EAST BOOKS - Making Money

Understanding our currency to get a handle on our economic development.

Nobel Prize-winning economist Paul Samuelson coined a definition that still holds today: “Money, as money and not as a commodity, is desired not for its intrinsic value, but for the things it allows us to buy”. The origins of money and its role in society are described in the book Making Money: Coin, Currency and the Coming of Capitalism by Christine Desan, a Harvard Law School professor who analyses international monetary systems and co-founded the university’s Program on the Study of Capitalism in Cambridge, Massachusetts.

Desan’s book is not for everyone. Anyone expecting an economics book could be disappointed. It is primarily a book on the history of money and its role in history. 

Should every euro in our wallets be considered stored value, which would require a limited offer if one is to avoid hyperinflation, or should we instead think of money as a mere medium of exchange produced in much great quantities?

Today we think that expanding the money supply would have no effect whatsoever on international commerce. The only consequence, according to modern economic doctrine, would be felt by the general consumer price index – and with it inflation. The more the monetary base expands, the greater the risk that prices spin out of control.

Yet Desan reminds us that the opposite problem existed in the Middle Ages: an expansion of the monetary base led to an increase in trade. Likewise, the more the money in circulation was reduced, the greater the contraction of economic exchanges. Therefore, rulers were often forced to re-denominate the currency used in their territories. As Desan puts it, an ancient version of today's quantitative easing (QE) by the Federal Reserve and European Central Bank (ECB).

This practice, however, risks creating speculative bubbles for any given commodity. One such example is the Dutch tulip bubble of 1635 when a single bulb was sold for 2,500 florins – the price of 83 pigs.

Some readers might wonder where the interest lies in a book on money. The reason is fairly straightforward. In our post-subprime world – in the aftermath of Lehman Brothers, the Fed and BCE's QE, the flare-up of the US economic crisis and the subsequent crisis in the eurozone – we need to get a handle on the world we live in.

In 2010, financial expert Mohamed El-Erian, co-founder of PIMCO, one of the largest bond investors in the world, first mentioned the “New Normal”, the post-economic global crisis situation in which we now find ourselves. The current crisis is not a passing one, nor is it the result of an economic cycle: it is the eruption of pre-existing conditions. A global shift in production factors is underway, and who knows how long it might last.

From post-WWII to the present, advanced economies grew based on what turned out to be a successful capitalist model. It brought wealth where there had previously been poverty and allowed many economies – including the BRICS nations (Brazil, Russia, India, China and South Africa) – to prosper. But the current development model cannot be applied in every situation. Factors of production differ from nation to nation and society to society, as do the territories, natural resources and local culture.

To understand how our economy should be allowed to evolve, we must understand the evolution of money. And Desan’s book helps us do precisely that.  


Write a comment for the Article