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

David Young
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The Tories are the zombie party: with an ageing, falling membership, still they stagger on to victory

One Labour MP in Brighton spotted a baby in a red Babygro and said to me: “There’s our next [Labour] prime minister.”

All football clubs have “ultras” – and, increasingly, political parties do, too: although, in the case of political parties, their loudest and angriest supporters are mostly found on the internet. The SNP got there first: in the early days of email, journalists at the Scotsman used to receive bilious missives complaining about its coverage – or, on occasion, lack of coverage – of what the Scottish National Party was up to. The rest soon followed, with Ukip, the Labour Party and even the crushed Liberal Democrats now boasting a furious electronic horde.

The exception is the Conservative Party. Britain’s table-topping team might have its first majority in 18 years and is widely expected in Westminster to remain in power for another decade. But it doesn’t have any fans. The party’s conference in Manchester, like Labour’s in Brighton, will be full to bursting. But where the Labour shindig is chock-full of members, trade unionists and hangers-on from the charitable sector, the Conservative gathering is a more corporate affair: at the fringes I attended last year, lobbyists outnumbered members by four to one. At one, the journalist Peter Oborne demanded to know how many people in the room were party members. It was standing room only – but just four people put their hands up.

During Grant Shapps’s stint at Conservative headquarters, serious attempts were made to revive membership. Shapps, a figure who is underrated because of his online blunders, and his co-chair Andrew Feldman were able to reverse some of the decline, but they were running just to stand still. Some of the biggest increases in membership came in urban centres where the Tories are not in contention to win a seat.

All this made the 2015 election win the triumph of a husk. A party with a membership in long-term and perhaps irreversible decline, which in many seats had no activists at all, delivered crushing defeats to its opponents across England and Wales.

Like José Mourinho’s sides, which, he once boasted, won “without the ball”, the Conservatives won without members. In Cumbria the party had no ground campaign and two paper candidates. But letters written by the Defence Secretary, Michael Fallon, were posted to every household where someone was employed making Trident submarines, warning that their jobs would be under threat under a Labour government. This helped the Tories come close to taking out both Labour MPs, John Woodcock in Barrow and Furness and Jamie Reed in Copeland. It was no small feat: Labour has held Barrow since 1992 and has won Copeland at every election it has fought.

The Tories have become the zombies of British politics: still moving though dead from the neck down. And not only moving, but thriving. One Labour MP in Brighton spotted a baby in a red Babygro and said to me: “There’s our next [Labour] prime minister.” His Conservative counterparts also believe that their rivals are out of power for at least a decade.

Yet there are more threats to the zombie Tories than commonly believed. The European referendum will cause endless trouble for their whips over the coming years. And for all there’s a spring in the Conservative step at the moment, the party has a majority of only 12 in the Commons. Parliamentary defeats could easily become commonplace. But now that Labour has elected Jeremy Corbyn – either a more consensual or a more chaotic leader than his predecessors, depending on your perspective – division within parties will become a feature, rather than a quirk, at Westminster. There will be “splits” aplenty on both sides of the House.

The bigger threat to Tory hegemony is the spending cuts to come, and the still vulnerable state of the British economy. In the last parliament, George Osborne’s cuts fell predominantly on the poorest and those working in the public sector. They were accompanied by an extravagant outlay to affluent retirees. As my colleague Helen Lewis wrote last week, over the next five years, cuts will fall on the sharp-elbowed middle classes, not just the vulnerable. Reductions in tax credits, so popular among voters in the abstract, may prove just as toxic as the poll tax and the abolition of the 10p bottom income-tax rate – both of which were popular until they were actually implemented.

Added to that, the British economy has what the economist Stephen King calls “the Titanic problem”: a surplus of icebergs, a deficit of lifeboats. Many of the levers used by Gordon Brown and Mervyn King in the last recession are not available to David Cameron and the chief of the Bank of England, Mark Carney: debt-funded fiscal stimulus is off the table because the public finances are already in the red. Interest rates are already at rock bottom.

Yet against that grim backdrop, the Conservatives retain the two trump cards that allowed them to win in May: questions about Labour’s economic competence, and the personal allure of David Cameron. The public is still convinced that the cuts are the result of “the mess” left by Labour, however unfair that charge may be. If a second crisis strikes, it could still be the Tories who feel the benefit, if they can convince voters that the poor state of the finances is still the result of New Labour excess rather than Cameroon failure.

As for Cameron, in 2015 it was his lead over Ed Miliband as Britons’ preferred prime minister that helped the Conservatives over the line. This time, it is his withdrawal from politics which could hand the Tories a victory even if the economy tanks or cuts become widely unpopular. He could absorb the hatred for the failures and the U-turns, and then hand over to a fresher face. Nicky Morgan or a Sajid Javid, say, could yet repeat John Major’s trick in 1992, breathing life into a seemingly doomed Conservative project. For Labour, the Tory zombie remains frustratingly lively. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.

This article first appeared in the 01 October 2015 issue of the New Statesman, The Tory tide