Ingham's The Nature of Money

Geoffrey Ingham, The Nature of Money,  I think this is a remarkable book.  I'm a little out of my depth here (and actually, I haven't finished it) but it's the most useful thing I ever read on the topic.  Put narrowly, it is just what its title says it is: an attempt to probe beneath the surface of a subject so manifestly cloaked in opacity.  It's written by a non-economist, which is good.  It's written by a self-admitted sociologist* which is better.  And perhaps even more remarkable: non-economist academics who stray into the field often stumble into a bog of abstract fulmination which suggests that after all, they really don't know much of what they are talking about.  Ingham by contrast sounds like a sociologist who has been locked up with economists for a decade or so and lived to tell about it (from what I read somewhere, I think this last guess is more or less correct, but I can't put my finger on the source just now).

You don't read many pages of Ingham without thinking that this is the kind of book that David Graeber thought he was writing, or perhaps should have written.  It isn't really; Graeber is must much more scattershot richer in detail, far more intent upon testifying to his disaffection with the current system.    I don't remember Graeber citing Ingham, but god bless Kindle search, it takes just a moment to determine that--there he is, some 15-plus citations text and footnotes together.  It's none too few: I can hardly accuse Graeber of ripping off Ingham but on the whole I'd say the most arresting and/or engaging parts of Graber's book are the parts he gets from Ingham.  I see that Ingham reviews Graeber here; I  haven't read beyond the ungated first page. But I see he wants to  "focus particularly on what I take to be the underlying threads--his analysis of the nature of money, its relationship to debt, and the moral basis of economic life."  Exactly. Although actually I haven't seen that much in Ingham yet about "the moral basis of economic life;" but as I say, I'm not finished.

Continuing what I guess you could call this chartalist bent, I've lain my hands on a copy of Keynes' Treatise on Money.  Eeuw, do I really need to read all of it?
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*Did I just compliment a sociologist on his writing style?  Yes, I believe I did.

And BTW:  Pardon the even-more-than-usual array of typos.  I should not blog after 9 pm.  Or wear white after Labor Day.

One More: One hundred and seven dollars? You gotta be kidding.

Forget Bitcoins

Here comes the Choco Pie:

The Choco Pie is a mouth-drying, individually wrapped slab of cake, marshmallow and chocolate, and in South Korea it is as important a part of childhood as Britain’s Mars bar or the American Twinkie. It is manufactured by the Orion company of Seoul, exported across Asia, and consumed in an arc of countries from Japan to Uzbekistan. In 2004, South Korean manufacturers began to set up factories in the North Korean city of Kaesong, an unprecedented experiment in co-operation between the fraternal enemies, and the core of what the South Korean government called its Sunshine Policy. Along with South Korean managers, manufacturing technology, telephone lines and a motorway, they brought the Choco Pie.

Within a few months, the bosses from Seoul began slipping their North Korean workers a Choco Pie or two as a perk. In part, this was a response to the Kaesong wage regime: rather than being paid directly, salaries were processed by the North Korean authorities, which then handed over the money minus hefty deductions. The Choco Pies were a small piece of South Korean largesse, but it was difficult at first to know how enthusiastically they were being received. The fact that Orion wrappers were nowhere to be found in the rubbish bins of Kaesong might have suggested indifference, but the opposite was true: the local workers, most of them women, had quickly realised that the Choco Pies were too delicious and valuable to eat. Kaesong employees, the best paid in North Korea and among the worst paid in Asia, were hoarding their pies, and selling them on at remarkably inflated prices: as high as the equivalent of $10 a piece, a large proportion of their monthly take home pay. The cakes found their way onto the black market in Pyongyang; corrupt soldiers in Kaesong, who routinely exacted ‘fines’ from the South Korean managers, began to accept, and sometimes require, payment in chocolate and marshmallow. By some estimates, 150,000 Choco Pies were being dispensed in Kaesong every day.

 Translated: once again, money is anything the people think is money: decorated paper, stone wheels, digital blips, even shiny pieces of metal.  And not even the most repressive of governments is any better than so so at controlling it.  It's all adumbrated in a famous econ paper which had the air of novelty when it was published, though it is pretty much conventional wisdom today.

The excerpt is from  Richard Lloyd Parry, "Advantage Pyongyang," reviewing Victor Cha, The Impossible State in the London Review of Books for May 9.  The whole thing appears to be ungated; it's worth a read.

And BTW, what is it with the LRB?  The showcased items for the week, along with Parry, are James Meek on the Cyprus haircut and Donald MacKenzie on the Whitehall heist bank restructuring of aught eight. Oh, and something about a former prime minister.  For a literary rag isn't this all getting a tad financial?

Sometimes it Pays to Read the Comments

Ritholtz posted a clever but instructive skewering of gold mania. He got some of the predictable blowback.  In response to the blowback, Ritholtz said "Paper money is backed...  a collective belief system — so is gold — but the fiat currency also is backed by the ability to tax and have a standing army."  Responding to Barry, comes now a certain "Carchamp1," otherwise unknown to me:

Consider that, despite conventional wisdom, fiat currency, or paper money, is backed by far more than general collective belief. When you think about how a fractional reserve system works, a currency is backed by productive enterprise and work. In a fractional reserve system, money is, yes, created “out of thin air”, but it is loaned out with some confidence that it will be paid back.

Now, as we saw with the housing bubble, capital is sometimes employed very poorly. When that happens we ultimately get a contraction, sometimes a very powerful one. This is inherent in fractional reserve systems. That is, it is supposed to happen. It is part of the plan.

While I think the idea of having a few bankers at the Federal Reserve pull the switches on monetary policy should be looked at (could this be done in a market-based approach?), I tend to think the fractional reserve system is pure genius. Probably never heard that before.

 Okay, I grant this may not be Nobel quality, but how often do you here anybody mount any defense at all of "fractional reserve banking?"  [Still as a general rule--I'd venture that any comment thread including both "fiat money" and "fractional reserve banking" is probably not worth the eyeballs.]

I'll Bite

Let's grant that we might like "“a universal payments system with no friction or interchange costs” (link).  And let's ignore that awkward little volatility thing.  Still, do we really want to be in a product whose target demographic would be (a) money launderers; (b) tax evaders; and (c) gullible paranoids of a sort who think they can get rich by shipping all their wealth to an anonymous transferee at the end of an intertube?

Playing Catchup on Bitcoin

If you still haven't gotten the memo on Bitcoin, Felix Salmon (of course) offers a great starter.  I picked it up in a link from Tyler Cowen whose comment thread tells you what you might have expected--that a Bitcom comment thread sounds a lot like a call-in show presided over by Glen Beck.   But I did like the imagination of the people trying to figure out how to short the stuff.

And let me add a couple of afterthoughts.  One, part of the supposed appeal for Bitcoin is that it has no history, no past: you don't know where it came from and you don't have to worry: Bitcoin is itself.  But isn't this the whole point of like, you know, money: that it passes "in currency," in the phrase of the great Lord Mansfield.  Or more practically: I don't have to worry about whether the guy who passes me the $20 acquired it when he ripped the purse of the arm of an old lady.   It is, as one might say, a "courier without luggage."  Ask yourself: how often has the clerk at the convenience store asked to see two forms of identification before he palms the green?  Or as they say down at the law school: "you can't take good title from a thief," except that when it is cash, you can take good title from a thief.

[Yes, I know there are all kinds of objections to what I just said, but they're details.  I mean--sure, the Feds may find some way to trace the drug dollars into the hands of the lawyer who represents the defendant ("wake up and smell the cocaine!").  But that's not enough of a concern to spoil the generalization. ]

So the real point about Bitcoin is not that it's different from "money" but that it's different from bank money, where a prosecutor with a subpoena can follow a paper digital trail.

Also: some of the commentary on Bitcoin addresses the "currency versus commodity" issue--whether an item can function as a currency when it is also a commodity, coupled with the inevitable response that "hey, it works for gold."  I tend to agree with those who believe that you can't serve both functions at once.  But try this: could it be the enthusiasts want Bitcoin (or gold) precisely because of its dual identity?    Talk to gold bugs (once in a while, I do) and you quickly learn that one of the problems with paper is that it is like, yech, paper.  They want money that jingles, money you can trip over in the dark..  It's a touching weakness, and it's ironic that they'd attach the same kind of enthusiasm to a  kind of non-money money whose notable characteristic is that it has no physical manifestation whatever?

Final thought:   I probably ought to count myself a Bitcoin skeptic, but with one important limitation: I fully accept the proposition that money is anything people think is money.  If the world wants to  be a Bitcoin world, why then a Bitcoin world it will be.

Bonus extra: Gary Gorton offers up a nice definition of what you need to make transactions work:

Markets are liquid when all parties to a transaction know that there are probably not any secrets to be known: no one knows anything about the collateral value and everyone knows that no one knows anything.  In that situation it is very easy to transact.  The situation where there is nothing to know or nothing worth knowing--no secrets--is desirable and allows for efficient transactions.

 Gary Gorton, Misunderstanding Financial Crises, Kindle Edition line 929 (2012). 

Update:  I assume he is talking about Bitcoin?

I have an idea: Let's make a bunch of new financial assets for overconfident people to overtrade, then take their money. Oh wait...old idea.
— Noah Smith (@Noahpinion) April 3, 2013

 

The ToniKröger

Mrs. Buce does not pay a lot of attention to financial news but like the rest of the world, she cannot evade the Cyprus kerfuffle. She's coming around to the view that there really two Eurozones, one for Huns and Vikings, the other for those excitable southerners.  It's like one soul trying to claw its way out of another body (think Steve Martin and Lily Tomlin).  Or perhaps one body comprising two souls, like the divided souls of Thomas Mann stories,  in particular the one about Tonio Kröger, the lad with the northern-banker father and the Italian-artist mother

Mrs. B suggests that it is time, maybe not to split the Euro in two but perhaps to recognize the duality of the  system by conferring a more suitable name. She would suggest "the Kröger," but rejects it because people might confuse it with the Krugerrand which is something altogether different. She thus lights on "the ToniKröger." I point out that for correctness she really needs the extra "o." She grants the point but responds that five syllables would be too many and that anyway, if she added an "o," people would think it Irish.

You say Po-tay-to, I say Po-tah-to

Here's an intriguing thread at the excellent Bruce Bartlett on  the subject of fee-yat (or is it fye-yat) money.  Bruce, who is not always given to nuance, declares that "anyone who uses the term 'fiat currency' has been reading too much Ron Paul-type monetary nonsense."  I feel his pain, though I stick stubbornly to the notion that one can give intelligible content to the term without committing to the whole Paulie magilla.  Specifically I wonder if this is the case: isn't the problem that in some sense all money is fiat money--i.e., in the sense that money is what we agree to treat as money, and lives only on confidence and expectation.  I guess I can recognize one distinction: you can't print gold the same way you can print paper (or drop electrons into the intertubs).  But here's one thing you can do re gold: you can break the promise.  That is, any sovereign that commits to the gold standard can change his mind and choose not to honor its promise--dim voices remind me that this just might have happened once or twice in the past, not so?  The cry of "fiat money" seems to rise from the supposition that there is something inviolate about gold, and there isn't, is there?

Afterthought: probably another one of those days when I'm just as glad that nobody reads this blog.  I hate to think of the comment thread if they did.

Sound as a ...

Krugman thinks we should pay our bills with moral obligation chits.   On the premise that money is anyone thing people think is money, then file this one under "not as crazy as it sounds" (and not as serious as this guy seems to think it is).   For added dignity, we could have them incised on giant pieces of stone, like they do on the Isle of Yap (copper, like they used to use in Sweden, is probably too expensive).    Or we could just dragoon all the lower-level treasury minions and send them to Safeway.

The Name is Bond...Convertible Bond

And here I thought this was going to be about the bond market:

Eichengreen's Horror Story

Looking for something to sooth me to sleep the other night, I cracked Barry Eichengreen's Exorbitant Privilege, about the dominance of the dollar as a world currency and its inevitable eventual decline.  Ha! for sweet repose, I would better have chosen a slasher flic.  Eichengreen offers a horror story  but he tells it with almost effortless ease: how grandly we perch on top of the world currency system, how much solace we draw from our privileged position, and how easily, and quickly, we might lose it all.*

We came by our privilege honestly: by the end of World War II we were the only substantial currency anywhere (though the British did not quite get the message until the Suez debacle of 1956).  We stay aloft now through a devils brew of inertial and kinetic force.   In any event, we get to push other people around do not get pushed around; we have everybody else in the world on a don't-call-us-we'll-call-you basis.  A moralist might say that our very success harbors the seeds of its own demise: our very preeminence has led us to go slack, to get away with stuff because we can get away with it and not for any better reason.  In any event, sooner or later the gas will go out of the bag, maybe with agonizing slowness, perhaps with a deafening "pop."    Either way it won't be pretty: it will make our lives tougher and more demanding than any native-born American has ever known.  The sheer economic consequences alone or sobering enough.  And although he doesn't dwell on them, it is clear from Eichengreen's narrative that the political consequences may be far worse: if, as they say, no politician ever survived a bad harvest, what will become of the person who presides over a currency collapse.

Eichengreen's book has been extensively reviewed elsewhere and I won't burden the record with repetition. but I would like to pose a question.  Stipulate that our present world financial order is held together with piano wire and glue (does anyone really think otherwise?).  Stipulate that the prospect of gold as an alternative is only fanciful (though perhaps not quite as fanciful as it may seem its sharpest critics).  Stipulate to all that but then ask--okay, Mr. Wiseguy, suppose you were sovereign: just what of monetary order would you propose?  Is there a coherent system that can be imagined or are we doomed forever to juggle hot knives on the edge of a precipice?    No, I was wrong to call you a Wiseguy.   But the question is advanced in earnest.  Stipulate that we creep interminably along the edge of the abyss, do we have any other choice? 
 --
*Previous foolish assertion excised.  See Stephan's comment below. and Buce's response.

Iceland v. Ireland

Great stuff up at Interfluidity on a topic well outside my comfort zone--the problem of default on the edge of the Euro Zone.  Ideal final exam question: Ireland v. Iceland.  Discuss.  

That Bernanke Fella is One Brave Dude

Underbelly's Minnesota bureau reports that some people take their money seriously:

In this year, before Christmas, king Henry sent from Normandy to England, and commanded that all the moneyers that were in England should be deprived of their members; that was the right hand of each, and their testicles beneath. That was because the man that had a pound could not buy for a penny at a market. And the bishop Roger of Salisbury sent over all England, and commanded them all that they should come to Winchester at Christmas. When they came thither they were taken one by one, and each deprived of the right hand and the testicles beneath. All this was done within the twelve nights; and that was all with great justice, because they had fordone all the land with their great quantity of false money which they all bought.

The Anglo-Saxon Chronicle, p. 221 (year 1125).

(Edited, with a Translation, by Benjamin Thorpe, Vol. II

(London: Longman, Green, Longman,and Roberts, 1861)

Buchan on Money

I suspect it is easy to overpraise James Buchan's Frozen Desire: Meaning of Money. They say people take you at your own valuation and Buchan's evaluation of himself seems high. I'd file him next to Henry Adams: the same self-assurance, the same deep-seated good breeding. Also: the same not too well concealed astonishment that, given his past and his parts, the world has no particular interest in him. They're too grownup to cry about it: Adams responds with a wry self-mockery at the picture of himself struggling to maintain standards among knaves that smell of sweat.  Buchan's tone is more one of faintly amused bewilderment.  It does serve him well insofar as it motivates him to try to consider his subject--money--with a kind of detached scrutiny rare among students of the topic.

This an approach which yields what is perhaps best in the book--an eye for the giddiness and confusion that money can create, not simply in one who wants money, but in more or less anyone who finds money within easy reach.  It allows him to convey a convincing sketch of the flavor of the madness that overcame France and then England in the two great ur-bubbles -- Mississippi  and then South Sea--of the 18th Century.  It leads him to a surprisingly compassionate portrait of Karl Marx and his family, struggling in Dean Street.  He doesn't simply dismiss them as confused visionaries--they were confused visionaries, at least mama and papa, but as poor fallible human beings who make the same damn kind of mistakes that the rest of us are wont to make.
He also has a good ear for anecdote---it was from him I pinched point d'argent a few days ago.   Yet it is very gift for anecdote that seems to betray him: he tells so many good stories about, e.g., John Law and the South Sea Bubble that you begin to suspect he doesn't understand Law's project itself all that well.  Similarly, over at the end of the book he lifts an arch piece of satire from Tom Wolfe in which the go-go Wall Streeter finds he cannot explain the bond market to his child.  "The Master of the Universe," intones Buchan,

ties himself in knots.  For even poor Sherman has grasped the imperative, which is categorical enough to be worth repeating, once a century: that even in great cities of finance, if you cannot explain your job to your child, you probably shouldn't be doing it.

He's probably got a point there, but it may not be the one he thinks he is making.  Specifically, if Sherman cannot explain bonds to his child, it may not that there is anything particularly corrupt or insidious about it; it may be simply that he doesn't understand it very well.  In outline if not in detail, the bond market is actually not all that difficult to explain.

Too True...

Took five hours out for the opera, so now catching up with other.  I leave you with:

Point d'argent, point de Suisse

That is: "no money, no Swiss," as in the tall guys who came down out of the Alps to make a nuisance of themselves iin the 15-16C.  Link.  Sometimes associated with Charles the Rash of Burgundy:

[I]t was the closure of the brief period when the dynastic rivalries of Europe permitted the Swiss as a nation to play a significant role in the affairs of the continent. As to the careless use of the term ‘mercenary’ as an epithet, to deny a soldier his pay is to refuse the honour due to him and implicit in the contract under which he takes service. The Swiss did not believe in promises and if pay day came around and it was not duly counted out, they would simply leave, no matter what the situation their patron might find himself in. Thus to this day the phrase point d'argent, point des Suisses (no money, no Swiss) persists in French usage.  

Link. Reformed as "point d'argent, point de buste."  Link.  I suppose in the 20C we might have said "no Swiss, no money," though whether that holds is perhaps an open question.

Apiary Wisdom

Cooling my heels at the gas pump at Costco this morning, I listened to a couple of guys puzzling over the one thing that puzzles us more these days than sex—I mean money. One guy in particular: from the sign on his truck, I gather was a beekeeper, but from the sound of his conversation he could have been a bookkeeper (ka-voom!): he knew the price of gasoline in Canada and the pound-dollar exchange rate. He knew that Germany was about the only economic engine in the European community, and said he figured that it was only a matter of months before the Euro went into the tank.

I suppose I could blow him off as just another talker except that, anticipating some foreign travel, I bought some Euros a few months back and so far I've lost a packet. Maybe I should have listened to the beekeeper.

Where's My Money?

I got a wake-up jolt this morning when I went on line to check my accounts at Fidelity. I had sent them a check for $12,000 back at the first of the month and it didn't seem to have been posted. I flipped over to a separate screen to look up my hometown bank records and sure enough, the check had cleared my bank on February 12.

Back to Fidelity where I set up an IM session with a techie. He asked some perfectly reasonable basic questions. Bank routing number? Who endorsed it (actually, the endorsement stamp is so smudgy I could barely make it out). After a few minutes he was back on line saying right, we have it, we'll post it right away (Dated back to the 12th, yes? Yes, dated back).

So it ended happily, if you price my time at zero. But I wondered--where does an outfit like Fidelity come off misplacing a $12,000 check even if only once in a while? Could it be--oh dear--that I sent paper, instead of bits and bytes?

Oh and he did say: better check back in a couple of days to confirm that it is in the account. Fine, good point, but not the kind of advice that inspires confidence in Fidelity.

Update: Looks like I have a history here:

Arrgh...

Truer than They Know?

Mouths of Babes dept.: Foreign Exchange

We gave grandkids assorted pocket change from our foreign travels. One of them wrote in a thank-you note:

I will leave it on a bookshelf until it appreciates.

Maybe he know something we don't know.

Money and Politics: Aw Right Awready!

I've had more than enough remonstrances about my late discussion of money and politics--and awright awready, I know that money has been "the mother's milk of politics" for longer than I can remember. What about Harding (in a satchel, Mr. Doheney?)? Grant? Come to think of it, how about those sturdy Roman republicans (small-r) who scratched and clawed for high office at Rome so they could get the opportunity to go pillage a province?

In particular the Kentucky memorialists bring me back to the 1963 Kentucky gubernatorial campaign, between A. B. (“Happy”) Chandler and Edward T. ("Ned") Breathitt. Happy was one of the last of the old-time stem-winder country pols, but oddly enough it was Breathitt, the forgettable and colorless technocrat, who got to claim the most memorable mot of he season. Okay, not Breathitt; rather, the mmorable d Prichard, who served as Breathitt’s Karl Rove. Prichard himself was at least as colorful as Chandler. Apparently Chandler had a son-in-law, one James J. Lewis, whose job was to work the campaign fuunding sources. The chronicler takes up the story:

This was surely no novelty in Kentucky, but the charge took on a comic character when Prichard shouted that Chandler was riding the state insisting that people “fill the sack for Jimmy Jack!” It became one of those campaign gimmicks which … could be counted on for a laugh, and the Breathitt speakers never missed a chance to “Fill the sack for Jimmy Jack!” … It was part demagoguery, part buffoonery, part hyperbole … it was also … effective.

--John Ed Pearce, Divide and Dissent: Kentucky Politics, 1930-1963 213 (available (here))

Footnote: It doesn’t seem to be in Pearce’s book, but as I recall, there was a minor candidate in the same race whose slogan was “Put the jam on the lower shelf, where the little guy can reach it!” We just don’t make voters like that any more.