Money: Book Review

Rating 5/5

This is a pretty interesting book which outlines how the face of money has changed since the ancient times. There are some great stories in the book, and some of them are parables about the way humans think and act. If we draw an arc from the very first time money came to be (as per the book), to where it is now, we do see a few patterns emerging throughout our short history.

Money is a pattern that we keep discovering

The origins of money are said to lie in servicing the "double coincidence of want" problem, and that's what I was taught in school, but there's a possibility that servicing debt was also one of the reasons money came to be – when enterprising people would hoard the goods like food, rare metals, etc. which were used as the payment for almost everything – killing someone, marrying someone, buying someone.

Over a period of time, these goods became too cumbersome to carry around, and enterprising merchants started behaving like banks, storing the goods, giving out receipts for payments. This allowed people to exchange the receipts for services, and go back later to the merchants to buy back the good. As per the books this started in many different places; Sichuan in China was the first place giving out these resource backing receipts in around 995AD. It wasn't too late before there were counterfeit receipts in the market.

This is the same process which goldsmiths in England followed during the 1600s , money changers in Venice during the 14th century, and was what central banks throughout the world were following when they were on the gold standard.

So the same principles of money, loans, banking, and currency have been reinvented or rediscovered (based on the needs of the people) multiple times throughout the millennia. The forms are different, but the principles are the same.

Powerful people or Herds change the definition of Money

Another pattern which emerges is how something starts (or stops) being money when everyone starts starts to agree about it. This usually requires a powerful person or authority to back the idea, or at least to give the guarantee about the authenticity of the scheme, e.g. a King, or a Prime Minister. But sometimes, the herdish thinking of people also can lead to new types of currency, e.g. Bitcoin and other cryptos.

For example, when China had its first paper based currency, it was backed by precious metals. Then the Mongols came in, ruled over China, lost a couple of invasions to Japan, using all the gold in the process. Then the Great Khan issued a new type of currency which was not backed by anything. It was just a word of the authority that money is what money is. The effects were not bad at all:

The paper still had pictures of bronze coins on it, but this time they were just pictures. Government offices refused to redeem the paper for silver or bronze; people could no longer exchange their treasure exchange vouchers for treasure. We have to imagine there was some panic. There was inflation: prices rose as money became less valuable. But then the economy stabilized. The center held. Pieces of paper that were just paper, that weren’t even pretending to be treasure vouchers or silver IOUs, still worked as money.

Another example is France where the Duke of Orléans made the rule for everyone to start using the paper notes to pay their taxes. It went fine for a while since people had the confidence on the figure of authority for the value of their money.

In another century, much much later, China's neighbour India also had a similar experiment when the Prime Minister Modi planned a failed experiment to terminate existing currency notes. Within a few hours, billions of currency notes (amounting to 86% of all cash) were deemed illegal, and people were forced to work with this new reality.

At the opposite end of the spectrum is something like Bitcoin which is considered as money by a group of people and the number of people who think of it as money keeps increasing all the time. It's also different in the way that the entire premise of crypto-currencies like Bitcoin is to not have a authoritative figure which can change the value of the coin.

Flow of money changes the way world works

This is another pattern which is repeated a few times throughout the book. The flow of money has a direct and measurable effect on the world.

The book states that carrying stuff around was cumbersome, so people were mostly either stuck with what they did, or where they lived. The primitive economies under the feudal systems would keep the labour in place, fed them, clothe them; and under the monarchies would force people to grow a given type of crop and the king's management would redistribute the goods.

With paper money, the first thing that happened was that the labour was emancipated. They were now paid in money, instead of food and clothes, and now had the opportunity to move around between jobs. Within the monarchies, now the people were asked to pay in currency, therefore they were free to grow whatever they wanted to.

With more money in hands of the people (instead of something like a goat) for payment, people were able to transact it freely. There were places which developed into some sort of evening markets, full of people buying and selling goods and services. This happened in both Greece and in China as they started using more paper money.

The book argues this fast movement of money also has direct effect on the way a civilization advances, and both China and Greece had some of the most advanced civilization during their respective times. (As an aside, China's downfall is attributed to Mongols, followed by a leader who wanted to bring China back to the glorified past. But the book is silent on the downfall of Greece.)

It's a good idea to keep banks independent of the politics

This section brings us to the irrational side of humans, and perhaps to the greed that stems from it.

Whenever money has been invented to solve the problems that it solves, we see that the human irrationality and greed promptly follows.

History is filled with the power of authority taking wrong decisions on how to best define money and use it.

But they gave money to the King, who didn't feel like returning the money, resulting in Bank Runs. This is in contrast with the Mongolian King, who stated that the money which people held still carry value, and when the authority feels like it's money, everyone feels the same. Obviously, goldsmiths couldn't have told people that the money they have is a valid currency because they weren't in the business of making laws. Same happened with John Law who befriended the Duke who was confident in the money, and therefore the rest of France became confident as well. With the current speculation based economy, it looks like a word (or a tweet) of a powerful personality is more than enough to move the stocks up or down.

(?? This is what was forced by the Mongol king for everyone in China). Should we allow the powerful person to dictate what needs to be used as the currency? While they can force people to have confidence in the money, sometimes they can also force people to lose confidence in the money (modi). FDR in taking the US away from the gold standard. It's always someone who can set the public mood to weave the lie of the power of money.

In 1716, when John Law was first pitching his bank, Orléans went to one of his closest advisors, the Duke of Saint-Simon, to ask him what he thought. Saint-Simon told him that Law’s ideas made sense. Paper money could be good for France’s economy. But, Saint-Simon said, there was a problem. Unlike the Netherlands, which was a republic, or Great Britain, which had a powerful Parliament, France was an absolute monarchy. The king could do whatever he wanted. And inevitably, the king or the people working for him would get carried away by the power of the bank, and they’d print too much money, and the system would break.

Inflation and markets have become unlinked from each other over the last decade.

Radiolab also has a very interesting podcast on the subject of inflation where they discuss if inflation is caused not by the amount of money in the system, but by the number of people competing for the same goods. In post pandemic economy people have more money but not a lot of stuff to buy, so only the prices of houses, stocks, and bitcoin are going up but nothing else directly.

As per the book, the amount of money in circulation has a direct effect on the number of people who are pulled out of poverty. This changes the way people behave with their work, as they become more independent. Also as people have more money to spend, it brings out more money in circulation. I'm not an economist, but the book suggests that both in ancient Greek and in ancient China, as money became more fluid, it led to development of markets and restaurants where middle class would come to enjoy.

Then there's the story of how money in ancient China was backed by nothing. In 2020, with the countries almost printing money out of thin air, this is more relevant now. He ends this chapter with stating that there are instances when civilizations end up being poorer. While he only talks about monetarily, I've recently seen the presentation by Jonathan Blow about how some of the older civilizations ended up losing their technological advantages. And the problem is civilizations, when they are going through downfall, don't really see that they are going through downfall. (See this fantastic interview of Edward Watts, where he argues that in Roman empire there was a revolution every 50 years and with the average age of 50 years, no one really lived through two revolutions and therefore most of the knowledge about previous tyrannies was lost with the old generation).

Stock Market, shorting and trying to upend the market. It wasn't too late before someone started shorting the stocks.

This is a pretty light book, a quick read which really worked wonders in filling out the knowledge gaps that I had about money, economy and some of the recent events in the world.

What we have today is the sum total of thousands of years (or maybe hundreds of years) of development

With the Fed bank being 20 years old when The Great Depression hit, they didn't have a lot of options to work with the condition at hand. I wonder if the banks today have gotten any better? We tend to print a lot more money, and there were people who were advising the US government to not print too much money during the 2008 crisis, but the government printed enough money, and everyone survived. And then the government printed more money in 2020, and in 2021 even though there were experts saying not to do that. Does government knows what it's doing? Do the experts know? I guess with Economics being a soft science which cannot be mapped to formulas, it's really hard to know what to do?

Busts came every 10 years or so in the US banks, because with the lack of the central banks, everyone would run to their local banks for getting the money turned into gold, which wouldn't be possible.

Money Market funds, the US and global bust of 2008, the Euro and how a central bank makes sense when people agree on stuff.

People have faith and then lose it

  • Runs are pretty much common

History repeats itself, and we tend to ignore it

Real Economy vs Finance

Any new type of money is promptly followed by someone trying to rig the system

We might destroy jobs as part of development

Are banks simply architectural patterns of money?

  • Since they keep getting reinvented to solve the money problems of people across different ages