by Felix Martin
8. Alistair Milne, Perry Mehrling, and others have proposed models for systemic risk insurance and premiums to support it that could be levied from banks. See Kotlikoff, 2010, p. 172 ff. for a discussion and references.
9. Kay, J., “Should We Have Narrow Banking?” in Turner et al., 2010, p. 219.
10. Tarullo, 2012a, p. 9.
11. The restriction on banking activities was in practice eroded over time, but it was in 1999 that the Gramm–Leach–Bliley Financial Services Modernization Act revoked the central provisions of the Glass–Steagall Act. The McFadden Act restriction was repealed by the 1994 Riegle–Neal Interstate Banking and Branching Efficiency Act.
12. Having been roughly stable for more than sixty years from the 1930s to the 1990s, the average size of U.S. banks relative to national income tripled in the space of twenty years (see Haldane, 2010, p. 8 and Chart 1). And the biggest beasts of all were the ones that grew the fastest. In 1990, the three largest U.S. banks accounted for only 10 per cent of all banking sector assets. By 2007, they made up 40 per cent (ibid., p. 9 and Chart 2).
13. The Financial Stability Oversight Committee in the U.S., the Financial Policy Committee of the Bank of England in the U.K., and the international Financial Stability Board founded by the G20 in London in April 2009. (The Financial Stability Board was in fact re-founded as a successor institution to the G7’s Financial Stability Forum—see http://www.financialstabilityboard.org/about/history.htm for details.)
14. As Daniel Tarullo, the leading regulatory expert on the Board of Governors of the U.S. Federal Reserve, has put it, “the primary aim” of the Dodd–Frank Act is “a reorientation of financial regulation towards safeguarding ‘financial stability’ through the containment of ‘systemic risk,’ phrases that both recur dozens of times throughout the statute.” Tarullo, 2012b, p. 1.
15. King, M., 2012, p. 5.
16. Buiter, W., “The Unfortunate Uselessness of Most ‘State of the Art’ Academic Monetary Economics,” Willem Buiter’s maverecon, Financial Times website, 3 March 2009. Available at http://blogs.ft.com/maverecon/2009/03/the-unfortunate-uselessness-of-most-state-of-the-art-academic-monetary-economics/#axzz2AgdwP9Yz.
17. Tarullo, 2012b, p. 22.
18. Skidelsky and Skidelsky, 2012.
19. Sandel, 2012.
20. Paul, 2009.
21. King James Bible, Ecclesiastes 9:11.
22. The Oxford English Dictionary defines a euphemism as “[t]hat figure of speech which consists in the substitution of a word or expression of comparatively favourable implication or less unpleasant associations, instead of the harsher or more offensive one that would more precisely designate what is intended.”
23. Full details of Professor Kotlikoff’s proposals can be found in Kotlikoff, 2010.
24. This is only the least adventurous of Shiller’s ideas (GDP-linked bonds have already been issued by several emerging market sovereigns); he has plenty of others. For an overview see Shiller, 2003.
25. The ongoing European sovereign debt crisis has forced the ECB to broaden the spectrum of assets that it accepts as collateral for its liquidity support to its banking sector significantly more than either the U.S. Federal Reserve or the Bank of England have done. A particular stir was caused in 2011, when it was revealed that the ECB had even been lending against securitised Australian automobile loans. It should be noted that in the ECB’s case, acceptance of such assets is as collateral under repo agreements, so that the credit risk that the central bank bears is not strictly speaking that of the financial security in question but of the bank that is taking liquidity support. Likewise, the U.S. Federal Reserve is in principle indemnified against credit losses on its holdings of mortgage debt by the U.S. Treasury. In both cases, in other words, there is in theory no credit support being granted.
26. It would be the world that James Tobin realised that the models of academic finance implied at their logical limit, in which “[t]here would be no room for discrepancies between market and natural rates of return on capital, between market valuation and reproduction cost. There would be no room for monetary policy to affect aggregate demand. The real economy would call the tune for the financial sector, with no feedback in the other direction” (Tobin, 1969, p. 26).
27. Fisher, 1936. The ultimate origins of Fisher’s plan were to be found in a book published in 1926 by the British monetary thinker Frederick Soddy: Soddy, 1926. Soddy’s book would have been dismissed as an instant classic of monetary crankery had it not been for the credibility he had as a winner of the Nobel Prize in Chemistry. Even then, it made little impression on either the public or the official imagination, in part because it was overshadowed by another more popular, but ultimately disappointing, proposal for monetary reform, the Social Credit Movement of Major C.H. Douglas: Douglas, 1924. Soddy’s ideas were taken up by Frank Knight at Chicago, from whom Fisher learned of them.
28. Fisher, 1936, p. 10.
29. Friedman, 1960, and Friedman, 1967.
30. See for example Kay, 2009 and Kay, J., “Should We Have Narrow Banking?” in Turner et al., 2010. Laurence Kotlikoff’s proposal for Limited Purpose Banking likewise effectively includes narrow banking as one of its component parts—see Kotlikoff, 2010, p. 132 ff.
31. Benes and Kumhof, 2012. In order to explore in detail the consequences of the Chicago Plan in the context of a formal model of the U.S. economy, Benes and Kumhof are obliged to go beyond Fisher’s narrow prescription for the reform of banks’ monetary activities and specify a novel structure for the provision of credit services. This is an extremely useful exercise; though it is not necessary—and perhaps, as Kay, J., “Should We Have Narrow Banking?” in Turner et al., 2010, pp. 4–5 argues, not desirable—to prescribe a structure for this non-utility tier of the financial system in advance.
32. Keynes, 1936, p. 372.
Bibliography
In addition to the works cited in the endnotes, there are a number of others which deserve special acknowledgement because their influence pervades the whole of this book.
My own interest in the topic began with reading Charles Goodhart’s article “The Two Concepts of Money: Implications for Optimal Currency Areas” (Goodhart, 1998)—a brilliantly concise and eloquent overview of the two main traditions in Western monetary thought, combined with a prescient warning concerning their implications for the then novel project of the euro.
I read that article in 2002 when I was just beginning a doctorate in monetary economics. My timing turned out to be fortunate because in 2004 three extraordinary books on money, by scholars from three different disciplines, were published. All three were profound influences on the present book.
The first was The Nature of Money by the sociologist Geoffery Ingham (Ingham, 2004) a masterful investigation of the history of money and monetary thought. The Nature of Money opened my eyes—and I am sure those of many other classically trained economists—to many fundamental questions about money that were abandoned by our own discipline over the course of the twentieth century, and still better, supplies historically compelling answers to them.
The second was Money and the Early Greek Mind, by the classicist Richard Seaford (Seaford, 2004), a profound and dazzlingly imaginative book on the origins of money in ancient Greece and the impact of monetisation on philosophy and art, the extensive influence of which on the present book will be obvious to all who know it.
Thankfully, the economists were not completely left behind in this bumper year for monetary thought. The year 2004 also saw the publication Credit and State Theories of Money: the Contributions of Alfred Mitchell Innes, edited by L. Randall Wray—an economist who has long been at the forefront of promoting and popularising more realistic approaches to money in economic analysis (Wray, 2004). This book did a particular service by recovering for contemporary readers two of the most extraordinary articles on the nature of money written in the twentieth century: Alfred Mitc
hell Innes’ “What is Money?” and “The Credit Theory of Money” (Mitchell Innes, 1913 and 1914).
All three of these books are required reading for anyone who wishes to learn more about the topic of the present book.
And 2004 turned out not to be the only great vintage for books on money. In 1977, three further books which were major influences on the present work were published. The first of these was Philip Grierson’s The Origins of Money (Grierson, 1977), where I found for the first time a serious attempt to answer the critical question of what monetary units of account actually are and where, historically speaking, they might have come from.
The second was Herbert Frankel’s Two Philosophies of Money: The Conflict of Trust and Authority (Frankel, 1977)—an inexplicably little-known work which probes the political and social underpinnings of monetary society.
The third, and most famous, was Albert Hirshman’s scintillating essay in the history of economic thought, The Passions and the Interests: Political Arguments for Capitalism Before Its Triumph (Hirshman, 1977).
Two other more recent books that were general influences were the extremely valuable collection of essays edited by John Smithin, What is Money? (Smithin, 2000), and James Buchan’s marvellously evocative literary-historical treatment, Frozen Desire (Buchan, 1997).
Several of these works investigate not only the nature of money today, but the history of money and of monetary thought. There is a vast literature in this area, of course, and many essential and standard works are cited in the notes. Here too, however, I owe special acknowledgement to a number of books: Joseph Schumpeter’s great, unfinished History of Economic Analysis (Schumpeter, 1954); Charles Kindleberger’s Manias, Panics, and Crashes (Kindleberger, 1978) and his Financial History of Western Europe (Kindleberger, 1993); Thomas Sargent and François Velde’s The Big Problem of Small Change (Sargent and Velde, 2002); James Macdonald’s A Free Nation Deep in Debt: The Financial Roots of Democracy (Macdonald, 2006); and Antoin Murphy’s books John Law: Economic Theorist and Policy-Maker (Murphy, 1997) and The Genesis of Macroeconomics: New Ideas from Sir William Petty to Henry Thornton (Murphy, 2009).
From the literature on comparative monetary systems, two modern books in particular were crucial in my education. The first of these is the political scientist David Woodruff’s brilliantly imaginative study Money Unmade: Barter and the Fate of Russian Capitalism (Woodruff, 1999). The second is the essay collection The Vanishing Rouble: Barter Networks and Non-Monetary Transactions in Post-Soviet Societies, (Seabright, 2000). Both these books may at first seem to be simply studies of the disintegration of monetary order during the collapse of the Soviet Union, but both in fact have profound lessons for the understanding of money more generally.
A final thing I have tried to do in the present book is to show why a clear and realistic understanding of money is not just of academic interest, but an important tool for confronting contemporary economic and social challenges. As I was writing, Andrew Jackson, Richard Werner, Tony Greenham, and Josh Ryan-Collins produced a supremely accomplished example of how this could be done in their book Where Does Money Come From? A Guide to the UK Monetary and Banking System (Jackson, Werner, Greenham, and Ryan-Collins, 2012)—essential reading for anyone who wants to understand how modern banking systems work and what could be done to improve them.
That book focuses on the U.K. banking system (though its relevance is much broader). For American readers, and anyone interested in particular in how “high finance”—the global, wholesale capital markets—works, then Perry Mehrling’s The New Lombard Street: How the Fed Became the Dealer of Last Resort (Mehrling, 2011) is an exceptional treatment by a distinguished economist who truly understands not only the workings of today’s financial markets, but also the developments both in financial practice and theory that made them. It was a fundamental influence on the present book.
Finally, two significant books on money were published in the U.K. when I was already in the midst of writing, with the unfortunate result that I was not able to absorb and make reference to them as I would in retrospect have liked. These are Philip Coggan’s Paper Promises: Money, Debt, and the New World Order (Coggan, 2011) and David Graeber’s Debt: The First 5,000 Years (Graeber, 2011).
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