be able to earn more?
And, I repeat, money was not invented by the Greeks. Actually this is one
example of his repeatedly switching between 'money' as something other than
coinage, and coinage itself.
But he ends the chapter with a very cogent new subject. "It is to the
perennial battle over who controls money that we therefore turn next."
Indeed a vital issue, but does he really want to revert to a condition in which
the government (an international government at that) controls all forms of
Cue in the next chapter.
Chapter 4 - The Money Maquis
The first section of this chapter is about the collapse of the Argentine peso
and then about the devaluation of the Russian ruble. The author's point is to
show the difference between sovereign and private money.
The next section is: "Money in Utopia - and in the Real World".
Mr. Martin continues with his concept from the previous chapter. "With the
Aegean invention of 'economic value' and the economy as an objective space, the
conceptual preconditions for 'money' were in place."
Apparently he is again mixing 'money' with 'currency - or 'coinage'. He is also
conforming to the establishment division of academic study into the three
separate disciplines, of economics, politics and sociology. 'Economic value'
and the economy are not an 'objective space'.
I will summarize again. 'Value' is an abstract concept and is a scale of
individual relative preference in which the individual decides the ranking of
all the available assets and actions he desires to have or do. But he lives in
a society in which the other members also have made similar evaluations. And
they are all engaging in this process of 'evaluation' (that is prioritizing) of
assets that have limited supply versus large or unlimited demand. Therefor as a
society they need to establish a common scale in which these individual
'values' may be organized and related. This socially agreed scale is also an
abstract concept and is called 'money' (of course in English). The increments
in this scale are called 'prices'. To perform the practical functions of this
'money' it may be made real in any of many forms, such as, cattle, cacao beans,
barley, tobacco, piece of metal, and engraved paper. And it also may be made
real in one of two types - sovereign money (created by the ruler) and private
money (created by private organizations such as banks). When considering the
exchange of assets, individuals, then, are able to relate assets to each other
in terms of the social consensus reached on 'value' in terms of 'prices' -AT
the moment of the exchange and in relation to their expectations about
unknowable future relative 'values'.
A significant characteristic of a free society is the relative ability of its
individual members to establish these 'prices' freely to reflect their personal
assessment of 'value' in exchanges in markets versus in a society in which
'prices', hence relative 'values', are being established by government decree.
And the significant aspect of the development of widely created (minted) coins
for use as symbols of 'values' via their 'prices' was to break the power of the
ancient temple-palace governments to establish 'value' by central control of
'money'. From then on relative 'values' of assets being exchanged in markets
could reflect the personal 'values' of the participants as realized by the
intermediate exchange of the symbols of 'value' namely coins. However, this
required that this 'value' of the coin was decreed and maintained by some
trusted authority. The most powerful, hence usually trusted, such authority was
the sovereign who created the coin. Thus also the exceptionally severe
punishment for anyone who counterfeited 'money'. Once established by decree at
a specific 'value' in a monetary system, such as shilling, the coin retained
that 'value' since the sovereign decreed its acceptance back for tax,
irrespective of the changing 'value' of its content (such as silver or gold) in
relation to its supply to the markets, its demand from the amount of exchanging
the changing population was undertaking, and its use for other purposes by
Reading Mr. Martin's text several times over and over I see again in this
section the result of the separation of what is called 'economic activity' from
the rest of human actions. In reality, when one engages in an exchange of
assets, one may be motivated by political and or social ideas, purposes,
(psychological views) rather than purely economic ones.
He continues the discussion and agrees with much of what I wrote above about
the significance of the sovereign's power that influences the role and 'value'
of 'money' in exchanges. He returns to Plato and Aristotle to cite their
opinions on the relation of politics to monetary policy.
The next section is: "Peace and Order in the Subcelestial Realm"
This is a well written and clear description of the early development of
Chinese philosophy about 'money' and its functions. It is quite different from
the Western concepts about which he focuses the book. That alone should alert
the reader to the relativity of the whole concept of 'money'.
Chapter 5 - The Birth of the Money Interest
The chapter begins with this section: "Paradise Lost: The Monetary
Achievements of the Romans."
This is a brief summary describing the extensive use of coinage and credit in
Imperial Rome until its collapse. There is much more to this topic than Mr.
Martin includes here.
The next section is: "Europe's Monetary Renaissance"
Mr. Martin begins with his concept that although the normal use of coinage and
the understanding of advanced financial methods practically disappeared during
the first centuries of the Middle Ages, the "concept of universal economic
value". remained. He relies on Spufford
for details of medieval use of money in commerce. But his broad understanding
of the introduction and use of coin disagrees with that of
Davies. He describes the role and results of
Charlemagne's introduction of monetary units such as pounds and shillings. And
he well notes the significant manner of the spread of numerous mints belonging
to the very large number of independent and semi-independent rulers and the
resulting proliferation of a great number of coins having no standard
relationship with each other.
He describes a major problem from use of all these different coins; the chief
of which were made of silver.
I object to his use of the term 'intrinsic' value rather than 'different' real
'value' to describe the actual situation. 'Intrinsic' creates the idea of
something fundamental and unchanging. The actual problem was that the coin was
declared by its issuer to have a specific 'value' greater than the 'value' in
the market for the bullion - that is raw metal - 'value' of the weight of
un-minted silver it contained when minted. This resulted in the 'seigniorage'
the profit to the issuing ruler. This was accepted and worked fine as the
public recognized the 'value' of using something - the coin - in conducting
exchanges that had an official and lasting 'value', if that difference was not
too large. But if and when the 'price' that is 'value' of the un-minted raw
silver might increase to a 'value' greater than that of the coin, then it would
be profitable to melt the coin and sell the raw silver. This called for the
sovereign to call in the coins and melt them and reissue them with less silver
but the same decreed 'value' - Or individuals would simply 'debase' the coin by
cutting off some silver. Or, when Europe stabilized into well established
different sovereignties, silver coins minted in one locale would be transported
to another if there silver content was worth more there and then melted. Worse
yet, the sovereign, always in need of more money (mostly for war) would himself
devalue his coinage by putting less silver into it but decreeing the same, now
high, value. But even apart from this frequent changing of the actual worth of
a coin versus its official 'value' the existence of so many hundreds of
different coins each having both actual and official 'values' when used as
intermediaries in exchange of assets required the expert attention of 'money
changers' to process transactions.
The next section is: "The Birth of the Money Interest
The remainder of the chapter is a clear exposition of the problem I described
and its recognition in contemporary Europe. People began to realize that there
was a problem for society when the sovereign could simply change the 'value' of
the 'money' used in commerce. Mr. Martin discusses the idea published in 1360
by Nicolas Oresme who published the radical concept that the nation's 'money'
was not the property of the sovereign but of the society at large. Thus the
society should have the power to control its 'value'. All excellent discussion,
but I don't understand his last sentence in which he claims the situation just
described resulted in the 'invention' of banks.
Chapter 6 - The Natural History of the Vampire Squid
The first section is: "The Mysterious Merchant of Lyons"
This is about the famous 'fair' at Lyons, France and a specific Italian
merchant who sat at a table there and made himself a fortune simply by
exchanging one coin for another or one 'bill' for another. The story appears in
many histories of money. Lyons was a meeting place for local and international
merchants or their agents to exchange assets (but not the only one). Mr.
Martin's discussion focuses on the gradual change of activity of the major
merchants from simply exchanging real goods to using the occasion to net out
credits and debits in financial accounts that had been created by previous
exchanges of commodities. This shift is an example of the gradual increase,
generally, in the use of paper bills that represented credit from exchange
transactions. The result was that the increasing volume of exchange of assets
was made easier by the exchange of credit instruments. Of course this meant
that this greater volume was not involving cash. Just like today when
credit-debt instruments (now electronic) have replaced cash in commercial
activities. And it also represented exchanges of goods without use of the
sovereign's 'money' not something he appreciated.
The next section is: "The Secrets of the Pyramid"
Mr. Martin relates the above mentioned activity to the concept, "how to
operate a monetary economy when the sovereign's interests diverged from their
own." The relation is that by conducting their business via private
exchange of credit instruments without recourse to coin they were bypassing the
sovereign's money system - coins - which meant, with less need for coins there
would be fewer coins minted and thus reduced seignorage for the sovereign. This
is an interesting idea that Mr. Martin presents. Most general descriptions of
the development of the use of paper - bills of credit - focus on its safety and
efficiency because it reduced the need to move physically quantities of heavy
coin subject to loss in transit. In addition, Mr. Martin notes that the big
time international merchant organizations were able to establish credit
'pyramids', that is networks through which they could shift a credit instrument
of a local merchant via a network to be used in a transaction far across
He describes the essence of banking thusly, "This is banks' specifically
monetary role, and what makes them special. A bank is in essence an institution
which writes IOU's on the one hand - these are its deposits, its bonds, its
notes; generically its liabilities - and accumulates IOU's on the other - its
loans and its securities portfolio; generically its assets." And, "A
bank's real assets are always negociable." He continues to describe more
of the details including the concepts of 'liquidity' and 'risk'. He continues,
"The whole business of banking resolves into the management of these two
types of risk, as they apply both to a bank's assets and it its
liabilities." And there is also the management of the time sequence
differentials between when liabilities might be due and when assets can be
recovered into cash. This section includes a history of some specific examples
of the late medieval merchant banking operations. He concludes that once
created this international banking system generated political change as well.
For a very informative comparative description of banking in several different
societies read Calomiris and then
Cue the next chapter.
Chapter 7 - The Great Monetary Settlement
The first section is: "Private Money and Market Discipline"
In my opinion this is the most important and interesting chapter in the book.
The title "Great Monetary Settlement" refers to the total political
compromise of which the financial part was the creation of the Bank of England
and its authorization to create money subject to control by Parliament. The
result was the dual nature of British money - the sovereign continued to create
money - coin - while the private Bank of England could create private money
-credit paper. This put the two authorities and their money into collaboration.
The fact of the event is reasonably well known, but here Mr. Martin gives us a
very clear look 'inside' with something of the historical background and the
immediate results along with his analysis. The event (or process) was every bit
of the combined political, social, and economic activity one would expect to
read in history, but as with so much of the unfortunate split of these three
academic disciplines one usually reads of only one or another of its aspects.
This may be why Dr. McCloskey ignores its importance in her books on the role
of the bourgeois. in creating the Industrial
Mr. Martin begins with, "Claude de Rubys, the historian of the Lyons fair,
was one observer who spotted the political significance of the international
system of exchange by bills: it enabled the mercantile class to escape from
their reliance on sovereign money." He, "Was aware that control of a
nation's money was one of the most basic and lucrative sources of sovereign
power. "And that their control of private money was 'potentially of
political revolution." It did not need metal coins to act as collateral
for its credit-debt operations. He continues, "sovereigns sought to wage a
rearguard action against this new enemy." He describes the activities of
Sir Thomas Gresham and William Cecil during the period in which the English
pound fell in 'value' in Holland. Gresham created an exchange stabilization
fund but lack of success caused the government to cancel the project. Other
efforts also failed. Mr. Martin next describes Montesquieu's contribution to
monetary theory. Enlightenment theorists began to have "a vision of money
as a force that can discipline even the mightiest sovereign."
The next section is: "Banking on the State: The Philosopher's Stone of
Mr. Martin describes some of the inherent problems of private money and the
corresponding advantages sovereign money has. He continues, "The result
was a chronically unstable monetary disequilibrium - a long-running guerrilla
war between sovereigns and the private money interest which neither side could
win." But the merchants in Holland came up with a new banking system. This
was then incorporated in England "The resulting invention was the Bank of
England - and with it, the basis of all modern banking systems, and all modern
money." Mr. Martin describes the political background and process in
detail in a lengthy and very interesting few pages. "With the foundation
of the Bank of England, the money interest and the sovereign had found an
historic accommodation." "The compromise is the direct ancestor of
the monetary systems that dominate the world today: systems in which the
creation and management of money are almost entirely delegated to private
banks, but in which sovereign money remains the 'final settlement assets,' the
only credit balance with which the banks on the penultimate tier of the pyramid
can be certain of settling payments to one another or to the state."
"Likewise, cash remains strictly a token of a credit held against the
sovereign, but the overwhelming majority of the money in circulation consists
of credit balances on accounts at private banks." Besides this
revolutionary change, Mr. Martin writes that there was another change, in the
very concept of the meaning of money and its role in daily commercial affairs.
Chapter 8 - The Economic Consequences of Mr. Locke
The first section is: "The Great Recoinage Debate"
Another excellent and interesting chapter. One does not usually read about the
famous Mr. Locke in his role in misdirecting the modern concept of money and
credit. Amid all the enthusiasm over this new political-economic regime there
were skeptics and critics. Yet to be solved was the question - on what standard
would the Bank of England's public-private money be based? Plus, what about the
use of the old currency - metal coins? The old vexatious problem remained, -
namely that between the decreed 'value' of a silver coin and the market value
of the same weight on bullion. And this also involved potential (and real)
shortages of coins for use in daily exchange. The existing coins had to be
revalued somehow to conform to the value of silver bullion. The proposals about
this generated a strong conflict between William Lowndes and John Locke over
the fundamental question of - 'what is money?' Locke proclaimed that "The
realty was that money was nothing more nor less than silver itself." He
had fundamental political purpose for this opinion. He was convinced that the
theory of money and coins asserted by Lowndes and the mercantile community was
subversive and a conspiracy to gain political power. It is "the measure of
Commerce by its quantity, which is the the Measure of its intrinsic
value." Mr. Martin describes the conflict and states that Lowndes was
correct but Locke won. The result was a disaster, according to Mr. Martin.
The next section is: "From the Palm of Olympia to the Gold Standard"
In this section Mr. Martin continues with description of the results.
"Locke's conception of money was therefore unorthodox - all the more so,
given that he was living in the middle of the financial revolution." But
Locke had in mind a larger context - the struggle between absolute sovereigns
and liberal democratic political power. One result of this faulty conception of
silver was its eventual disappearance from commerce and replacement by gold.
Thus came into being the 'gold standard'
The next section is : "Enter the Drone: The Apotheosis of Monetary
First we learn about Bernard Mandeville, so frequently mentioned in financial
and economic history (including Dr. McCloskey's volumes on the
bourgeois.) The chapter ends with: "The
founders of the Bank of England believed that their marriage of private banking
and sovereign money had unleashed the greatest force for economic and social
progress in history." A view Dr. McCloskey ignores.
Chapter 9 - Money: Through the Looking Glass
The first section is: "The Achilles' Heel of Monetary Society"
Mr. Martin begins by noting that, "That problem was debt - and
specifically, its tendency to accumulate to unsustainable levels." He
immediately relates 19th century to today, noting the financial crisis of 2008,
the books of Charles Kindelberger and of
Kenneth Rogoff and Carmen Reinhart. He
writes that the problems they describe relating financial crises and debt are
due to - "The reason is that this instability is intrinsic to money's
miraculous promise to combine security and freedom."
Chapter 10 - Strategies of the Sceptics
The first section is: "The Ancient Origins of Modern Misgivings About
Mr. Martin begins with, "The brilliantly counter-intuitive notion that the
pursuit of money for its own sake could actually be good was an idea alien to
Alien to me also and to anyone I know.
"For them, money was still new and strange."
He means coins.
He adds, "the revolutionary notion of universal economic value."
I still do not believe in any such concept as 'universal economic value' .
Yes, he describes the myth of Midas. Well understood today as well. But he
continues, "The central theme of this myth is money's intrinsic tendency
to reduce everything to a single dimension by weighing it in the balance of
universal economic value." And also, "A single metric that can serve
as the criterion for any decision does wonders for the organization of a
No, the message of the Midas Myth is that pursuit of wealth for its own sake is
misguided and fraught with the peril of loosing all other valued relationships
in life. Man does not live by bread alone.
So what is this 'single metric' I have not seen it.
More, "The universal application of the new concept of economic value
brings with it a major problem: the lack of any intrinsic limit to consumption,
accumulation, and the quest for status."
As if ancient pharaohs, kings, priests, nobles, and everyone didn't seek all
these without limits. But he is correct, then, when he states that Midas sought
not only gold but all that wealth could bring him - just like rulers before
him. He continues to be confused. "Traditional society had intrinsic
limits - limits defined by the immutable social obligations owed by peasants to
chieftains, chieftains to priests, and so on. There is no intrinsic limit to
the accumulation of wealth, and since status in monetary society is by its
nature relative, not absolute, monetary society constantly risks degenerating
into an unending one-upmanship."
Well, Egyptian and Babylonian societies were monetary and to look at the
pharaohs' tombs they accumulated quite a bit of wealth. There was constant
competition for status. For that matter, individuals in tribal, nomadic
societies also sought to enhance their status and wealth as well, without
coinage. There is much more philosophizing in this section. Again, all this is
well described in essays in Landes.
The next section is: "The Spartan Solution'
Despite what Mr. Martin writes, the Spartans did have money, but not coinage.
And they also created a totalitarian terror regime with its economic base
slaves. But the Spartans were also notorious for rampant greed whenever posted
The next section is: "The Soviet Solution"
The author writes a lengthy story about Soviet citizens trying to function
extracted from a satirical novel. Satire is not reality. Yes, the initial
socialist concept was to abolish money. But the practice quickly failed. But it
was not "a strategy that sought, in other words, a partial reversion from
monetary to traditional society."
Chapter 11 - Structural Solutions
The first section is: "The Scotsman's Solution"
This section is a well done description of the idea put into practice in France
by John Law.
The next section is: "The Wisdom of Solon"
Rather than read this scattered section for the reforms of Solon read Josiah Ober
Chapter 12 - Hamlet: Without the Prince: How Economics Forgot Money.
This is one of the most important chapters in the book.
The first section is: "The Queen's Question".
This is about a famous incident in which Queen Elizabeth II offhandedly asked a
group of 'expert' economists at LSE why no one had predicted the financial
crisis of 2008. The answer was something of a tautology - well no one predicted
it because no one saw it coming. From that Mr. Martin moves on to Alan
Greenspan's answer, well there was a flaw in the model the FED uses. Then
Lawrence Summers replied to same question that the whole structure of orthodox
macroeconomic theory was faulty, well, actually "useless". Summers
cited the old stand bys Walter Bagehot, Hyman Minsky and Charles Kindleberger
who really did understand but are no too old school.
This leads to the next section, which is: "The Model Instance of all Evil
This is a good summary of the build up period that lead to the 2008 crisis. He
mentions the huge expansion of credit and increasing 'moral hazard and the
failures of 'regulators' and then the frenzy to 'print' more money to save the
banks. This leads to discussion of the famous collapse of British banking
behemoth Overend Gurney and Co in 1865. He describes how the Bank of England
took action, but lacked sufficient reserves, so the British government itself
had to step in by putting the sovereign's money behind (or under) the financial
system. Nevertheless there were many bankruptcies.
Mr. Martin writes a direct hit. "It is just such unquestioning confidence
in credit that is the essential ingredient of liquid financial markets, as the
Governor of the Bank of England knew."
Exactly then and now - the real money supply is always credit and the viability
of credit depends fully on trust - that is confidence that debts will be
He continues, "This was a lesson that had been learned time and time again
in the course of the preceding half-century." Being English, he cites at
length Overend - very interesting - but the same conditions and results took
place in the US during the same time period with the 'runs' on American
The next section is: "What Economists Forgot"
The scene shifts to the Economist (still the best in my opinion_ and its
editor, Walter Bagehot. My view is that he knew what was really going on is due
to not being an academic economist. The result of all this was that his
response to the banking crisis was his classic, Lombard Street, or, a
Description of the Money Market.
Mr. Martin captures the essence. "And what Bagehot saw as the most basic
reality to be grasped about the modern monetary economy was that the
conventional understanding of money as gold and silver - the understanding
adopted by habit by the man in the street, and the one promoted by the academic
economists of the day - was confused."
Worse than confused. And it still is (see Tamny).
There is much more in this important section.
"The first step here was to understand that although all money is
transferable credit, there is one issuer of money whose obligations are ,under
normal circumstances, more credit worthy and more liquid that all the rest: the
sovereign, which in the modern financial system had delegated its monetary
authority to the Bank of England." "The clear view of how sovereign
money is, in normal circumstances, qualitatively different from private money,
allowed Bagehot to explain the continuing importance of the Great Monetary
Settlement and its practical implications for the modern economy."
And he describes much more that still in not understood by many commentators.
He spells out Bagehot's recommendations (three rules) on how to protect the
monetary system by appropriate actions, when necessary, by the central bank -
the 'lender of last resort'. If used, it "had the unique powers to save
the financial system from disaster."
Chapter 13 - ...and Why It is a Problem
The first section is: "What Economics Got Distracted By"
Mr. Martin hits the nail again. "At the root of these differences between
Bagehot and his classical forebears was the way they conceived of money and
finance." He fingers Locke's continued influence that the only money is
gold and silver. And worse, that being a commodity it is governed by the laws
of supply and demand. This resulted in faulty theory about monetary policy.
"What was in short supply in a crisis was not gold but trust and
confidence." He continues with much more excellent analysis based on
Bagehot's perceptive theory. Among other issues, he viewed that Say's law was
inappropriate. Sovereign money had a very different role to play.
The next section is: "How On Earth It Happened"
Mr. Martin begins with ironic commentary - Bagehot's correct analysis was not
accepted or adopted by the economist community. He turns next to Lord Keynes
and A Tract on Monetary Reform Next is General Theory of Employment,
Interest and Money He cites Keynes' idea about expanding government demand
in the depression. And disapproves of the 'classical economist' reaction that
did not accept it. But he notes several changes. "Money was no longer
claimed literally to be a commodity - it was just right to think of it as if it
were one. Value was no longer held explicitly to be an intrinsic property of
things - thought it was still treated as a natural fact." "The
moneyless economics of the classical school emerged from the Second World War
battered, discredited, and apparently overshadowed by a new and persuasive set
of ideas. But emerge it did." He refers to economists Leon Walras, John
Hicks, Kenneth Arrow and Gerard Debreu with reviving the old ideas in new form
as the 'general equilibrium theory'. Arrow and Debreu's math too over the
research agenda. The establishment still refused to believe in the importance
of money and banking, despite the warnings from Minsky and Kindleberger. Mr.
Martin explores these controversies in good detail.
The next section is: "Why It is a Problem: The Answer to the Queen's
In this section he explores the fault line between finance theory and practice
and establishment economic theory. This had its practical impact in development
of monetary policy. Here is a typical comment. "Indeed, the fruits of a
decade's devoted worship at the shrine of monetary stability were more damaging
even than this." Namely that they failed "to identify that credit and
asset price cycles are key drivers of instability."
He blames John Locke's influence. "What was it in the end that frustrated
the dream of Bagehot and of Keynes for an economics that takes money seriously?
The ultimate answer lies in the powerful influence of Locke's monetary
doctrines. " "money had already gone through the Looking Glass."
Orthodox macroeconomics and financial theory remained separate. "And at
the root of it all was a deceptively simple change of perspective: the
difference between two conceptions of money."
Chapter 14 - How to Turn the Locusts into Bees
Here we have one of the most important chapters in this book.
The first section is: "Can We Avoid the Island of Dr. Moreau?
Mr. Martin turns to the German, Franz Muntefering who denounced the 'culture of
modern financial capitalism". The author writes that Muntefering's attack
claimed that 'Banking is basically a parasitic rather than a productive
Wonderful - I agree fully. Well, not so much the simple, local deposit bank -
but the trading desks at the big, international banks. They are simply modern
'money changers' like those in the Jewish Temple. They continually create new
games like black jack but called CDO's and CDS's and ABCP and SPV, in which
they are the house that creams off the top from the fresh credit-money that the
FED creates, while they engage the fools in zero-sum games.
Mr. Martin notes that finally there has been a reaction - due to the 2008
financial crisis. But the system continues to flourish despite massive 'reform'
The next section is: "From Quid Pro Quo to Something for Nothing"
In this section we learn about what happened in England in the Northern Rock
affair. Mr. Martin reminds us about how banks borrow (or take deposits) as
short- term liabilities and lend to mortgages and other investors at long-term
assets. The books balance but the time differential does not. There is the
'maturity gap'. Suddenly Northern Rock bank was in trouble in a typical
'liquidity crisis' when depositors and its lenders demanded their money back
and the bank could not liquidate its long term loan assets in time. This
short-term liability and long-term asset situation is standard essence of
banking. It works as long and the short-term folks do not all rush to a 'run on
Next, as Mr. Martin explains, "Under terms of the Great Monetary
Settlement (described earlier) a bank's liabilities, unlike the liabilities of
normal companies, are an officially endorsed component of the national money
supply. And since money is the central coordinating institution of the economy,
any impairment of its transferability would impose grave costs on the whole of
society" it must be protected by the sovereign.
Here is the point people must understand. "the vast majority of modern
money is provided and operated by a network of banks in which the failure of
one can disrupt the system as a whole."
"In the banking system, a mere loss of confidence in one of the parts can
be fatal to the whole. Preventing liquidity crises in banks has therefore long
been recognized as an important responsibility of the sovereign." Mr.
Martin elaborates very well on this.
But the Northern Rock saga continued. It turned out that this bank was not only
illiquid - that is with a maturity gap' problem. It was also insolvent -
meaning that even with full matching its assets did not equal its liabilities.
Disaster. Now the Bank of England could not supply the funds necessary to cover
these losses. Its job was only to provide the required short term assets
against good credit to fix the 'maturity gap' temporarily, at no long term risk
of loss. What to do? The Bank had to turn to the sovereign - the Exchequer. In
order to provide liquid funds the government had to 'nationalize' the bank -
that is take ownership - equity - from the shareholders. This was a shift of
the credit risk from the bank to the taxpayers. Naturally all this was beyond
the understanding or concern of the taxpayers. But to the professional finance
and economist fraternities it was dramatic and momentous. And sooner rather
than later, the public did begin to smell something was cooking.
The similar events took place next in New York, when Bear Stearns was bankrupt
and sold to J. P Morgan. And then the full impact hit when Lehman Brothers went
bankrupt as well. No one imagined before that what the international result
would be. "Twenty five countries experienced major banking crises between
2007 and 2012: two thirds of them resorted to providing credit support to their
Mr. Martin continues by noting that the public environment in which the
government 'bails out' the bankrupt bank in a process that protects its bond
holders now has changed because of the increased inequality of wealth with rich
people benefiting from this and also due to the internationalization of finance
in which taxpayers in one country find themselves involved in the 'bail out' of
banks in another. "The global public's dismay at this state of affairs is
therefore not due to an unfortunate misunderstanding of how the financial world
does and indeed has to work. The crisis and sovereign's response to it revealed
a profoundly uncomfortable truth: something has gone terrible wrong with the
Great Monetary Settlement." "The sovereign ended up supporting the
credit of the banks." The banks get everything and the taxpayers get
The next section is: "The Coup D'etat in the Credit Markets"
In this section the author discusses the growth of deregulation and
globalization in recent years, plus decentralization - the outsourcing of so
much of a company's support organs. Finance industry also took part with the
creation of more elaborate credit-debt instruments. Plus there was a
proliferation of financial intermediaries that focused on narrow segments of
financial transactions. For instance, the agencies that created mortgages no
longer held the debt, but passed it on through a whole chain of other
institutions. "By the end of 1993, they (credit markets) accounted for
more than 60% of U.S. corporate debt finance." And it continued to expand
after that. The author provides an excellent primer on the complex new
structure of the credit-debt market. This is the expansion of the so-called
'shadow banking system'. "History proves that the power to issue money is
an irresistible lure."
This entire section is important reading. I, years ago, contended that the FED
had lost control of the U.S. money supply. That is what Mr. Martin is
explaining here. He states that the manner in which all this was concealed from
the public was by making it all extremely complex. But I do not believe it was
motivated by an effort at concealment - rather simply the concept of finding
more ways to make money.
"With a chain between borrower and end investor involving seven legal
entities in several jurisdictions issuing seven different securities rather
than one issuer in one jurisdiction issuing one bond, a sleight of hand could
be achieved." He describes this in more detail. "As with the demise
of the Great Monetary Settlement, it was only when it was too late that the
truth of the matter was discovered." "The displacement of traditional
banks by a disaggregated network of specialist firms linked together by complex
supply chains, had not just been about greater efficiency, more choice, and
better value, as it had in the car or mobile-phone industries." It was
creating private money outside the sovereign money system.
Weatherford describes this as well.
He continues, "The result was the bizarre sight of the U. S. Treasury
providing credit support to an insurance company, and an expansion of
central-bank balance sheets on an unimagined scale, as they absorbed the
liquidity risk that banks and shadow banks had proved unable to manage
Chapter 15 - The Boldest Measures Are the Safest
This is another of the most important chapters because Mr. Martin offers
actions, potential solutions to the fundamental causes of financial crises.
The first section is: "Monetary Counter-Insurgency"
In this chapter the author describes the government response.
"The Great Monetary Settlement has become a one-way bet for banks, and the
Monetary Maquis has been busy on a scale unparalleled in history."
"The global headquarters of the regulatory reaction-force" is in
Switzerland. This is the Basel Committee on Banking Supervision, based at the
Bank for International Settlements. He discusses the regulatory tools this bank
uses to try to reduce risk taking by other banks. He states that the analytical
community is split, with many members being skeptical about the ability to
really reduce risk. This is a complex discussion of a complex process.
One of his conclusions is: "The root of the failure in both cases, as we
discovered, is the conventional understanding of money. Stuck in its
Looking-Glass world, the policy-makers are flying blind. Can the alternative
traditions of monetary scepticism help instead?"
The next section is : "The Boldest Measures Are the Safest"
He believes the dire level of the financial crisis has opened minds to consider
bold alternatives. Some of these ideas are quite radical. He writes, "The
most important thing, the unconventional tradition provides, however, is not
any particular proposal. It is the alternative understanding of money not as a
thing, but as a social technology." (Read Ingham and Frankel on
This brings him into philosophical discussion of the nature and role of money
begining with concepts about sovereign money. But then he writes a key point,
"So much for sovereign money. In the modern world, nearly all the money in
circulation is not issued by the sovereign any more; it is issued by
It is so difficult to get people to understand this (Tamny for instance.) But read also
He presents a lengthy discussion with more detail about sovereign money.
"For money issued directly by the sovereign, we have seen that the promise
works because the sovereign, by definition, has political authority."
"It becomes all the more pressing because one's promise of stability means
that debt crises are bound to arise- and the sceptical tradition has understood
since ancient times that a critical prerequisite for the sustainability of
monetary society is therefore the safety valve of a variable monetary
standard." And much more he writes on this.
He describes the 'liquidity transformation' issue and the reality of the role
of confidence and risk well. But then he comments, "the distribution of
risks that today's system of bank-based money dispenses has become intolerably
I always perk up with I read someone write that some public policy or activity
is 'unjust'. Who says? What is the criterion for 'justice' and who determines
this? His view has some validity in that he is describing public rescue of
private risk taking. He offers two potential solutions. One, "The first
would be to privatize all the risks - to restructure the banking system so that
investors bear all potential costs, as well as all the profits. The other would
be the opposite: to redesign the system so that the financial system socialize
all risks." He presents some detail about these concepts. The first idea
above, he claims is what John Law was trying to do with 18th century French
government finances. He describes also ideas from Laurence Kotlikoff and Paul
Volcker. (Read also Conti-brown on the FED) But
Kotlikoff's proposal is not as far reaching as Law's. Law wanted to shift the
center of finances from sovereign debt to sovereign equity. The concept, also
advanced by Robert Shiller, is for the sovereign to share with investors the
risk to the public finances inherent in uncertain economic growth by issuing
bonds that pay interest linked to GDP"
My idea is that the FICA tax that supports the Social Security system should be
invested in a government operated single trust fund invested in all the
companies on the several Stock exchanges in nonvoting shares. And 10% or so if
the existing theoretical SS trust be shifted into these shares each year.
Mr. Martin continues, "Law's strategy of creating a monetary system which
privitizes all risk represents on extreme option." "At the opposite
end of the spectrum is a reformed monetary system structured to socialize all
risk. This alternative extreme would see the banks replaced not by mutual
funds, but by the sovereign." In other words ALL money- credit would be
issued by the sovereign. This means the sovereign would own all the banks. As
it is we saw that the British did have to nationalize Northern Rock. And the
U.S. FED has taken over 1 trillion in mortgages.
Mr. Martin claims, "As counter-insurgency strategies designed to disable
the monetary Maquis and secure a new Great Monetary Settlement, these extreme
strategies have the merit that they would eliminate once and for all the
problematic distribution of risks inherent in the current structure of the
banking system." "Unfortunately, they would do so only at the cost of
destroying monetary society itself."
Thus, he describes the anarchy that would result from either solution. But he
also claims we do need a 'radical reform of the banking system.' He suggests
several reforms. He writes, "So long as democratic politics commands the
escape valve of a flexible monetary standard, it should therefore be
preserved." In several more pages he describes reforms and cites Irving
Fischer's proposal titled "100% Money. This has been revived by
Milton Friedman and the Univ. of Chicago economists. The fundamental basis of
this system is simply to separate deposit banks from all others and make them
the only ones with sovereign backing. Sovereign money would be the only asset
of these banks.
Chapter 16 - Taking Money Seriously
This is a summary of the author's narrative and analysis. But he also
introduces a remarkable concept about 'value'. He defines again money by its
functions - "a concept of universally applicable economic value - a system
of account-keeping whereby that value can be measured and recorded -and the
principle of decentralized transfer whereby that value can be transferred from
one person to another."
But I dispute these three as the definition of 'money'.
Dr. Ingham gives the standard list of functions:
"medium of exchange, store of value, means of unilateral payments, and
measure of value - unit of account". He also notes 'Money is one of our
essential social technologies..."
Mr. Martin explains, "I claimed that it is because money's central idea is
that concept of universal economic value, and because the appropriate standard
of value has to be political one, that money as we know it today was first
invented by the collision of the Mesopotamian invention of literacy numerancy,
and accounting, with the notion of the equal social value of every member of
the tribe that the primitive Dark Age Greeks had."
He continues with, "both concepts and the standards used to measure them
are determined by the uses to which people put them." "The concept of
universal economic value is just like a physical unit of measurement: the
extent of its applicability, and what its standard should be, is properly
determined by what it is used for. But the second was that universal economic
value is also different from a physical unit of measurement. It is a property
of the social rather than the physical world." "The right criteria
for choosing its standard are not consistency and accuracy - as they are for a
physical unit of measurement - but fairness, or political justice, or whatever
you want to call the characteristic quality of a well-governed society."
First, I disagree that there can be any such thing as "universal economic
value". Second, I disagree that the Greeks or other tribes had any such
idea as 'equal social value' of their members. Third, I disagree with his
picture of the Greek polities that created coinage - not to mention that
coinage - currency - was created elsewhere also. Fourth, I disagree with the
separation of the single, unified psychological concept 'value' into one of its
aspects, economic. Fifth, I disagree with his description of the monetary
system of ancient Egypt and Mesopotamia. And sixth, I disagree with the 'holy
grail' search for 'fairness and political justice' via some manipulation of the
However, once beyond this effort to create a basis, I agree with most of his
critique of the problem in the banking system today. I agree with him that the
popular conception of money is faulty, but do not necessarily agree with his
alternative concept. Rather, his concept about money is right, but it is his
theory about the relationship of money and 'value' that I believe is faulty.
His idea about 'value' is as faulty as the common concept.
But he elaborates, "that money is a tool of government, and that the
extent to which economic value is used to coordinate social activity, and the
question of what the standard should be, are therefore to be determined solely
by reference to how they contribute to the successful government of the
This is the central objection to current use of money by government
manipulation that S. Herbert Frankel denounces
as being immoral. The struggle during the middle ages between the creation and
role of sovereign and private money that Martin explains was because as long as
the government controls the use of money for its own purposes the liberty of
private individuals and economy are curtailed. The creation of a form of money
by the Greeks independent of the control of the ancient empires such as in
Mesopotamia was directly liked to their freedom. And centuries later the
ability of private interest - the bourgeois - to create and control money is
what enabled their freedom from the absolutist monarchs. He terms this "a
long-running battle between sovereigns and their subjects over the management
of the standard." But it was over much more.
And he continues to accuse John Locke with the mistake in his definition of the
nature of real money and of John Law for an opposite mistake.
And from there he elaborates on his theory connecting money and value. This
becomes quite complex. I believe he is correct in identifying the current
establishment misunderstanding of the nature and role of money. Or possibly
they do understand the nature of money and are concealing what they believe
from the public because they are manipulating it for the government. This is
part of what Frankel claims. And also Martin links this with the financial
crisis and growing size of government debts throughout the world. But it is his
ideas about value that are confusing. Here are some of his arguments about the
3 basic policies for manipulating money.
"The first related to the management of the monetary standard. The
principal differences between the conventional view of money and the
alternative view is that the monetary standard can, and indeed should, be
deliberately managed. The conventional view implies that economic value is a
natural fact. As such, the job of money and finance is to measure it -but not
to influence it. The monetary standard is the fulcrum of the scales of
political justice, as it were - and just like the fulcrum on a physical pair of
scales, it has to be fixed in place in order to be accurate. Any redistribution
required in order to even things up between different members of society should
be achieved by taxing stuff away from the people on one side of the scales and
doing it out to the people on the other - or perhaps by making the process of
accumulating stuff itself more equitable, so that redistribution of this sort
This clearly claims that egalitarian concepts of 'justice' are valid. Martin
"The alternative view of money sees economic values not as a natural fact,
but as a concept invented for the purpose of organizing society in the most
just and prosperous way. The job of money and finance is therefore not just the
measurement of value - but the achievement of this objective as well. There is
therefore nothing intrinsically wrong with moving the fulcrum of the scales of
justice, since their purpose is not to achieve accuracy - a notion without
meaning in the social world - but fairness and prosperity. On the alternative
view of money, keeping the fulcrum fixed while shifting weight from one scale
to the other via fiscal redistribution is certainly one way of doing things -
and quite rightly the usual way in normal times. But the nature of monetary
society is such that unsustainable inequalities that cannot feasibly be
corrected in this way will inevitably occur from time to time. When that
happens, it is time to move the fulcrum to restore balance."
So this idea amounts to the same purpose and result. Mr. Martin's view is that
the current distribution of income and wealth is 'unjust' and demands redress.
His conclusion is that there are two methods for achieving this 'justice' each
involving a different concept for the role of money in society. He is explicit,
"I think many countries are currently at the point where financial
inequalities have reached unsustainable dimensions - the point where there's
too much debt. I think that the current strategy of trying to sweat these debt
mountains off over time - of trying to amortise the debt gradually - is not
politically feasible or economically desirable."
He is thinking about 'financial engineering' used in the US in the 1950-70 era
- that is depreciating the money supply via induced inflation that will favor
debtors over creditors. Exactly what Frankel insists if immoral.
Mr. Martin continues, with his opinion. "The ultimate goal of monetary
policy isn't monetary stability, or financial stability, but a just and
prosperous society....it represents the only reliable guide to policy."
Some readers will disagree with this view.
But he continues, "I think the time has come to abandon the cult of
inflation targeting and revert to a broader idea of what monetary policy has to
achieve - and to allow the central bankers a larger set of tools to attempt
these more difficult goals." .."Central banks shouldn't be
independent. Or at least, not like they are now."
He devotes several pages to round about discussion that advocates a total
restructuring of banking and money creation. He insists that monetary policy is
political policy and therefore should be controlled by the democratic means.
But, he states, the origin of the current problem is a faulty concept of what
money really is. And this requires a total 'reform of economics' itself.
Now we are getting down to fundamentals.
"We need to reformulate economics so that it starts from a realistic
understanding of money." He wants to reintegrate the study of economics
with history, politics, ethics and philosophy. He returns to commentary on
current society stressing inequalities. Again and again he claims the
fundamental problem is misunderstanding of money. He repeatedly cites Keynes
for describing the current ideas. He again focuses on money.
"The sovereign doesn't actually control money.... Money is a social
phenomenon - like language - so the whole notion that the sovereign or the
central bank controls the standard is in fact a myth. It doesn't control the
monetary standard any more than the editors of the dictionary control the
meaning of words....Because money, like language, is intrinsically social, one
certainly can't just invent it on ones' own. ... People can create IOU's but
"they can circulate as money. But what people cannot do is issue their own
money - regardless of how creditworthy an issuer they are - denominated in
their own, private, monetary unit. "
Well this is false - there are many examples of private money denominated in a
private term and circulating locally. His discussion goes round and round from
there but does not reach a conclusion
S. Herbert Frankel - Two Philosophies of Money: The Conflict of
Trust and Authority
G. L. S. Shackle - Epistemics and Economics: A Critique of Economic
Geoffrey Ingham - The Nature of Money
Perry Mehrling - The New Lombard Street: How the Fed Became the
Dealer of Last Resort
Ludwig von Mises - The Theory of Money and Credit
Kwasi Kwarteng - War and Gold: A 500-year history of Empires,
Adventures and Debt
Nicholas Wapshott - Keynes - Hayek: The Clash That Defined Modern
Hunter Lewis - Where Keynes Went Wrong
Jerry Z. Muller - The Mind and the Market - Capitalism in Western
Geoffrey Ingham - Capitalism
Philip Coggan - Paper Promises: Debt, Money and the New World
David Graeber - Debt: The First 5,000 Years
Glyn Davies - History of Money: From Ancient Times to the Present
Lawrence H. White - The Clash of Economic Ideas
Charles W. Calomiris and Stephen Haber - Fragile by Design: The
Political Origins of Banking Crises and Scarce Credit
Anat Admiati & Martin Hellwig - The Banker's New Clothes: What's
Wrong with Banking and What to Do about It
Peter Conti-Brown - The Power and Independence of the Federal
Stephen D. King - When the Money Runs Out
Rana Foroohar - Makers and Takers: The Rise of Finance and The Fall
of Ameerican Business
Frank Trentmann - Empire of Things
Joel Mokyr - Culture of Growth
Danielle Dimartino Booth - FED UP
John Tamny - Who Needs the Fed?:
Karl Polanyi - The Great Transformation