[PDF]Money The Unauthorized Biography ( Felix Martin)

THE UNAUTHORIZED BIOGRAPHY


Felix Martin


Money


The Unauthorised Biography


FELIX MARTIN


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ALFRED A. KNOPP NEW YORK 2014


THIS IS A BORZOI BOOK
PUBLISHED BY ALFRED A. KNOPF


Copyright © 2013 by Failu Ltd.


All rights reserved.
Published in the United States by Alfred A. Knopf, a division of Random House LLC, New
York, and in Canada by Doubleday Canada, a division of Random House of Canada
Limited, Toronto, Penguin Random House Companies. Originally published in Great Britain


by The Bodley Head, a division of the Random House Group Limited, London, in 2013.
www.aaknopf.com
Knopf, Borzoi Books, and the colophon are registered trademarks of Random House LLC.
Library of Congress Cataloging in Publication Data is available.
ISBN 978-0-307-96243-0 (hardcover) ISBN 978-0-307-96244-7 (eBook)
Jacket design by Evan Gaffney


v3.1


To Kristina


Contents


Cover
Title Page
Copyright
Dedication


1 What Is Money?
2 Getting Money’s Measure
3 The Aegean Invention of Economic Value
4 The Monetary Maquis
5 The Birth of the Money Interest
6 The Natural History of the Vampire Squid
7 The Great Monetary Settlement
8 The Economic Consequences of Mr. Locke
9 Money Through the Looking-Glass
10 Strategies of the Sceptics
11 Structural Solutions
12 Hamlet Without the Prince:
How Economics Forgot Money ...
13 ... and Why It Is a Problem
14 How to Turn the Locusts into Bees
15 The Boldest Measures Are the Safest
16 Taking Money Seriously


Notes

Bibliography
Acknowledgements
Illustration Credits

A Note About the Author


1 What Is Money?


Everyone, except an economist, knows what “money” means,
and even an economist can describe it in the course of a
chapter or so ...

—A.H. Quiggin, A Survey of Primitive Money: the Beginnings of
Currency, p. 1


THE ISLAND OF STONE MONEY


The Pacific island of Yap was, at the beginning of the twentieth
century, one of the most remote and inaccessible inhabited places
on earth. An idyllic, subtropical paradise, nestled in a tiny
archipelago nine degrees north of the equator and more than 300
miles from Palau, its closest neighbour, Yap had remained almost
innocent of the world beyond Micronesia right up until the final
decades of the nineteenth century. There had, it is true, been a brief
moment of Western contact in 1731 when a group of intrepid
Catholic missionaries had established a small base on the island.
When their supply ship returned the following year, however, it
discovered that the balmy, palm-scattered islands of Yap had not
proved fertile ground for the Christian gospel. The entire mission
had been massacred several months previously by local witch
doctors aggrieved at the competition presented by the Good News.


Yap was left to its own devices for another one hundred and forty
years.

It was not until 1869 that the first European trading post—run by
the German merchant firm of Godeffroy and sons—was established
in the Yap archipelago. Once a few years had passed, with
Godeffroy not only avoiding summary execution but prospering,
Yap’s presence came to the attention of the Spanish, who by virtue
of their colonial possessions in the Philippines—a mere 800 miles to
the west—considered themselves the natural overlords of this part
of Micronesia. The Spanish laid claim to the islands, and believed
that they had achieved a fait accompli when in the summer of 1885
they erected a house and installed a Governor in it. They had not
counted, however, on the tenacity of Bismarck’s Germany in matters
of foreign policy. No island was so small, or so remote, as to be
unworthy of the Imperial Foreign Ministry’s attention if it meant a
potential addition to German power. The ownership of Yap became
the subject of an international dispute. Eventually, the matter was
referred—somewhat ironically, given the island’s track record—to
arbitration by the Pope, who granted political control to Spain, but
full commercial rights to Germany. But the Iron Chancellor had the
last laugh. Within a decade and a half, Spain had lost a damaging
war with America, and its ambitions in the Pacific had
disintegrated. In 1899, Spain sold Yap to Germany for the sum of
$3.3 million.

The absorption of Yap into the German Empire had one great
benefit. It brought one of the more interesting and unusual
monetary systems in history to the attention of the world. More
specifically, it proved the catalyst for a visit by a brilliant and
eccentric young American adventurer, William Henry Furness III.
The scion of a prominent New England family, Furness had trained
as a doctor before converting to anthropology and making his name
with a popular account of his travels in Borneo. In 1903 he made a
two-month visit to Yap, and published a broad survey of its physical
and social make-up a few years later.1 He was immediately
impressed by how much more remote and untouched it was than
Borneo. Yet despite being a tiny island with only a few thousand


inhabitants—“whose whole length and breadth is but a day’s walk,”
as Furness described it—Yap turned out to have a remarkably
complex society. There was a caste system, with a tribe of slaves,
and special clubhouses lived in by fishing and fighting fraternities.
There was a rich tradition of dancing and songs, which Furness took
particular delight in recording for posterity. There was a vibrant
native religion—as the missionaries had previously discovered to
their cost—complete with an elaborate genesis myth locating the
origins of the Yapese in a giant barnacle attached to some floating
driftwood. But undoubtedly the most striking thing that Furness
discovered on Yap was its monetary system.

The economy of Yap, such as it was, could hardly be called
developed. The market extended to a bare three products—fish,
coconuts, and Yap’s one and only luxury, sea cucumber. There was
no other exchangeable commodity to speak of; no agriculture; few
arts and crafts; the only domesticated animals were pigs and, since
the Germans had arrived, a few cats; and there had been little
contact or trade with outsiders. It was as simple and as isolated an
economy as one could hope to find. Given these antediluvian
conditions, Furness expected to find nothing more advanced than
simple barter. Indeed, as he observed, “in a land where food and
drink and ready-made clothes grow on trees and may be had for the
gathering” it seemed possible that even barter itself would be an
unnecessary sophistication.2

The very opposite turned out to be true. Yap had a highly
developed system of money. It was impossible for Furness not to
notice it the moment that he set foot on the island, because its
coinage was extremely unusual. It consisted of fei—“large, solid,
thick stone wheels ranging in diameter from a foot to twelve feet,
having in the centre a hole varying in size with the diameter of the
stone, wherein a pole may be inserted sufficiently large and strong
to bear the weight and facilitate transportation.”3 This stone money
was originally quarried on Babelthuap, an island some 300 miles
away in Palau, and had mostly been brought to Yap, so it was said,
long ago. The value of the coins depended principally on their size,


but also on the fineness of the grain and the whiteness of the
limestone.

At first, Furness believed that this bizarre form of currency might
have been chosen because, rather than in spite, of its extraordinary
unwieldiness: “when it takes four strong men to steal the price of a
pig, burglary cannot but prove a somewhat disheartening
occupation,” he ventured. “As may be supposed, thefts of fei are
almost unknown.” But as time went on, he observed that physical
transportation of fei from one house to another was in fact rare.
Numerous transactions took place—but the debts incurred were
typically just offset against each other, with any outstanding balance
carried forward in expectation of some future exchange. Even when
open balances were felt to require settlement, it was not usual for fei
to be physically exchanged. “The noteworthy feature of this stone
currency,” wrote Furness, “is that it is not necessary for its owner to
reduce it to possession. After concluding a bargain which involves
the price of a fei too large to be conveniently moved, its new owner
is quite content to accept the bare acknowledgement of ownership
and without so much as a mark to indicate the exchange, the coin
remains undisturbed on the former owner’s premises.”°5


The stone currency of Yap as photographed by William Henry Furness III in 1903, with
people and palm trees for scale.
(illustration credit 1.1)


When Furness expressed amazement at this aspect of the Yap
monetary system, his guide told him an even more surprising story:


[T]here was in the village near by a family whose wealth was
unquestioned—acknowledged by everyone—and yet no one,
not even the family itself, had ever laid eye or hand on this
wealth; it consisted of an enormous fei, whereof the size is
known only by tradition; for the past two or three generations
it had been and was at that time lying at the bottom of the


sea!l6


This fei, it transpired, had been shipwrecked during a storm while
in transit from Babelthuap many years ago. Nevertheless:


[I]t was universally conceded ... that the mere accident of its
loss overboard was too trifling to mention, and that a few
hundred feet of water off shore ought not to affect its
marketable value ... The purchasing power of that stone
remains, therefore, as valid as if it were leaning visibly against
the side of the owner’s house, and represents wealth as
potentially as the hoarded inactive gold of a miser in the
Middle Ages, or as our silver dollars stacked in the Treasury in
Washington, which we never see or touch, but trade with on
the strength of a printed certificate that they are there.’


When it was published in 1910, it seemed unlikely that Furness’
eccentric travelogue would ever reach the notice of the economics
profession. But eventually a copy happened to find its way to the
editors of the Royal Economic Society’s Economic Journal, who
assigned the book to a young Cambridge economist, recently
seconded to the British Treasury on war duty: a certain John
Maynard Keynes. The man who over the next twenty years was to
revolutionise the world’s understanding of money and finance was
astonished. Furness’ book, he wrote, “has brought us into contact
with a people whose ideas on currency are probably more truly
philosophical than those of any other country. Modern practice in
regard to gold reserves has a good deal to learn from the more
logical practices of the island of Yap.”8 Why it was that the greatest
economist of the twentieth century believed the monetary system of
Yap to hold such important and universal lessons is the subject of
this book.


GREAT MINDS THINK ALIKE


What is money, and where does it come from?

A few years ago, over a drink, I posed these two questions to an
old friend—a successful entrepreneur with a prospering business in
the financial services industry. He responded with a familiar story.
In primitive times, there was no money—just barter. When people
needed something that they didn’t produce themselves, they had to


find someone who had it and was willing to swap it for whatever
they did produce. Of course, the problem with this system of barter
exchange is that it was very inefficient. You had to find another
person who had exactly what you wanted, and who in turn wanted
exactly what you had got—and what is more, both at exactly the
same time. So at a certain point, the idea emerged of choosing one
thing to serve as a “medium of exchange.” This thing could in
principle be anything—so long as, by general agreement, it was
universally acceptable as payment. In practice, however, gold and
silver have always been the most common choices, because they are
durable, malleable, portable, and rare. In any case, whatever it was,
this thing was from then on desirable not only for its own sake, but
because it could be used to buy other things and to store up wealth
for the future. This thing, in short, was money—and this is where
money came from.

It’s a simple and powerful story. And as I explained to my friend,
it is a theory of money’s nature and origins with a very ancient and
distinguished pedigree. A version of it can be found in Aristotle’s
Politics, the earliest treatment of the subject in the entire Western
canon.? It is the theory developed by John Locke, the father of
classical political Liberalism, in his Second Treatise of Government.1°
To cap it all, it is the very theory—almost to the letter—advocated
by none other than Adam Smith in his chapter “Of the Origin and
Use of Money” in the foundation text of modern economics, An
Inquiry into the Nature and Causes of the Wealth of Nations:


But when the division of labour first began to take place, this
power of exchanging must frequently have been very much
clogged and embarrassed in its operations ... The butcher has
more meat in his shop than he himself can consume, and the
brewer and the baker would each of them be willing to
purchase a part of it. But they have nothing to offer in
exchange, except the productions of their respective trades, and
the butcher is already provided with all the bread and beer
which he has immediate occasion for ... In order to avoid such
situations, every prudent man in every period of society, after


the first establishment of the division of labour, must naturally
have endeavoured to manage his affairs in such a manner, as to
have at all times by him, besides the peculiar produce of his
own industry, a certain quantity of some one commodity or
other, such as he imagined few other people would be likely to
refuse in exchange for the produce of their industry.1!!


Smith even shared my friend’s agnosticism as to which
commodity would be chosen to serve as money:


Many different commodities, it is probable, were successively
both thought of and employed for this purpose. In the rude
ages of society, cattle are said to have been the most common
instrument of commerce ... Salt is said to be the common
instrument of commerce and exchange in Abyssinia; a species
of shells in some parts of the coast of India; dried cod in
Newfoundland; tobacco in Virginia; sugar in some of our West
India colonies; hides or dressed leather in some other countries;
and there is to this day a village in Scotland where it is not
uncommon, I am told, for a workman to carry nails instead of
money to the baker’s shop or the alehouse.!2


And like my friend, Smith also believed that in general, gold,
silver, and other metals were the most logical choices:


In all countries, however, men seem at last to have been
determined by irresistible reasons to give the preference, for
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