Money As 'Social Technology'

Money has fascinated as well as bewitched mankind for centuries. How was it born? How did it become popular? Many books have been written on the history of money. Here is another book with an interesting hypothesis about how money came into being and what constitutes money.

My review of the book was carried by Business Standard today (http://goo.gl/k6QZ8l):

Mankind felt a compelling need to give it physical shape, even though it resides mostly in the head. It's universally coveted, yet it is willingly and freely exchanged. Meet this unique commodity called "money", which is probably mankind's most remarkable - and paradoxical - innovation to date. Stripped of its basic functions and viewed from different vantage points, it has provided grist for every philosopher's mill - explanations for the entire spectrum of human frailties. Money, in short, is intriguing yet simple, notional yet real.

No wonder, then, that it has inspired numerous writers across generations. Here's an easy exercise: go to amazon.com and type in "money" in the search bar. You will see the number of books that pop up, including some in the fiction genre (sample Money: A Suicide Note by Martin Amis, a part of the London Trilogy). Some of the books written about the history of money have remained outstanding works on the subject. John Kenneth Galbraith's Money: Whence it Came, Where it Went was less known than some of his other books, but it was as much a pleasure to read. A more recent book is Niall Ferguson's The Ascent of Money, which has won some acclaim but has also generated heated debate, especially since the book's unabashed and ill-timed hymn to capitalism was rudely overtaken by the global financial crisis.

Along comes another book that purports to tell the truth about the origins of money and the peculiar mechanics that make it tick. It also goes boldly where no book has gone before; it claims that the popular belief that societies have used a system of barter is built upon an elaborate myth. Different societies, at different times, have used several versions of what they considered money - sea shells, large circular stones, leather tablets, pebbles, coins and, with the advent of the printing press, paper money. But the author's contention is that money is not just a medium of exchange or solely a repository of value. At its heart, it's a system of credit and debit that allows people to trade and deal with each other. Money, it seems, is the best credit rating for any economic agent. Money also helped ancient societies unhook themselves from the hierarchical yoke of social burdens.

The author buttresses his hypothesis by citing Ireland's example. In the 1970s, all banks in that country had to be closed for seven months owing to a labour dispute. This forced everyday commerce and trade to depend on cheques (which couldn't be banked) and IOUs, which rapidly assumed the form of an alternative currency. Trust and a personal assessment of risk lubricated dealings in this new arrangement. The author contends that this is nothing but money, because even though the centralised monetary system had broken down, housewives still bought milk and bread, publicans continued plying regulars with their pints, and the small businessman managed to buy his raw materials. At work was the credit and debit that each person maintained against another in the economy, which was tradeable and hence eligible to be called money.

Therefore, apart from facilitating commerce, money also organises society and creates some sort of social order and cohesion. This, then, debunks another important and prevailing concept about money: only sovereigns can issue money. So, if we stay on with the Irish example, the author contends that even though the banks - the main purveyors of currency in any economy - were shut for seven months, the economy didn't come to a standstill. An alternative system sprung up all the same. He concludes that money is nothing but a "social technology".

The author, a scholar of classics and economics, has managed to provide a grand sweep of history and sociology to present his views on money. This book is, therefore, less of a biography and more of a well-strung and interesting necklace of ideas, hypotheses and theories. And we wish he had not walked into the same trap as some of his predecessors (including Galbraith): they often ended their books with a homily or a home-grown theory about the future, especially about the conduct of monetary policy. His contention is that the system of tradeable credits - since it is just one step away from speculation - is bound to lead to a succession of financial crises. His prescriptions for greater state support and narrower banking practices are inherently impractical and unlikely to find popular support.

MONEY: THE UNAUTHORISED BIOGRAPHY

Felix Martin

Bodley Head (a Random House imprint)

327 pages; £14

The Great Indian Rupee Trick - Redux

A lot has already been written about why the Indian rupee has gone into a free-fall. Some of it is utter nonsense, such as stuff which claims rupee should actually be appreciating instead of depreciating. But, otherwise, the narrative has mostly been sane and restricted to the straight and narrow.

What, however, does not get written is Indian government's strategic intent, or the lack of it. Most analyses tend to paint the Indian government as a hapless bystander, hit athwart and stunned by debilitating global financial flows. The fact is this: the portends were strewn in the four winds many moons ago. But, our policy makers were busy frying other fish.

Authorities have been blaming "global conditions" for the rupee volatility. This is an euphemism for Federal Reserve Bank's loud thinking about ending its accommodative monetary policy, or now known as "tapering" in the international bond markets. In essence, it implies the Fed is thinking aloud about when to start reducing (or tapering off) its $85-billion-a-month bond buying programme. 

Arguably, if this does materialise (as some are convinced that it might in September or October), then interest rates in the USA are bound to rise from their current near-zero levels. Plus, that would also imply an improvement in the US economic prospects, because the Fed has categorically stated that it would "taper" only if unemployment rates fall and inflation bumps up.

Now, given all the problems with the Indian economy -- widening current account deficit, slowing economic growth, stubbornly high consumer inflation, stagnant industrial production, a spike in short term foreign debt, growing reliance on populist measures, corruption scandals and impending elections -- the US bond market definitely looked more interesting. Therefore, as soon as news started filtering in about "tapering", investors dumped Indian stocks and bonds and rushed to get back into dollar assets, such US treasury bonds.

This rush to sell Indian assets, take the rupees and exchange them for dollars, created a spike in demand for dollars, leading to the rupee's fall. As the rupee started to fall, more investors started getting out because staying on would mean a further erosion of yields. This self-perpetuating crisis was fed a bit of fuel by emergency measures implemented by Reserve Bank of India.

One leg of the strategy should have been to encourage flow of foreign direct investment which is typically sustainable and long term in nature. But they made a complete mess of it.

But the point here is that the Fed has been talking about "tapering" for quite some time. Sample Fed chairman Ben Bernanke's testimony to the joint economic committee of the US Congress on May 22: "At its most recent meeting, the Committee made clear that it is prepared to increase or reduce the pace of its asset purchases to ensure that the stance of monetary policy remains appropriate as the outlook for the labor market or inflation changes." (read it here)

On the same day, the Fed released the minutes of the meeting of the Federal Open Markets Committee (the round table of Fed knights that sets the interest rate) held on April 30 and May 1. This is the paragraph that showed up on investors' radars with a loud bleep: "Participants also touched on the conditions under which it might be appropriate to change the pace of asset purchases. Most observed that the outlook for the labor market had shown progress since the program was started in September...A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome. One participant preferred to begin decreasing the rate of purchases immediately..." (read the full text of the minutes here)

Fed chairman Bernanke testimony to the US House of Representatives on July 17 had similar strains (read it here). Please note: he never once mentioned that the Fed had decided to withdraw the accommodative measures, leave alone finalising a date to begin the tapering off. He only reiterated that the economy was doing well, there was still some distance left to cover, that the expansionary strategy would continue even after Fed began  "tapering off" and so on.

In addition, many Fed governors had been debating the same point -- about the appropriate timing of the Fed's "exit strategy" -- in their various speeches for months. 

It is, therefore, surprising that while the whole wide world, its grandmother and all the portfolio investors could feel their antennae tingling, the Indian government and its various policy-making arms were oblivious to these developments. There was no counter-strategy, no emergency measures. Nothing.

Forget the past six months. Ever since Fed launched its expansionary monetary policy and flooded the global markets with excess liquidity, it was well known that this money would flow back as soon as there were hints of increases in US bond yields. And, yet they dithered. 

A columnist in Washington Post also said:  "The Fed has telegraphed the tapering and eventual end of its QE policies with with increasing specificity for months now, so you would expect, in a perfectly rational world, for currency and bond markets to have long ago priced in plans of Bernanke & Co. The wild thing about the most recent bout of market volatility in the last few weeks is there's been no earth-shattering news about the prospects for the Fed tapering and then ending its bond purchases. Both US economic data and comments out of senior officials have been broadly consistent with where they were a month ago." (read the column here).

There's only option left now: pray.