Money
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13. Kim, H., “Archaic Coinage as Evidence for the Use of Money,” p. 8, in Meadows and Shipton, 2001. The earliest Lydian coinage was minted from electrum, a natural alloy of gold and silver. Most Greek coins were minted from silver—though base metals were sometimes used as well.
14. Von Reden, 2010, p. 40.
15. The first experience of monetisation in Europe, that is. It appears that money may have been invented, independently of the Greeks, in India and China as well—to say nothing of the controversy over whether it was in fact invented in the ancient Near East.
16. Pindar, Isthmian, 2.11–12. The sentiment evidently resonated widely, however: Alcaeus too quoted it in one of his poems: see Seaford, 2004, p. 161.
17. Or as Parry and Bloch put it: “By a remarkable conceptual revolution … the values of the short-term order have become elaborated into a theory of long-run reproduction. What our culture (like others) had previously made room for in a separate and subordinate domain has, in some quarters at least, been turned into a theory of the encompassing order—a theory in which it is only unalloyed private vice that can sustain the public benefit,” Parry and Bloch, 1989, p. 29.
18. This and the following examples are taken from M. Sandel, “What isn’t for sale?” The Atlantic, April 2012. Available at: http://www.theatlantic.com/magazine/archive/2012/04/what-isn-8217-t-for-sale/8902/.
19. The statement (“Remember that you are an Englishman, and have consequently won first prize in the lottery of life”) is attributed to Cecil Rhodes by Peter Ustinov in chapter 4 of his 1977 autobiography, Dear Me. Elsewhere it is attributed to Rudyard Kipling.
20. Sandel, 2012.
21. Locke, 2009, chapter 11, §106.
4 Financial Sovereignty and Monetary Insurrection
1. De la Torre, Levy Yeyati and Schmukler, 2003.
2. T. Catan, “Argentina Snowed under by Paper IOUs: Pesos or Pacificos? A Dizzying Array of Quasi-currencies Now Fill up the Tills,” Financial Times, 11 April 2002. The peso was Argentina’s currency. The lecops, or Letra de Cancelacion de Obligaciones Provinciales was a peso-denominated quasi-currency issued by the Argentine National Treasury. The patacon, or Letra de Tesoreria para Cancelacion de Obligaciones was a peso-denominated quasi-currency issued by the Treasury of the Province of Buenos Aires. Eleven other provinces and cities issued their own quasi-currencies. See De la Torre, et al., 2003, p. 77.
3. Colacelli and Blackburn, 2006, p. 4, fn. 8.
4. L’Armée des Ombres—“The Army of Shadows”—is the title of a famous account of the Maquis by Joseph Kessels published in 1943 and filmed by Jean-Pierre Melville in 1969.
5. IMF, “Introductory remarks on the Role of the IMF Mission in Argentina by Anoop Singh, Director for Special Operations, IMF,” Press Briefing, Buenos Aires, 10 April 2002. Available at http://www.imf.org/external/np/tr/2002/tr020410.htm.
6. Aukutsionek, 1998.
7. Ryabchenko, P., “Talony vmeste deneg,” Nezavisimaya Gazeta, 13 October 1998, quoted in Caroline Humphrey’s chapter in Seabright, 2000, p. 290.
8. Seabright, 2000.
9. WIR Bank Annual Report 2011, summarised in press release at www.wir.ch.
10. Indeed, one can learn a lot about money from this, one of its simplest incarnations—as the Nobel laureate Paul Krugman often points out. A famous analysis of what one can learn—and the one which initially captured Krugman’s attention—is Sweeney and Sweeney, 1977.
11. There are historical examples of just this happening during the early 1930s in Europe, when mutual credit networks gained widespread popularity as a means to escape the economic depression. In Germany for example, the owner of a mine in the Bavarian town of Schwanenkirchen put a scrip currency into circulation, with spectacular economic results: “[N]ews of the town’s prosperity in the midst of depression-ridden Germany spread quickly,” wrote the American economist Irving Fisher; “[f]rom all over the country reporters came to see and write about the ‘Miracle of Schwanenkirchen.’ ” When the news reached the German government in November 1931, it passed an emergency law banning all private scrip money. See Greco, 2001, p. 64 ff.
12. Constitution of the United States, Article 1, Section 8, states that “The Congress shall have power … to coin money, [and] regulate the value thereof.”
13. Even less popular have been the occasional proposals to endorse officially the co-circulation of existing national currencies. Friedrich von Hayek, for example, proposed this in von Hayek, 1976. When the U.K. Treasury adopted this policy as a serious proposal for how a transition to the euro might work in the early 1990s, it was interpreted by other EU member states as a spoiling tactic.
14. Madison, J., 1788, “Federalist 51: The Structure of the Government Must Furnish the Proper Checks and Balances Between the Different Departments,” in Genovese, 2009, p. 120.
15. The protagonist of a more recent constitutional debate also makes just this connection: “If a society were truly moral, a written constitution would hardly be necessary. The moral principles that would guarantee sound money, and our not needing a central bank to maintain it, are honesty, which would reject fraud, and keeping one’s word” (Paul, 2009, p. 149). Dr. Paul, however, believes that this Utopia is attainable.
16. Plutarch, Pericles, 12; quoted in Trevett, J., “Coinage and Democracy at Athens,” in Meadows and Shipton, 2001, p. 24.
17. Trevett, J., “Coinage and Democracy at Athens,” in Meadows and Shipton, 2001, p. 24.
18. International Monetary Fund, 2012, Statistical Table 5, p. 65.
19. This is the essence of the chartalist theory of money, the foundation text of which is Knapp, 1924.
20. This is an extreme simplification of the view put forward by the great German philosopher Georg Simmel in his 1907 book, The Philosophy of Money, see Simmel, 1978.
21. Plato, Laws 5.741e–742b.
22. This estimate of the number of Athenian citizens in the second half of the fourth century BC is from Hansen, 1985, pp. 67–78.
23. Aristotle, 1932, I.3.13–14.
24. Guanzi 73, “Guoxu” III: 70, quoted in von Glahn, 1996, p. 29. Von Glahn’s superb account of ancient Chinese monetary thought is the primary source for this section.
25. Guanzi 74, “Shanguoshi” III: 71, quoted ibid., p. 33.
26. Sima Chen, “Shi Chi 30: Treatise on the Balanced Standard,” in Watson, 1961, p. 80.
27. Quoted in von Glahn, 1996, p. 36.
28. Guanzi 73, “Guoxu” III: 66, quoted ibid., p. 30.
5 The Birth of the Money Interest
1. “Others, I doubt not, shall with softer mould beat out the breathing bronze, coax from the marble features to life, plead cases with greater eloquence and with a pointer trace heaven’s motions and predict the risings of the stars: you, Roman, be sure to rule the world (be these your arts), to crown peace with justice, to spare the vanquished and to crush the proud,” Virgil, Aeneid VI.847–53 (in H.R. Fairclough’s translation).
2. The Roman general Marcus Claudius Marcellus recovered astronomical instruments from Archimedes’ academy following the sack of Syracuse—Cicero saw them in his grandson’s house—that were probably similar to the Antikythera Mechanism, the extraordinary ancient computer the workings of which were deciphered in 2006 by the international Antikythera Mechanism Research Project. The carvings on the tomb of Marcus Vergilius Eurysaces, a Roman baking tycoon of the Augustan age, proudly depict the mechanised mass production of bread.
3. Cicero, De Officiis, 3.59, quoted in Harris, 2008, p. 176.
4. Ovid, Ars Amatoria, 1.428, quoted ibid., 2008, p. 178.
5. Horace, Ars Poetica, l.421.
6. For example, the jurist Scaevola refers to a certain banker who paene totam fortunam in nominibus [habebat] (“had almost his entire fortune in bonds”). The Digest of Justinian, 40.7.40.8. See Harris, 2006, p. 6.
7. Andreau, 1999.
8. Cicero, De Officiis, 2.87. Quoted
in Jones, 2006. Janus was, of course, the two-faced god—though this did not have the same connotations for the Romans as for us.
9. The law was de modo credendi possidendique intra Italiam (“Regulating lending and title within Italy”).
10. Tacitus, Annales, 6.16.
11. Tacitus, Annales, 6.17. The history of this and other banking crises is analysed in Andreau, 1999, chapter 9.
12. See Harris, W., “The Nature of Roman Money,” in Harris, 2008, p. 205.
13. Ibid.
14. Spufford, 1988, p. 9.
15. Spufford, 2002, p. 60 ff. In the most economically advanced and politically coherent parts of Europe it had started even earlier: “… in the hinterland of Genoa and Lucca rents in kind gave way to rents in money in the course of the eleventh century, and in the Campania the exploitation of estates began with labour hired for money wages” (Spufford, 1988, p. 97).
16. Spufford, 2002, p. 63.
17. For example, in England, where direct taxation re-emerged at the end of the twelfth century. See Spufford, 2002, p. 65.
18. On the impact of monetisation on social mobility and on the social roles of ambition and avarice, see in particular Murray, A., 1978.
19. Hildebert of Lavardin Carmina misc., 50, quoted in Murray, A., 1978, p. 81. “Money is the man!” was the famous saying attributed to the Argive aristocrat Aristodemus, quoted both by Pindar and by Alcaeus; see chapter 3.
20. Rolnick, Velde, and Weber, 1996, 797.
21. Ibid.
22. Ibid.
23. Sumption, 2001, p. 195.
24. Johnson, 1956.
25. Ibid., p. 10.
26. Ibid., pp. 19–20.
27. Ibid., p. 38.
28. Ibid., p. 40.
29. Ibid., p. 6.
30. Ibid., p. 17.
31. Ibid., p. 44.
32. Ibid., p. 42.
6 The Natural History of the Vampire Squid
1. Described in Frankel, 1977, p. 15.
2. Élie Brackenhofer was told in 1634 that the Fair of Lyons had been founded in AD 172. See Braudel, 1992.
3. See Spufford, 2002, p. 19 ff.
4. Braudel, 1992, p. 91.
5. The phrase is Braudel’s, quoted in Frankel, 1977, p. 15.
6. Amis, 1984, pp. 119–20.
7. De Rubys, 1604, Part IV, chapter 9, p. 499. The pound (livre) was the abstract money of account, whilst the sou was a coin of the French king.
8. To be more precise, it had not worked as much as they would have liked. By the sixteenth century, the extreme debasements of the Middle Ages were a thing of the past and the Spanish and French sovereign currencies were comparatively speaking fairly stable—in the French case, partly as a result of pressure from taxpayers to limit seigniorage. See chapter 3 of Macdonald, 2006, for details.
9. This is a description of how they achieve the transformation at its most generic, and one which is sufficient as it stands for private banks in the Middle Ages. As we shall see later in this chapter, and in chapter 14, modern banks benefit from a crucial element of external assistance in their business of transforming illiquid claims into liquid ones.
10. Nor is it unique to banking: mutual funds, for example, also manage credit risk in the same three respects.
11. The most important general characteristic of the liquidity risk that is managed by modern banks is the mismatch between the fact that a large part of their liabilities is made up of deposits available for withdrawal on demand, and the fact that their assets generally consist of loans or securities which do not mature and may not be otherwise realisable in the same time frame. Indeed, Walter Bagehot, in his foundational classic of the modern finance literature, identified this characteristic as the one which discriminated banking from other financial activities. “Messrs. Rothschild,” he wrote in Lombard Street, “are immense capitalists, having, doubtless, much borrowed money in their hands,” and “a foreigner would be apt to think that they are bankers if any one was.” But “[t]hey do not take 100l. payable on demand, and pay it back in cheques of 5l. each, and that is our English banking. The borrowed money they have is in large sums, borrowed for terms more or less long. English bankers deal with an aggregate of small sums, all of which are repayable on short notice, or on demand” (Bagehot, 1873, pp. 212–13). The distinctive business of a bank is in other words “maturity transformation,” in the technical jargon—in that they “transform” short-term liabilities to their depositors into long-term loans to their clients. Of course, this jargon is a euphemism. No transformation takes place—alchemy is as impossible in banking as in the natural sciences. Banks really do have a mismatch, which is sustained only so long as their depositors remain confident in their creditworthiness and the liquidity of their liabilities. We will discover more about banking in chapter 14.
12. Spufford, 2002, p. 38.
13. Ibid., pp. 38–9.
14. Ibid., p. 39.
15. Johnson, 1956, p. 34.
16. Spufford, 2002, p. 40.
17. Huerta de Soto, 2006, p. 75.
18. In essence: its full details were complicated. For a virtuoso overview of the system in all its complexity, see Boyer-Xambeu, Deleplace, and Gillard, 1994.
19. Indeed, Boyer-Xambeu et al. (ibid.) argue that under the sovereign monetary policies that were obtained in the mid-sixteenth century, the profits to the exchange-bankers were essentially certain.
20. See ibid., pp. 91–4 for further details on the protocols of the Lyons fair.
21. Ibid., p. xvi.
7 The Great Monetary Settlement
1. R.H. Tawney’s Introduction to Wilson, 1925, p. 83. “[A]nd the third person of this inharmonious trinity,” Tawney added, “was perpetually at war with the two first.”
2. Mayhew, 1999, p. 54.
3. Hist. MSS. Comm., MSS. of the Marquis of Salisbury, Pt. I, pp. 162–4, quoted in Tawney’s introduction to Wilson, 1925.
4. Montesquieu, Mes Pensées, quoted in Hirschman, 1977, p. 74.
5. Montesquieu, Esprit des lois, Book XXII, 13, quoted ibid., p. 74 (where it is accidentally attributed to Book XXII, 14).
6. Montesquieu, Esprit des lois, Book XXI, 20, quoted ibid., pp. 72–3.
7. Ibid.
8. James Carville, quoted in Wall Street Journal, 25 February 1993, p. A1.
9. It was published in England in 1767, nine years before Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations.
10. Steuart, 1966, Vol. 1, p. 278. Quoted in Hirschman, 1977, p. 85.
11. Boyer-Xambeu et al., 1994, p. 30.
12. The extent to which the development of finance in England lagged behind Continental Europe until the late seventeenth century is demonstrated by Thomas Mun’s treatment of standard Latin practices such as payments by transfer between bank accounts as unknown in England in his 1621 Discourse on Foreign Trade. See also Clapham, 1944, Vol. I, p. 5.
13. The king’s adviser Sydney Godolphin, seeking to borrow for the crown from William of Orange in 1680, offered 8 per cent for a loan “secured upon the King’s hereditary revenue.” This was meant to tempt his target away from lending in the Dutch credit markets, where “at this time no one gives more than 4 per cent for money.” See Macdonald, 2006, pp. 170–1.
14. For a detailed discussion of the main Projects, see Horsefield, 1960, pp. 114–24.
15. It was the brainchild of Thomas Neale, the Master of the Mint and a close adviser to the Treasury. Some years later, another larger lottery was held to raise even more money. It was called, imaginatively enough, “The Two Million Adventure.”
16. Richards, 1958, pp. 112–13.
17. Curiously enough, the Bank’s original charter—itself deliberately tucked away in a corner of a more general public finance bill—did not authorise note issue explicitly. But explicit or not, more than £750,000-worth of notes had been issued by the time the Bank’s first public balance sheet had been drawn up in November 1696. See Clapham, 1944, p. 43, for details.
18.
Modern scholarship on the nature and significance of this Great Monetary Settlement, starting from the pioneering contribution of Dickson, 1967, is extensive, but it was Ingham, 2004, who first identified its importance as the moment in which the modern, public-private monetary system was born. See especially Ingham, 2004, pp. 128ff.
19. Roseveare, 1991, pp. 14–15.
20. Clarke v. Martin 1702 per Holt C. J., quoted in Carswell, 1960, p. 18. Holt’s efforts to reverse the tide and outlaw the dangerous commercial practice of transferability were defeated by statute within two years. The Promissory Notes Act of 1704 made private credit notes legally transferable.
21. Steuart, 1966, Vol. 2, p. 477.
22. Smith, A., 1981, II.ii.85, p. 320.
23. The 1709 regulation forbade partnerships with more than six members from issuing any kind of note of less than six months’ maturity payable on demand—the result of a concerted campaign by the Bank’s Directors to muzzle what was then its chief competitor, the Sword Blade Bank. The Bank of England did not receive a monopoly on issuance until the Bank Charter Act of 1844, however—and even then note-issuing banks already in existence were permitted to continue to do so until taken over by banks without the privilege. It was therefore not until the small Somerset partnership of Fox, Fowler & Co., which had received its charter in 1787, was absorbed into Lloyds Bank in 1921, that the last private English banknotes were removed from circulation.
24. H.V. Bowen, “The Bank 1694–1820,” in Roberts and Kynaston, 1995, p. 10.
25. Clapham, 1944, Vol. I, p. 102.
26. Speech of 13 June 1781 in the Committee of Ways and Means, as reported by William Cobbett (1806–20) Parliamentary History of England from 1066 to 1803, Vol. XXII, cols 517–20, quoted in H.V. Bowen, “The Bank 1694–1820,” in Roberts and Kynaston, 1995, p. 3.