Money: The True Story of a Made-Up Thing
A History of Money by Jacob Goldstein (with a lot of monetary policy commentary!)
I’m on vacation this week and using the time off to catch up on reading I’ve been meaning to do for a while. Over the last few days, I read Money: The True Story of a Made-Up Thing by Jacob Goldstein. Despite having read a substantial amount of economic history over the years, I still found that I learned quite a bit from Goldstein’s illuminating, entertaining, and insightful exposition of the origins and history of money. I’m going to try something a little different today and discuss a few passages I found especially perceptive:
For modern money to work - to have banks, and a stock market, and a central bank - there needs to be tension. Investors and bankers and activists and government officials all need to be arguing over who gets to do what, and when.
This was a thoughtful take which hadn’t occurred to me in the past, but an overview of economic history shows this makes a lot of sense. In cases when an absolute monarchy (i.e. France in the 18th century) has had complete control over currency, the temptation is too great to manipulate it for its own ends, and that usually doesn’t lead to intelligent monetary policy. Sure, our current system is a a bit of a kludge, but the combination of the Federal Reserve, Congressional oversight, the White House’s nominations (and bully pulpit, when used effectively), and organizations like Employ America combine for a system that more or less works effectively (1). One example that I struggle to reconcile with this view on tension is an authoritarian state like China, but even in China you have tension between businesses, the PBOC, and the CCP leadership, though I won’t profess to know much about the details there.
Roosevelt recognized that there was nothing natural about the gold standard; it was as artificial as any other monetary arrangement. The gold standard was a choice people had made - even if they didn’t recognize it as a choice. Roosevelt’s great genius was simply to say: we can choose something else.
I thought this was spot-on: the gold standard is not a scientific, “sound”, and rigorous method of assigning value to currency - rather it is as arbitrary as any other system, actually more so than our current floating currency. At least with our current system, the Federal Reserve aims to control inflation and deflation with the aim of (hopefully) keeping the economy growing and strong, while with the gold standard, we had a system where the value of money was determined by something as a random as an arbitrary quantity of gold. (That’s just one of the many problems with the gold standard, and Goldstein does a good job of thoroughly debunking any myths in favor of the gold standard)
The way we do money will look as strange to our great-great-grandchildren as a world where banks print their own paper money with pictures of Santa Claus.
Goldstein spends a decent amount of time describing the history of the United States monetary system, and the main takeaway is that until the creation of the Federal Reserve in the 1910’s, the system was total chaos. State and local banks would all create their own currencies, and in effect have their own monetary policy regimes, and this made doing interstate commerce especially challenging. To be fair, there were ways in which this was beneficial; the economy in Texas is likely in different shape than the economy in New York and contrasting monetary regimes might be beneficial for different regions. However, the lack of any coordination or organization to the system led to frequent banking crises, counterfeit issues, and mini economic depressions. This is all to say that the monetary system in our country and the world has evolved significantly over a short amount of time, and I’m curious if you all have any views on how it will evolve going forward.
I would highly recommend this book, and would love to discuss it with any of you.
Notes:
(1) One of President Trump’s largest success stories is in monetary policy. Jay Powell was a great nominee for Fed Chair and has been a great leader for the economy during the current crisis. Even before COVID, Trump had used his bully pulpit to (successfully) argue for looser monetary policy, which in my opinion, has directly contributed to the sub-4% unemployment we saw prior to COVID. If Joe Biden is elected, I would encourage him to learn this lesson from Trump and work with Congress and external associations like Employ America to continue to push for intelligent, expansionary monetary policy.