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Money: The Unauthorized Biography by Felix Martin
Mar 19, 2016, 10:34p - Book Notes, - Economics

It has been a very long time since I last wrote a Book Notes entry (in fact, the last one was in 2007). During PhD grad school (2007-2015), I didn't write any Book Notes because I barely read books, as journal articles fully absorbed my attention. Now that grad school is finished, we've finished our move from Boston to Oakland, and my time is unstructured once again, I no longer have the attention span for the disorganized presentation of journals and returned to that old standby, the book.

As some of you may know, I have been slightly very obsessed with understanding the true nature of money: how does money come into existence, and how does its manufacture influence the economy, from pricing to economic volatility. I have been thinking about this question since Dec 2013. Surprisingly, while trying to research how money is created in modern American society, I found very little written about the topic in economics books. I went to the Sloan Business School's library at MIT, rustled through the shelves on macroeconomics, and came up virtually empty-handed on a detailed description of how money is created. Sure, a country's central bank (in our American case, the Federal Reserve) generates money out of thin air, "printing" it both physically and virtually, but how exactly does this money get put to work, from start to finish? And if all money is created as debt (which it is), then how can the system not fail if that debt requires interest payments, which must be paid with money which is itself borrowed? Isn't this a pyramid scheme, which at some point must collapse? And might this not be the fundamental reason that we have recurring periods of economic crisis, during which massive debts must be forgiven? I have much to say about these questions, but that will have to wait for a future blog post.

Due to this paucity of written material on the nature of money, I was very happy when I discovered Felix Martin's recent book, entitled Money: The Unauthorized Biography. I picked it up at the Harvard Bookstore in Cambridge last month and now I've finally finished it.While it doesn't answer all the questions of money I posed above, it nonetheless provided a fascinating historical account of money and attempted to seriously determine what money actually is. While I don't agree with much of the author's idealogy, the historical incidents are quite illuminating as to what money truly is and how societies have made use of it.

As is my Book Notes style, below you will find sections quoted from the book itself, which I found interesting enough to underline while reading the book. Pages where the quotes can be found in the paperback edition are written in parentheses. I will also provide my own commentary as I see fit, which will be indicated by bullets (•) or brackets [].

I've bolded the quotes I find especially salient and insightful, so just skim those if you want an even quicker read of the book.

Finally, Martin discusses the viability of Bitcoin as money very briefly at the end of the book, essentially dismissing it. I plan to take up this question, in addition to articulating my understanding of what makes something money, in greater detail in a later blog post.

Book Notes from Money: The Unauthorized Biography
written by Felix Martin
published in 2013

- "Coins and currency, in other words, are useful tokens to record the underlying system of credit accounts and to implement the underlying process of clearing... Money is the system of credit accounts and their clearing that currency represents." (14)

- "At the centre of this alternative view of money - its primitive concept, if you like - is credit. 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 trades with one another. The third is the possibility that the original creditor in a relationship can transfer their debtor's obligation to a third party in settlement of some unrelated debt." (27)

- "Whilst all money is credit, not all credit is money... Money, in other words, is not just credit - but transferable credit." (27)

- "For sellers to accept buyers' IOUs in payment, they must be convinced of two things. They must have reason to believe that the debtor whose obligation they are about to accept will, if it comes to it, be able to satisfy their claim: they must believe, in other words, that the money's issuer is creditworthy [this is credit risk]. This much would be enough to sustain the existence of bilateral credit. The test for money is more stringent. For credit to become money, sellers must also trust that third parties will be willing to accept the debtor's IOU in payment as well. They must believe that it is, and will remain indefinitely, transferable - that the market for this money is liquid [this is liquidity risk]. Depending on how powerful are the reasons to believe these two things, it will be easier or harder for an issuer's IOUs to circulate as money... What matters is only that there are issuers whom the public considers creditworthy, and a wide enough belief that their obligations will be accepted by third parties." (28-29)


- "When it comes to money itself - rather than the tokens that represent it, the account books where people record it, or the buildings such as banks in which people administer it - there is nothing physical to look at." (33)

- "These three simple mechanisms for organising 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." (37)

- "...Mesopotamia witnessed the invention of three of the most important social technologies in the history of civilization: literacy, numeracy, and accounting." (40)

- "Correspondence-counting requires no numerical sophistication whatsoever, merely the ability to check whether are the same." (42)

- "Henceforth, a sheep would not be represented by a conical token kept in an account box, but by the triangular impression of such a token on a clay tablet... The ancient system of three-dimensional objects had been translated into a new system of two-dimensional symbols... Instead of writing five sheep symbols to signify five sheep, separate symbols for the number five and the category sheep were introduced." (43)

- "Why was it that this extraordinary commercial civilisation [of Mesopotamia], the most advanced economy that the world had ever seen, the society that invented literacy, numeracy, and accounting - did not invent money?" (45)
  • Martin raises this question, but then does not answer it convincingly. My sense is that while the Mesopotamians excelled at abstractive, symbolic processes, they somehow were not able to abstract the next step, to the genericization of value.

    - "When fathoms, furlongs, leagues and hands were originally devised, for example, there simply was no unversal concept of linear extension."
  • This statement forms a bit of the bedrock for Martin's idea that once people recognized that all objects can be measured against each other by noticing their abstract value, the need for money became clear, as the yardstick for measuring an object's value. However, for the other kinds of measurement, such as length as described in the quote above, Martin does not make a convincing argument that the abstract concept of length was lacking when many different measurement units for different kinds of objects were in use. This is a huge, unsupported stretch, one that's hard for me to swallow and which I strongly disagree with. I think it more likely that the people measuring depths in the ocean were simply different people than those measuring the lengths of fields, and so used different jargon (as frequently occurs in different, isolated fields of work today).

  • Of the three classical functions of money (medium for exchange, unit of account, store of value), I think the most critical and unique to money itself is the function as a medium for exchange. It is this function that enables "liquidity", that is, the ability to convert an asset into one or many other assets, with money serving as a transient lubricant. Without a medium for exchange, this conversion would be difficult or impossible. The medium for exchange function of money also includes the credit creation of money, in which one party trades their future work for another's current work product. Although it is not quite as obvious, this is also an exchange of assets - however, this exchange in practice requires accounting, highlighting the practical relevance of the second property of money, as a measure used for accounting.

    The evolution of a medium for exchange:
    1) An item of innate social value (e.g. gold)
    2) An item that represents something of innate social value (e.g. a bill that can be exchanged for gold)
    3) An item that does not represent something of innate social value (e.g. a bill that can only be exchanged for another bill; a virtual coin, i.e. bitcoin)

    - "If the dollar is a unit of measurement, what does it measure? The answer, on the face of it, is simple: value, or more precisely, economic value." (52)
  • I prefer the following explanation of the dollar: What is a dollar? A dollar is a unit of measurement that measures the value of something in the context of trade. Money comes in different currencies, and all are units by which to measure value.

    - "The spread of money's first two components - the idea of a universally applicable unit of value and the practice of keeping accounts in it - reinforced the development of the third: the principle of decentralised negotiability." (61)

    - "...Liturgies - the ancient, civic obligations of the thousand wealthiest inhabitants of the city to provide public services ranging from choruses for the theatre to ships for the navy." (62)

    - "By July [2002], nearly one in ten of the adult population [of Argentina] was discovered to be using the Credito - a mutual credit money issued by the local exchange clubs on its own, independent standard... Until the peso regained its monopoly over the monetary franchise, the government could not be in control of the country." (69-70)

    - "[Mutual credit] is a credit not against the original issuer, but against society as a whole - or against the body politic of a credit network's members. There are two basic preconditions for the successful functioning of such a system. First every member must maintain his creditworthiness. Only then can society be confident in the value of his money. Second, all member must know one another, if not at first hand, then at second; or have some other grounds, by convention or compulsion, to accept society's word for an unknown member's credit." (73)

    - "[In a monetary utopia,] everyone would issue their own IOUs, those IOUs would be readily accepted by all, and the entire economy would function as a vast mutual credit network. But men are no more angels in economics than in politics... Money on any significant scale can therefore never consist of liquid credit accumulated against "society". The alternative is obvious - and was so at money's birth. Money will naturally consist of liquid credit accumulated against society's most concrete manifestation: the sovereign." (73-74)
  • I don't think I agree with this reasoning for why the sovereign generally gets to determine which token functions as money in society. Instead, I believe that the sovereign decides because (1) they are the biggest payer and receiver of credit in the economy as a whole, and (2) they represent society, at least in the case of democracy. It is (1) that essentially allows them to dictate what the credit token will be, and by using it to pay workers and to get paid taxes, it spreads to other domains of the economy as a matter of convenience. Sovereign money might be displacable if another institution came to occupy a larger fraction of the economy than the government did, I suspect.

    - "In purely practical terms, sovereigns makes a lot of payments." (74)

    - "Money's value [in some monarchies] was directly proportional to how much of it was in circulation compared to the quantity of goods available. The role of the soverign, therefore, was to modulate the quantity of money available in order to vary the value of the monetary standard in terms of those goods. He [the king] could choose a deflationary policy - "if nine-tenths of the kingdom's currency remains in the hands of the ruler and only one-tenth circulates among the people, the value of money will rise and prices of the myriad goods will fall"; or an inflationary one - "he tranfers money to the public domain, while accumulating goods in his own hands, thus causing the price of myriad goods to increase ten-fold" - depending on the needs of the economy." (78)
  • Sounds a lot like the Fed of today...

  • Balance the guarantee afforded by cash with the vulnerability it opens to the whimsy and attack of the government.

    - "In the poet Ovid's satirical textbook for young lovers, The Art of Love, he warns the prospective Lothario that girlfriends need presents - and it is no good making the excuse that you have no cash on hand, because you can always write a cheque." (83)

    - "Under normal circumstances, when seigniorage [payment made to the government] was levied only on the gradual increase in the coinage supply demanded by a growing monetary economy, the revenues [payments made in exchange for turning metal into coins] were relatively modest. But when the need arose, a sovereign could raise enormous sums by crying down or even demonetising altogether the current issue of the coinage and calling it in for re-minting off a debased footing." (89)

    - "At some point, the new money interest was bound to assert itself against the sovereign's perceived excesses." (89)

    - "The soverign, Oresme pronounced, "is not the lord or owner of the money current in his principality. For money is a balancing instrument for the exchange of natural wealth... it is therefore the property of those who possess such wealth." (92)

    - "If people wanted coins, they could bring silver to the Mint and have it coined, with only minting costs and a minimal seigniorage tax to pay. The problem was that this laissez-faire solution was unlikely to worrk in practice, because there was no reason to suppose that the arbitrary supply of precious metal would necessarily accord with the demand for money." (93)

    - "Less and less were they [mercantile fairs] opportunities for the physical exchange of goods. More and more, they were occasions for the clearing and settlement of credit and debit balances accumulated in the course of international trade over the preceding months... It had become the most important market in Europe not for goods, but for money." (97-98)

    - "The great merchant houses of Europe had rediscovered the art of banking - how to produce and manage private money on an industrial scale." (100)

    - "If a great merchant substituted his word for that of a local tradesman, an IOU that might previously have circulated at most within the local economy coud be transformed into one that could circulate anywhere where the great merchant's prestige was acknowledged. A pyramid of credit could be constructed, with the obligations of local tradesmen as the base, large wholesalers in the middle, and the most exclusive, well-known, and tight-knit circle of international merchants at the top." (101)
  • Successful Banking depends on Successful Branding!

    - "It was here - in the creation of a private payments system - that the invention of modern banking originated." (101)

    - "Any IOU has two fundamental characteristics: its creditworthiness - how likely it is that it will be paid when it comes due - and its liquidity - how quickly it can be realised [converted to money], either by sale to a third party or simply by coming due if no sale is sought. The risks associated with any promise to pay depend upon these two characteristics. Accepting a promise to pay in a year's time entails more risk than accepting a promise to pay tomorrow - a lot more can go wrong in a year than in twenty-four hours. This is the dimension of liquidity risk - so called because unless it can be sold in the meantime, a private promise to pay only becomes liquid at the moment it is settled in sovereign money. Then there is the possibility that the IOU's issuer will not be able to pay at all, regardless of the timeframe... This is the dimension of credit risk." (102-103)
  • Seems to me that even if there is credit risk, then that will in turn affect and increase liquidity risk. Why buy something now if you think the debtor is unlikely to pay back its debt? On the other hand, even if there is no credit risk, there could be significant liquidity risk.

    - "The whole business of banking resolves into management of these two types of risk, as they apply both to a bank's assets and to its liabilities. Banks transform uncreditworthy and illiquid claims on the assets and income of borrowers into less risky and more liquid claims - claims which are so much less risky and so much more liquid that they are widely accepted in settlement of debts." (103)

    - "Strip a bank's balance sheet back to its barebones, and the simplest form of banking, the form practised by the most risk-averse of banks, is the short-term financing of trade. In this kind of banking, credit risk is minimal: loans are usually extended simply to cover the purchase and transport of goods for which a sale has already been agreed, and the goods themselves are often used as collateral. With sufficient insurance, the bank might even eliminate the credit risk altogether. The risk it can never get rid of, however, is liquidity risk...[The banker's art] is nothing more than ensuring the synchronization, in the aggregate, of incoming and outgoing payments due on his assets and liabilities - which are themselves, of course, the aggregated liabilities and assets of all his borrowers and creditors." (103-104)

    - "By buying such a bill of exchange, the Italian merchant achieved two things. First, he accessed the miracle of banking: he transformed an IOU backed by ony his own puny word for one issued by a larger, more creditworthy house, which would be accepted across Europe [an example of banking as branding]. He transformed his private credit into money [generally accepted credit]. His second achievement was to exchange a credit for a certain amount of Florentine money into one for a certain amount of the money of the Low Countries where he was making his purchase [foreign exchange]." (106)

    - "The end result [of bill-of-exchange banking] was to overcome a previously insurmountable series of obstacles. The exchange-bankers would accept the importer's credit, knowing him and his business well from the local market. Meanwhile, the supplier in the Low Countries would accept the exchange-banker's credit as payment, knowing that it would be good in its turn to settle either a bill for imports or for some local transaction - and satisfied that he was being paid in the local money. Of course, the banker ran the risk that the exchange rates of the two sovereign moneys against the imaginary ecu de marc [the exchange banker's internal community currency] might change in between his issuing the bill of exchange and its being cashed in the Low Countries, but he made sure that his fees and commisions made this a risk worth taking... The exclusive cadre of exchange-bankers would convene alone to agree on the conto: the schedule of exchange rates between the ecu de marc and the various sovereign moneys of Europe. This schedule was the pivot of the entire financial system, since it was at these exchange rates that any outstanding balances had to be settled on the final day of the fair - the "Day of Payments" - either by agreement to carry over the balances to the next settlement date, or by payment in cash." (106-107)
  • Could Bitcoin function as a modern ecu du marc?

    - "Monetary society, [Oresme] wrote, was nothing other than "the most effective bridle ever was invented against the folly of despotism."" (113)

    - "What was new about the Projector William Paterson's proposal was that this Bank of England would in effect be a public-private partnership. The Bank's primary role would undoubtedly be to put the sovereign's credit and finances on a surer footing. Indeed, its design, governance and management were to be delegated to the mercantile classes precisely in order to ensure confidence in its operation and credit control. Bur in return the sovereign was to grant important privileges. Above all, the Bank was to enjoy the right to issue banknotes - a license to put into circulation paper currency representing its own liabilities, which would circulate as money. There was to be, quite literally, a quid pro quo... If they and the private interest money they represented would agree to fund the king on terms over which they, as Directors of the new Bank, would have a statutory say, then the king would in turn allow them a statutory share in his most ancient and jealously guarded prerogative: the creation of money and the management of its standard." (117-118)

    - "Without the state, the Bank would have lacked authority; without the Bank, the state would have lacked credit." (119)

    - "This compromise [between private bankers and the sovereign to create the Bank of England] is the direct ancestor of the monetary systems that dominate the world today: systems in which the creation and management of money are almost entireley delegated to private banks, but in which sovereign money reamins the "final settlement asset," 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." (120)

    - "Before Oresme, money had been understood implicitly as a tool of government: part of the sovereign's feudal domain, and an instrument of his policy. Oresme had challenged this, and proposed an alternative objective of monetary policy - to supply the needs of the community." (120)

    - "The value of money depended not on the stuff that coinage was made of but on the creditworthiness and authority of the sovereign who stood behind the tariff that specified the nominal value of the coin." (129)

    - "Plato called it [money] a "symbol that exists for the sake of exchange... It exists not by nature but by convention."" (130)

    - "The feudal lords who had been the prime beneficiaries of traditional [non-monetary] society had been bewitched by the magic of money. Their love of luxury had made them encourage the monetisation of their feudal rents: "thus, for the gratification of the most childish, the meanest and most sordid of vanities, they gradually bartered their whole power and authority."" (135)

    - "The founders of the Bank of Englans believed that their marriage of private banking and sovereign money had unleashed the greatest force for economic and social progress in history." (136)

    - ""Financial crises have tended to appear at roughly ten-year intervals for the last 400 years or so." [Charles Kindleberger said]" (137)

    - "All financial contract must be fair to be sustainable." (140)
  • An interesting definition of fair - if a contract sustains, is it necessarily fair?

    - "[Keynes:] "For nothing can preserve the integrity of contract between individuals except a discretionary authority in the State to revise what has become intolerable."" (140)

    - "Money promises to organize society in a manner that combines freedom and stability. This it will achieve first by transforming social obligations - traditional rights and duties that are fundamentally incommensurable with one another - into financial obligations - assets and liabilities all measured in the same units of abstract economic value; and then by making these financial obligations liquid - allowing them to be transferred from one person to another." (141)

    - "As the great recoinage debate had revealed, Locke's understanding of money represented a complete reversal of perspective from the vantage point occupied by Lowndes and his practitioner friends. It was obvious to them that the pound was just an arbitrary standard of economic value. It had lost value against silver - there had been inflation, and the price of silver had risen. The coinage had lost its silver content [by being shaved down by the populace] because the pound had lost value. Locke, by contrast, thought this was getting it completely the wrong way around. A pound was nothing but a definite weight of silver bullion. The pound had lost its value because the coinage had lost its silver. The old understanding had been that money is credit, and coinage is just a physical representation of that credit. The new understanding was that money is coinage, and credit is just a representation of that coinage." (142)
  • This is interesting, because it shows that what the people thought was what mattered. They did not think of the pound as being a definite amount of silver, but a more general intermediary used in trade. If the value of that intermediary went down relative to silver, than the people shaved down the coins to collect the extra silver.

  • Money is an organizing power for society insofar as it controls consumptions to prevent scarcity

    - "Money's ability to deliver personal freedom - from traditional social obligations, even from family obligations - was an exhilirating prospect." (155)

    - "[In early Soviet Russia] the job of banks was not to screen projects for finanicng and monitor loans once granted. It was simply to create money to order as soon as a payment instruction had been issued from an engineer's desk. The process was automatic... The inevitable result of this relegation of money to a passivce role was an explosion in its issuance. The engineers were in charge, and there was no incentive to listen to the irrelevant bankers' whining about finanical viability...since it was production and not money that mattered, who cared?" (162)

    - "The more people use money to preserve their security, the less that money generates wealth and facilitates mobility... Economic slumps occur, [Law] explained, when "[s]ubjects...hoard up those Signs of Transmission as a real Treasure, being induced to it by some Motive of Fear or Distrust."" (167)

    - "[Law argued that] the sovereign issuer of money must have the ability to vary the supply of money to match the needs of private commerce, public finance, and the balance between private creitors and which allows discretion in the issuance of money." (168)

  • France moved off of the gold standard in the 18th century. (170)

    - "Law finally achieved an unprecedented and never-to-be-repeated feat: a comprehensive swap of government debt for government equity." (172)

    - "The monetary standard was now the elusive creature of the sovereign - so that if the economy, and thereby the Company [which had convinced everyone to exchange their government bonds for company equity], fell on hard times, the value of the Bank's money could fall to reflect this." (172)

    - "The problem with conventional sovereign money was that it consisted of financial claims of certain value backed by revenues whose value was intrinsically uncertain... If the economy prospered, the sovereign's tax revenue grew, his credit improved, and his bonds would pay as promised... Rather than pretending to his subjects that he can magic away the uncertainty inherent in economic activity, better for the sovereign to give them access to its proceeds directly - and by the same token, make them bear the risks. With government equity - shares in thr Mississippi Company - this could be done directly. With transferable sovereign credit on a fiat standard - notes issued by the Royal Bank - it could be done at one remove." (173)

    - "All income and wealth flows in the end from the productive economy - and it is claims on this income alone that money ultimately represents... The simpler way to acknowledge this fact of life is to transform the fixed financial claims that are generally used as money - otherwise known as debt - into variable ones - otherwise known as equity... [one mechanism would be for] a corporation that owns all the assets of the state, including its rights to collect taxes, in which citizens can own shares." (175-6)
  • This is an interesting idea, and one which Law implemented in France in the 18th century, but that ultimately failed because equity is vulnerable to bubbles in value, and this variability was too much for a money system.

  • Monetization of social obligations allowed for social mobility.

    - "[Overends] had evolved naturally into merchant bankers by borrowing on their good name in London and lending to the local sheep-farmers... A potential borrower in the provinces would bring his bills to Overends for scrutiny. If Overends liked the credit, they would find a London commercial bank that would lend against security of the bill - a procedure called "accepting" it... Bill-broking became big business, and the market in debt securities that they intermediated became the governing mechanism of the Industrial Revolution... By the 1850s, [Overend, Gurney]...had a balance sheet ten times larger than those of the two biggest banks in Britain combined." (190-1)

    - "[Overend] made a host of other long-term, speculative investments, the only unifying feature of which was that every one was funded, as was the way with the bill brokers' business model, by deposits from the commercial banks that could be withdrawn on demand." (193)

    - "But in the end, it as the oldest trick in the City's books that was chosen: an initial public offering that would transform the [Overend] partnership into a public company and thereby offload the problem on to that perennial savious of the City insider's bacon - the general public." (193)
  • Is this what is happening with the IPO of Editas?

    - "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 academic economists of the day - was confused. The slightest acquaintance with Lombard Street [where Overend was] revealed that the money overwhelmingly uses by businessmen was by and large private transferable credit: above all, bank deposits and notes. "[T]rade in England," he explained, "is largely carried on with borrowed money."" (198)

    - "If money is in essence transferable credit - rather than a commodity medium of exchange, as the academic economist insisted - then fundamentally different factors explain the economy's demand for it. Meeting demand for commodities is a simple matter of ensuring a sufficient supply on the market. When it comes to transfeable credit, however, volume alone is not enough: the creditworthiness of the issuer and the liquidity of the liability come into play." (198)

    - ""Credit is an opinion generated by circumstances and varying with those circumstances," so that genuine insight into the functioning of the economy requires an intimate familiarity with its history, its politics, and its psychology - "no abstract argument, and no mathematical computation will teach it to us" [wrote Bagehot]." (199)

    - "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 creditworthy and more liquid than all the rest: the sovereign, which in the moden financial system had delegated its monetary authority to the Bank of England... The Bank had married the commercial acumen of one privileged set of private bankers with the public authority of the sovereign to render the Bank's money both creditworthy and universally transferable... Just as the sovereign had lent its unique authority to the Bank, so the Bank had over time got into practice of lending its authority to the universe of other banks... "[a]ll banks depend on the Bank of England, and all merchants depend on some banker."" (200)
  • All of this discussion of sovereign money and bank money shows that there is a hierarchy of money/credit.

    - "This remarkable monetary infrastructure was, Bagehot explained, the operating system of the Industrial Revolution, and what distinguished Britain from every other country in the world." (201)

    - "[Bagehot's] first and most basic prescription [to avoid financial crisis] was that he central bank''s roles as the lender or broker of last resort should be made a statutory responsibility, rather than left to the directors' discretion... "in time of panic [the Bank] must advance freely and vigorously to the public out of its reserve."" (202-3)
  • Since money is a special type of credit/debt (one which is liquid), this policy amounts to selling productivity expected in the future to restore confidence today.

    - "The bank should not try to make nice distinctions between who is insolvent and who merely illiquid in the heat of a crisis. It should lend "on all good banking securities, and as largely as the public ask."... Bagehot therefore proposed his third principle to ward off this risk [which is that, if backstop money is always available, banks will make credit available to those who are not creditworthy]. Emergency lending "should only be made at a very high rate of interest... [to] operate as a heavy fine on unreasonable timidity, and... prevent the greatest number of applications by persons who do not require it."" (203)
  • This is essentially the policy adopted by the Fed during the 2008 financial crisis.

    - "The conventional understanding of money led the classical economists to diverge dramatically from the views of Bagehot in three areas. The first was the correct principles for monetary policy in a crisis. If the classical conception of money was correct - if money was gold and silver alone - then although everyone might want it in a crisis, there was only so much to go round. The Bank of England should therefore protect its hoard by refusing access, or raising the rate of interest at which the Bank would lend out its gold... [but] what was in short supply in a crisis was not gold, but trust and confidence - which the central bank had a unique ability to restore by standing ready to swap the discredited bills of private issuers for its own sovereign money." (205-6)

    - "Thomas Joplin had summed it up concisely: "[a] demand for money in ordinary times, and a demand for it in periods of panic," he had written, "are diametrically different. The one demand is for money to put into circulation; the other for money taken out of it." (208)

    - "There is no guarantee that, in the aggregate, supply will always equal demand, for the simple reason that in a monetary economy, rather than having to buy goods and services with their income, people can hold money instead. When prospects look grim, that is exactly what people choose to do in spades - and only the safest and most liquid money, the money of the sovereign, will do." (212)

    - "The insight of Bagehote, and Joplin and Thronton before him, [was] of the importance of liquidity as a distinct property of credit - the property which makes it money when it exists, and inert bilateral credit when it does not... The sovereign's liabilities enjoy a degree of liquidity to which no private issue can aspire." (217)
  • So, liquidity can be quantified as the probability that another member of your society will accept your bill or note as payment. This is nearly 100% with sovereign money, and lower for all other kinds of money.

    - "The U.S. spent 4.5% of GDP recapitalizing banks - equal to its entire annual defence budget in the midst of a major war." (230)

    - "[The banks'] business was - just as it had always been - to manage liquidity and credit risk. But if they proved unable to synchronise their payments [of term loan payments in and demand deposits out], the central bank would step in with liquidity support. And if their loans went bad and their equity capital was too thin, the taxpayer would backstop their credit losses. The consequences were, in retrospect, utterly predictable. Around the world, banks had grown in size, reduced their capital buffers, made riskier loans, and decreased the liquidity of their assets." (230-1)

    - "In November 2009, a year after the collapse of Lehman Brothers, total sovereign support for the banking sector worldwide was estimated at some $14 trillion - more than 25% of global GDP. This was the scale of the downside risks, taxpayers realized, that they had been bearing all along - whilst all the upside went to the shareholders, devt investors, and employees of the banks themselves." (231)

    - "[With the establishment of the Bank of England in 1694,] the private bankers got liquidity for their banknotes. The crown's writ, unlike their own, ran throughout the land, and money that had its blessing could enjoy universal circulation. In return, the bankers provided the financial acumen and the trusted reputation in the City that enhanced the crown's credit-worthiness. In modern terms, the crown provided liquidity support to the Bank, while the Bank provided credit support to the sovereign." (233)
  • credit risk is the risk that a borrower will repay their loan
  • liquidity risk is the risk that another person will accept the loan as payment
  • seems like you can have low credit risk (a guaranteed repayment) with high liquidity risk (no market exists for the asset class, or the creditor has a bad name and no one wants to hold his debt)
  • can you have high credit risk with low liquidity risk? seems more difficult
  • in general, these two risks seem well-correlated

    - "The skeptical 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. So long as citizens permit the sovereign a discretionary power to recalibrate the financial distribution of risks by adjusting the monetary standard when it becomes unfair, sovereign money can work." (249)

    - "The US economist Robert Schiller... has for many years urged sovereigns to share with investors the risk to the public finances inherent in uncertain economic growth by issuing bonds that pay interest linked to GDP." (252)

  • Overall, this chapter was unclear, vague, imprecise, and of little value as he treated complex topics as simple ones that follow his assertions and assumptions.

    - "To be precise, you explained that, in essence, money comprises three things: a concept of universally applicable economic value [store of value?]; a system of account-keeping whereby that value can be measured and recorded [unit of account]; and the principle of decentralised transfer, whereby that value can be transferred from one person to another [medium of exchange]." (257)

    - "You explained that a dollar, a pound, a euro, is not a physical thing but a unit of measurement." (258)

    - "The first [point] was that 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 [point] 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 - it's the central component of a technology for organizing society, as you put it - so that its standard needs to be political as well." (258)

    - "Money isn't silver, it's tranferable credit!" (262)

    - "Anyone can issue their own money - the problem is getting it accepted." (272)
  • It is this acceptance issue that will determine whether Bitcoin or anything else claiming to be money can actually make it as Money (with a capital M).

  • In this epilogue, Martin very briefly evaluates the viability of Bitcoin as a successful Money. His overall judgement is that it will not succeed, due to the reason quoted below. I found his analysis superficial, as it was likely written only so that they could put "cryptocurrency" on the cover of the new book edition.

    - "Yet as this book has shown, [bitcoin] represents a backwards step in the evolution of money, not a revolutionary advance. To achieve widespread acceptance, a money's standard of value must strike a compromise between a wide range of interests [as observed during the creation of the Bank of England] - and just as importantly, it must be flexible over time... Nevertheless, it seems destined to remain an iron law of monetary history that the money which will win the widest acceptance is the one whose standard satisfies the most people - and which those people can adjust if they need to." (277)


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