Buck stops where?

So, who’s in charge of money these days?


Money is the engine of our world, writes David McWilliams in Money: A Story of Humanity. Money is trust. To mess with money is to rip the fabric of society and mess with people’s heads. The book is an accessible account of money through historical eras – from notches in bones dated to 18000 BCE, and found in Congo, to Mesopotamian tablets containing forecasts for livestock investment, to coinage-enabled sophistication of ancient Greece. The Roman Empire turned their conquests into credit, and thus began the world’s first private corporations, its first credit crisis, and central bank.

Putting today’s price on tomorrow is another characteristic of money. Interest rates and mortgages are the price put on time, expressed through money. The Sumerians had simple and compound interest, more than 5,000 years ago. The Indian invention and Arab transmission of zero made money digital, made big numbers, precision and empiricism possible for commerce.

After the Dark Ages in Europe, medieval merchants became newly powerful – banking, trading, settling, hustling. Florentine guilds minted their own currency, the florin, breaking the power of the king and the mint. While paper money was invented during the Song dynasty in China, banknotes emerged in 1609 with the Dutch Wisselbank. 17th century Amsterdam was a monetary metropolis, pioneering the stock exchange and modern financial instruments.

Fiat money is the most important innovation since coins, and US is at the centre of this system. Central banks underpin global financial architecture. But are they really in charge, or does finance have its own runaway logic in real life?

Since the time of the Sumerians, there have been two types of money: The first is currency, anchored by something like gold or the guarantee of the state, the second is finance, created by commercial banks and governed by commercial law. Currency makes up about 10% of the money supply, the rest is finance, the energy that can propel or sink economies and societies.

Contrary to the textbook idea that the central bank pushes money into commercial banks, the $12tn secret is that it’s the other way round; money is pulled by large commercial banks through offshore 'Eurodollars’, a parallel capital market that dominates international finance. This is why we have recurrent banking and financial crises – the people in charge are not in charge.

Money is a trippy substance, says the book, pointing to the financial crisis and asset price meltdown of 2008, where leverage distorted prices, easy money and mass delusion gave way to panic and implosion, and deposits fled the banks. After that, central banks tried to refloat the balance sheets with quantitative easing, but commercial banks lent this new money to the already wealthy, creating huge inequality between the owning class and the ‘left behinds’.

Cryptocurrency? On blockchain enabled private currency, the book is sceptical. Its volatility makes it dysfunctional as a means of payment, and it’s not even an asset since it entails no cash flow or legal claim on anything. For now, it fails both as investment and as money.