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Mammom Dearest

(This past weekend I took part in a Liberty Fund conference having as its main topic David Graeber's Debt: the First 5000 Years (Melville House, 2011), but also addressing parts of Felix Martin's Money: The Unauthorized Biography (Knopf, 2014). Although Martin is an economist and Graeber an anthropologist, the two works have much in common, including their authors' general contempt for what Martin refers to as "Adam Smith and his school," meaning just about every economist who has ever had anything nice to say about either money or free markets.

It so happens that a review I'd written of Martin's work appeared, in somewhat abbreviated form and minus the title I'd given it, in Barron's (together with Larry White's review of Jim Grant's The Forgotten Depression and a review of a book about football that almost certainly got the the most attention) a week prior to the Liberty Fund event. Here, by kind permission of Barron's Gene Epstein, is the original version. By way of further comment I will say only that, as bad as I think Martin's book is, Graeber's is even worse–so much so that I am seriously contemplating having an intern here at Cato compile a list of scholars–and economists especially–who have praised it, so that I might make a mental note to never again take any of their recommendations or criticisms seriously.)

*****

The aftermath of the worst financial crisis since the Great Depression is a good time for taking a hard look at money, that most basic of all financial institutions atop which all the rest teeter. As his book’s subtitle suggests, Felix Martin, having taken such a look, reports, not with a flattering portrait, but with a warts-and-all unmasking.

Mr. Martin’s good prose and eye for money’s naughtier antics help to equip him for his task. Nor is he short of tales to tell, about money’s little prank of masquerading as stone wheels in the western Pacific, its domestication by Greek kings, its adolescent kidnapping by crafty private bankers, its disastrous fling with John Law, and, finally, its post-2001 binge. Mr. Martin relates them all, and many others, with élan.

But in his eagerness to reveal truths to which others have been blind, Mr. Martin ends up exposing, not so much money’s mysteries as his own incomprehension of it. He goes astray, first of all, in assuming that, because credit rather than barter came before money, money consists, not of any physical stuff, but solely of a more-or-less elaborate system of IOUs. But while simple societies may track and settle debts in many different ways, among relative strangers and throughout most of history monetary promises have been promises to pay some particular stuff, whether tobacco, metal discs, or engraved paper strips.

The distinction between monetary promises and the stuff promised is, admittedly, often muddied, as it was when Great Britain’s pound sterling ceased to refer to any actual coin (gold guineas having been worth a bit more than £1), and when modern central banks turned their paper promises to pay gold into what one former New York Fed President dubbed “IOU nothings.” But the fact that a Federal Reserve note is no longer a promise to pay anything doesn’t make the dollar an “arbitrary increment on an abstract value scale” or “a unit of abstract, universally applicable economic value.” When a diner sells me bacon and eggs for $4.99, that doesn’t mean that bacon and eggs are worth $4.99, “universally” or otherwise. It means that to the diner they are worth less, and to me, more.

Mr. Martin’s understanding of what economists have had to say about money is still more inadequate. With the phrase “Adam Smith and his school,” he lumps together every thinker from John Locke and Bernard Mandeville to Friedrich Hayek, throwing some later mathematical economists in for good measure, and excepting only John Law, Walter Bagehot, and John Maynard Keynes. He then attributes to this homogenized mass “a vision of society in which economic value had become the measure of all things” together with a blindness to the “debt and financial instability” to which this crass vision leads. Horse feathers. The monetary theories of John Locke (Martin’s unlikely heavy) didn’t particularly impress Smith, though Locke’s mercantilism did—unfavorably; and far from sharing Mandeville’s identification of narrow self-interest (“private vices”) with public virtue, Smith condemned it as “pernicious.” No one aware of the English currency controversies that raged for decades after the Panic of 1825 could possibly hold English economists oblivious to financial turmoil. Finally (to cut a long list short), in saying that the Bank of England should serve as a lender of last resort, Bagehot was taking issue, not with his fellow economists, but with the Bank’s short-sighted Directors.

If Mr. Martin’s knowledge of the history of economics is less than reassuring, his choice of economic good guys, Bagehot apart, is downright scary. He has soft spots for the ancient Spartans, who (according to him) wisely chose to dispense with money and all the “impersonal and inhumane relations its use entailed,” and for Lenin and his crew, who tried unsuccessfully to do the same. Another of Martin’s heroes is John Law, the Scottish “projector” whose “System,” implemented in France in 1720, was, according to Martin, “ingenious, innovative, and centuries ahead of its time.” Just shy of three centuries, one is tempted to elaborate. (Law’s “system” collapsed, catastrophically, in 1721.)

That a jaundiced view of both money and most expert thinking about it shouldn’t lead to any novel proposal for its reform isn’t surprising. Stopping shy of suggesting another stab at Sparta’s convivial solution, Mr. Martin instead endorses the old-hat idea of making commercial banks keep reserves (of “abstract units,” presumably) equal to their readily transferable liabilities. To be free of the bathwater of financial crises we must, in other words, give old-fashioned banking the old heave-ho.

A proper respect for the crucial role bank loans play in promoting economic growth—in industrialized countries still, but especially in developing ones—combined with a glance beyond the limited experience of a few countries ought to suffice to make anyone think twice about such a Procrustean (if lately de rigueur) remedy: Canada, for instance, which has a very highly developed banking system (and one that has, since 1987, been utterly-free of Glass-Steagall-like regulations separating commercial from investment banking) experienced neither bank failures nor insolvent-bank bailouts during the recent crisis; indeed it has had an almost uninterrupted record of financial stability since the mid-19th century. Scotland long boasted a similar record, with no central bank to look to for bailouts, and very little bank regulation of any kind, until English currency laws were thoughtlessly imposed upon it in 1845.

It happens that Adam Smith supplied an especially eloquent account of the workings and advantages of Scotland’s once brilliant fractional-reserve banking system as he witnessed it in its formative years. That account can be found in Book II, chapter 2 of The Wealth of Nations. Alas, so far as Mr. Martin is concerned, Smith’s real thoughts about money might as well be among the very deepest of its secrets.

  • John S

    Agree on Graeber–I'm truly shocked that so many economists think he has anything even remotely insightful or relevant to say. What a pity so much time has been wasted on such a hack.

  • Andrew_FL

    One is sorely tempted to ask, whether a book entitled "Credit: The First 5000 Years" would have sold nearly as many copies.

  • Paul Marks

    The modern, fiat, Dollar is based upon three things.

    Tax demands (try paying your taxes with Bit "coin" and see how far the "magic numbers" get you).

    Legal tender laws – "accept this – or else….".

    And habit – the folk memory and practice of when the Dollar was not fiat (when it actually represented a physical commodity – when it was not just a rerun a of "not worth a Continental").

    How long will the fiat Dollar last? I do not know – but it will go.

    • George Selgin

      Paul, I'd put "habit" first on the list, though the other factors contribute of course. The role of Legal Tender laws (as opposed to laws making dollars publicly receivable) tends, in my opinion, to be exaggerated. As for the dollar not lasting, well, I agree, but only because forever is a long time, for the dollar of course but for everything else as well. Predicting the dollar's imminent demise, on the other hand, has been a fool's errand, albeit one for which there seems to be no end of volunteers.

      • Paul Marks

        George I can remember when ordinary American coins were partly (only partly I admit) silver, and when other governments (not ordinary people) could present Dollars and get gold for them – that only stopped in 1971.

        So we are not talking about "for ever" – the 100% fiat system has lasted just over 40 years.

        • George Selgin

          Paul, despite their silver content those coins were mere token money, the value of which did not depend on the metal (the metal mattered only in the sense that, if its commodity value got too high, as happened with the coins in question, then the coins would be hoarded and melted.)

          Still, you are correct to observe that the true fiat dollar isn't all that old (precisely how old one dates it depends on how much importance one attaches to the slim gold thread that was the last of the old gold standard). It remains the case nonetheless that plenty of people have embarrassed themselves by confidently predicting hyperinflation that never materialized. That it might materialize yet doesn't (or shouldn't) serve to restore their reputations, either: if it did, then every one who predicts, say, a financial crisis, can claim victory even if the crash comes years after the date suggested in the original prediction!

          Then again, come to think of it, that's precisely how our great crisis prognosticators (Roubini, Shedd, et hoc genus omni) operate! So maybe the hyperinflationarianists (to coin a term for them) will yet come to be regarded as so many clairvoyants–though not, I hasten to say, by yours truly!

          • Paul Marks

            I found the predictions of hyper inflation odd George.

            After all Japan had been following the same basic monetary policy, the government pushing out new "monetary base", to prop up an already-existing "broad money" credit bubble, for years – indeed decades.

            There had been no "hyper inflation" in Japan so why should there be "hyper inflation" in the United States? It was almost as if the "Ludwig Von Mises Institute" people had forgotten that the purpose of the pumping out of more "monetary base" was to prop up an already-existing "broad money" credit bubble.

            It is, after all, "Theory of Money and Credit" (the last word is important).

            There is has been no vast increase in the level of "broad money" (bank credit) it is not much higher than it was in 2008 – so how could there be hyper inflation?

            What there has been is a massive increase in the "monetary base" in order to prop up an already-existing level of "broad money".

            Of course, being a black hearted reactionary with ice water for blood, I would not have done this – I would have let the "broad money" bubble collapse, and take the banks (and so on) with it. Start again from a clean foundation.

            But predicting "hyper inflation" from a policy of propping an already-existing level of "broad money" was odd.

  • dsolon

    I would love to here what you and the other economist had to say about Graeber. I'm an undergraduate student at GMU and have been looking for solid critiques of his book from someone who knows monetary history without much success. Is there a video of this conference?