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Felix Martin


Alfred A. Knopp, NYC., 2014, 320 pgs., bibliography, index, end notes


Reviewer Comments:
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 entirely false."

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 tallies".

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 another.
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 difference.
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 income statements."

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 value."

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 against silver.

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 Mankind"

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 money?
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 society.

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 Europe.

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 Admati.

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 Revolution.

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 Finance"

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 Society"

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 Money"

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 the Greeks."

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 complex economy."

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 outside Sparta.

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 is Business"

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 honored.

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 'wild-cat banks'.

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 Question"

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 activity."

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' regulations.

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 the bank."
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 banks."

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 nothing.

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 alone."


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)

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 banks."

It is so difficult to get people to understand this (Tamny for instance.) But read also Wray and Mehrling.

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 unjust."

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 money supply.

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 country."

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 isn't needed."

This clearly claims that egalitarian concepts of 'justice' are valid. Martin continues:

"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

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S. Herbert Frankel - Two Philosophies of Money: The Conflict of Trust and Authority

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G. L. S. Shackle - Epistemics and Economics: A Critique of Economic Doctrines

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Geoffrey Ingham - The Nature of Money

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Perry Mehrling - The New Lombard Street: How the Fed Became the Dealer of Last Resort

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Ludwig von Mises - The Theory of Money and Credit

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Kwasi Kwarteng - War and Gold: A 500-year history of Empires, Adventures and Debt

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Nicholas Wapshott - Keynes - Hayek: The Clash That Defined Modern Economics

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Hunter Lewis - Where Keynes Went Wrong

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Jerry Z. Muller - The Mind and the Market - Capitalism in Western Thought

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Geoffrey Ingham - Capitalism

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Philip Coggan - Paper Promises: Debt, Money and the New World Order

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David Graeber - Debt: The First 5,000 Years

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Glyn Davies - History of Money: From Ancient Times to the Present Day

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Lawrence H. White - The Clash of Economic Ideas

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Charles W. Calomiris and Stephen Haber - Fragile by Design: The Political Origins of Banking Crises and Scarce Credit

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Anat Admiati & Martin Hellwig - The Banker's New Clothes: What's Wrong with Banking and What to Do about It

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Peter Conti-Brown - The Power and Independence of the Federal Reserve

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Stephen D. King - When the Money Runs Out

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Rana Foroohar - Makers and Takers: The Rise of Finance and The Fall of Ameerican Business

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Frank Trentmann - Empire of Things

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Joel Mokyr - Culture of Growth

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Danielle Dimartino Booth - FED UP

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John Tamny - Who Needs the Fed?:

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Karl Polanyi - The Great Transformation


Return to Xenophon.