Money by Felix Martin: Exposing the flaws in the way we think about money

A fresh addition to the growing library of "recession lit": one which delves into anthropology and ancient history to argue we will never understand the financial crisis with our current misguided perspective on money.

Money: the Unauthorised Biography
Felix Martin
Bodley Head, 336pp, £20

By now, one might have thought there was little to add to the literature of the “Great Recession”. But it keeps coming and some leading economic practitioners, notably the departing governor of the Bank of England, Mervyn King, argue that it will be three decades until we get the authoritative account. Many believe the best book on the 1929 meltdown was John Kenneth Galbraith’s The Great Crash 1929, published in 1955.

One of the biggest failings of modern-day economic and financial writing is a lack of historical perspective. When the run on Northern Rock caught the Bank of England and other regulators on the hop in August 2007, King established a recherché book club at his Notting Hill home in west London, where economists and economic historians gathered to discuss works on financial panics.

Felix Martin, an academic economist who now seeks to apply his knowledge in the financial world, reaches beyond conventional analysis in explaining the events that brought about the biggest disruption to finance and economic activity for more than a century. His core argument, reaching into anthropology and ancient history for support, is that classical economics – as exemplified by Adam Smith – misjudges the nature of money.

Smith and his cohorts saw money as commodity, based on gold, silver, copper or some other substance, that is used as a medium of exchange in commercial transactions. Martin does not disagree with this but views it as only part of the picture. He reaches into the primitive culture of the Pacific island of Yap and into the almost destroyed history of England’s Exchequer tallies: strips of willow on which non-monetary business transactions were recorded to understand the social technology of money.

What the author finds is enormously helpful in resolving some of the mystery behind the “Great Recession”. He found that physical coins and banknotes issued by central authorities such as the Bank of England tell only a fraction of the money story. The broader narrative is one of accounting: unseen transactions conducted privately among businesses and, in modern times, among banks without any notable intervention by central authorities.   

These transactions are so vast and so much more important socially and commercially that they far outstrip the notes and coins in circulation and the officials bills and bonds issued by central bankers on behalf of governments. It is this enormous social edifice that was the hidden hand behind the “great panic” of 2007-08 that came close to bringing the whole banking and financial system down. Financiers took “social” banking to the ultimate degree, turning the dodgy physical product of sub-prime mortgages into exotic securities.       

When it came to stabilising the financial system, the traditional central banking solution of providing temporary cash (lender of last resort money) in exchange for bills or securities, was inadequate to the task. The banks needed recapitalisation to restore solvency, and only the “sovereigns” – national governments – were adequate to the task. In the US the capital injections came to 4.5 per cent of GDP or the size of the vast US defence budget; in Britain, with its bloated financial sector, the sovereign bailout was 8.8 per cent of GDP and in Ireland it reached 40 per cent. Bank debt, at a stroke, had been socialised and politicised.

The virtue of Martin’s book is that it exposes the deep flaws in the way we have traditionally thought about money. The exposition is clear, unlike most jargon-filled economic texts. But this book could have done with some tighter editing. The flow is interrupted by clunky transitions from the ancient to the modern, interspersed with attempts at a conservational, over-a-drink style. Nevertheless, it provides a fresh understanding of its subject.

Alex Brummer is city editor of the Daily Mail and the author of “Britain for Sale”

Adolfo Tovar, collector of old banknotes and coins, brandishing his treasures. Photograph: Getty Images.

This article first appeared in the 10 June 2013 issue of the New Statesman, G0

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Richmond is a wake-up call for Labour's Brexit strategy

No one made Labour stand in Richmond Park. 

Oh, Labour Party. There was a way through.

No one made you stand in Richmond Park. You could have "struck a blow against the government", you could have shared the Lib Dem success. Instead, you lost both your dignity and your deposit. And to cap it all (Christian Wolmar, take a bow) you self-nominated for a Nobel Prize for Mansplaining.

It’s like the party strategist is locked in the bowels of HQ, endlessly looping in reverse Olivia Newton John’s "Making a Good Thing Better".

And no one can think that today marks the end of the party’s problems on Brexit.

But the thing is: there’s no need to Labour on. You can fix it.

Set the government some tests. Table some amendments: “The government shall negotiate having regard to…”

  • What would be good for our economy (boost investment, trade and jobs).
  • What would enhance fairness (help individuals and communities who have missed out over the last decades).
  • What would deliver sovereignty (magnify our democratic control over our destiny).
  • What would improve finances (what Brexit makes us better off, individually and collectively). 

And say that, if the government does not meet those tests, the Labour party will not support the Article 50 deal. You’ll take some pain today – but no matter, the general election is not for years. And if the tests are well crafted they will be easy to defend.

Then wait for the negotiations to conclude. If in 2019, Boris Johnson returns bearing cake for all, if the tests are achieved, Labour will, and rightly, support the government’s Brexit deal. There will be no second referendum. And MPs in Leave voting constituencies will bear no Brexit penalty at the polls.

But if he returns with thin gruel? If the economy has tanked, if inflation is rising and living standards have slumped, and the deficit has ballooned – what then? The only winners will be door manufacturers. Across the country they will be hard at work replacing those kicked down at constituency offices by voters demanding a fix. Labour will be joined in rejecting the deal from all across the floor: Labour will have shown the way.

Because the party reads the electorate today as wanting Brexit, it concludes it must deliver it. But, even for those who think a politician’s job is to channel the electorate, this thinking discloses an error in logic. The task is not to read the political dynamic of today. It is to position itself for the dynamic when it matters - at the next general election

And by setting some economic tests for a good Brexit, Labour can buy an option on that for free.

An earlier version of this argument appeared on Jolyon Maugham's blog Waiting For Tax.

Jolyon Maugham is a barrister who advised Ed Miliband on tax policy. He blogs at Waiting for Tax, and writes for the NS on tax and legal issues.