1. Mirror of the Times

There’s old money; then there’s new money. Old money is the stuff of storied Mayflower descendants in the Hamptons or hyphenated names and titles in London’s South Kensington. New money is the arriviste stuff brandished by Russian oligarchs who buy Chealski football club, and hedge fund managers with a taste for modern art works called The Physical Impossibility of Death in the Mind of Someone Living.

There’s hard money, there’s fiat money, and there’s debt. Gold, greenbacks, dollars, pounds, euros, loonies (Canadian dollars), aussies (Australian dollars), kiwis (New Zealand dollars), Chinese renminbi, Indian rupees, Russian roubles, Brazilian reals, South African rands, Kuwati dinars, Saudi riyals, and the Zambian kwatcha. In the film Other People’s Money, Lawrence Garfield, aka Larry the Liquidator, played by Danny de Vito, tells his lawyer that everyone calls it “money” because everybody loves “money.”

In truth, money exists only in the mind. It is a matter of trust. With trust, comes the possibility of betrayal. The late Michael Jackson understood money’s essence, urging people to lie, spy, kill, or die for it.¹

Some Kinda Money

There are different sorts of money. Most of the participants at the Portfolio Management Workshop run by a prestigious business school were in their late 20s or early 30s, already managing other people’s money. One man did not fit the typical attendee profile. Almost 80 years old—tall, straight-backed, and gaunt—he was there to learn to manage his own money better. He told an interesting story about gold.

He was a boy when the great earthquake struck San Francisco at 5:12 a.m. on Wednesday, April 18, 1906, one of the worst natural disasters in U.S. history. The man and his family survived the earthquake and subsequent fire, managing to get out of the destroyed city by boat. His father paid the boatman, who would not accept money, in gold, secreted away for emergencies. Gold, the sweat of the god as the Incas called it, is hard money. It is the only money when chaos ensues.

In the 1970s many Indians emigrated in search of a better life. Indian foreign exchange controls prevented legal conversion of worthless Indian rupees into real money—American dollars or British pound sterling. Emigrants resorted to Hawala or Hundi—an informal money transfer system.

You needed an introduction to a money broker. You paid him your rupees. In return you received a small chit of paper on which were scrawled a few words in Urdu, a language spoken mainly in Pakistan and India. This chit had to be presented to another money broker outside India to receive the agreed amount of dollars. There was no guarantee that you would receive the promised dollars. It was a pure leap of faith. Hawala is paper money, based entirely on trust and honor.

In July 2008, a bank in Zimbabwe cashed a check for $1,072,418,003,000,000 (one quadrillion, seventy-two trillion, four hundred eighteen billion, three million Zimbabwe dollars). In the 28 years since independence, Zimbabwe, the former colony of Rhodesia, progressed from one of Africa’s richest states into an economic basket case. The government’s answer to economic collapse was to print money until the Zimbabwe dollar became worthless. This is mad money—paper money made valueless through inflation and its extreme mutation hyperinflation.

Inflation in Zimbabwe was 516 quintillion percent (516 followed by 18 zeros). Prices doubled every 1.3 days. The record for hyperinflation is Hungary where in 1946 monthly inflation reached 12,950,000,000,000,000 percent—prices doubled every 15.6 hours. In 1923, Weimar Germany experienced inflation of 29,525 percent a month, with prices doubling every 3.7 days. People burned Marks for heat in the cold Northern German winter. It was cheaper than firewood. The butter standard was a more reliable form of value than the Mark. The German government took over newspaper presses to print money, such was the demand for bank notes. The abiding image of the Weimar Republic remains of ordinary Germans in search of food pushing wheelbarrows filled with wads of worthless money.

To avoid calculators from being overwhelmed, Gideon Gono, the governor of Zimbabwe’s central bank who despised bookish economics, lopped 10 zeros off the currency in August 2008. It did not restore the value of the Zimbabwe dollar but made it easier to carry money.

You receive a letter, a fax, or an email. The letter is from the wife of a deposed African or Asian leader, a terminally ill wealthy person, a business being audited by the government, a disgruntled worker, or corrupt government official who has embezzled funds. He or she is in possession of a large amount of money—in the millions—but cannot access the money. You will receive 40 percent if you can help retrieve the money or deal with it according to the owner’s instructions. You just need to send a little money.

It’s a scam. Any money you send is lost. This is bad money. Scammers are known as Yahoo millionaires. “Ego” or “pepper” is money. To be fooled in a scam is to “fall mugu.” “Dolla chop” refers to the receipt of money from a victim.

Money is pure trust and faith. Money itself can have value—gold. It can have no intrinsic value—paper. Money can be easily debased. It can corrupt and, in turn, be corrupted.

Trading Places

In trade, two parties willingly exchange goods and services. The economist Adam Smith observed that people have an intrinsic “propensity to truck, barter, and exchange one thing for another.”² Trade originally involved barter, the direct exchange of goods and services. If you have two items to trade, then you agree a rate of exchange—for example, five of this is worth one of that. If you have 100 items, then traders would have to remember 4,950 exchange ratios. For the 10,000 different items that a supermarket may stock, you need to remember 49,995,000 exchange ratios.

In the eighteenth century the French opera singer, Mademoiselle Zelie, performed in French Polynesia during her world tour, receiving one-third of the box office—3 pigs, 23 turkeys, 44 chickens, 5,000 coconuts, and considerable amounts of fruit. Unable to consume the payment, Mademoiselle Zelie’s fee equivalent to 4,000 francs—a considerable sum at the time—was wasted.³ When naturalist A.R. Wallace was exploring the Malay Archipelago, he planned to obtain food through barter. But he found that the indigenous people did not want the commodities he brought. Wallace nearly starved as his and the Malays’ needs rarely coincided.⁴

The problems of barter are overcome where traders negotiate through a medium of exchange—money. Money allows separation of buying and selling in the process of exchange. Any traveler in the Malay Archipelago today carrying cash or an American Express or Visa card is unlikely to suffer the indignities and privations of Wallace.

Barter still exists. During the Cold War era, communist economies bartered for essential goods. The UK exchanged Russian grain for Rolls Royce jet engines that were used to power Soviet MiG fighters in the Korean conflict. “Returned with interest,” Glynn Davies, a monetary historian, grimly noted. In 2010, North Korea’s cash-strapped totalitarian regime, through its Bureau 39, offered several tons of ginseng, a curly white root claimed to improve memory, stamina, and libido, to settle $10 million in accumulated debt owed to the Czech Republic.⁵

The Invention of Money

Money is universally accepted as payment, a claim on other things—food, drink, clothing, operatic arias, travel, knowledge, or sex. It is a medium of exchange, a measure of the market value of real goods and services, a standard unit of value, and a store of wealth that can be saved and retrieved in the safe knowledge that it will be exchangeable into real things when retrieved.

Commodity money is anything that is simultaneously money but is a desired tradable commodity in its own right—money that is good enough to eat. Humans have experimented with dried fish, almonds, corn, coconuts, tea, and rice.⁶

The ancient Aztec cultures used cacao. The large green-yellow pods of the cacao tree produce a white pulp that, when dried, roasted, and ground, becomes chocolate. Some European pirates seized a ship full of cacao beans—a true El Dorado worth more than galleons filled with gold doubloons. Unaware of the value of the cargo and mistaking it for rabbit dung, the pirates dumped the cacao into the ocean.⁷

Commodities have intrinsic value and their supply cannot be changed easily. But restrictions on the availability of a commodity can artificially limit the amount of money, in turn limiting the volume of activity and trade. If water were used as a form of commodity money, then hoarding it to preserve wealth would reduce the amount available. People might die of thirst, but they would die rich. Commodities are also difficult to store, so inhibiting the capacity to amass and store wealth.

In economic chaos, war or collapse, commodity money reappears. In post-Saddam Iraq, mobile phone credit became a popular quasi-currency, rivaling banks and the Hawala system. Prostitutes asked for payment by way of mobile phone airtime credits, leading to the nickname scratch-card concubines. Even kidnappers asked for ransoms to be paid in the form of high-value phone cards.

Over time, more permanent forms of money have developed—massive stone tablets, animal skins and fur, whale teeth, and shells, especially the cowrie shell (the ovoid shell of a mollusk commonly found in the Indian and Pacific Ocean). Ultimately commodity money focused on precious metals, gold and (to a lesser extent) silver, until superseded by paper.

Fiat or paper money is the promise by the government or state to pay you whatever it says on the paper—usually in the form of more paper. It relies on acceptance—the trust of everyone to exchange often dog-eared and toxic notes into real things. Where gold relies on a deep-rooted mythology, paper money relies on a system of trust and faith as well as the sanctity and integrity of the underlying legal system.

Credit money—the last form of money—is a future claim against someone that can be exchanged for real goods and services. The person lending money trusts the borrower to repay the money lent at the agreed time in the future.

British economist John Maynard Keynes once gave his friend Duncan Grant, the artist, money as a birthday gift. Grant was enraged: “The thing is good as a means and absolutely unimportant in itself.” Keynes thought of money as “a mere intermediary without significance in itself which flows from one to another is received and dispensed and disappears when its work is done.”⁸

Barbarous Relic

Gold—chemical symbol Au and atomic number 79—is a dense, malleable, and highly ductile lustrous metal that does not rust in air or water, making it useful in dentistry and electronics. Gold has qualities desirable in money—it is rare, durable, divisible, fungible (each unit is exactly identical and equivalent to other units of gold), easy to identify, and easily transported and possesses a high value-to-weight ratio. The gold standard was the basis of money for substantially all of human economic history.

Gold bullion is stored in ultra secure vaults, such as Fort Knox and the Bank of England. The gold is in 400 troy ounce bars—each bar weighs about 28 pounds (11 kilograms). At a price of $1,200/ounce, each bar is worth around $480,000. The bars have an assay mark recording the quantity and quality of the gold and the mint at which it was produced.

The bullion is stored in sealed lockers. At an appointed time, burly men dressed in drab gray uniforms move bars of gold from one numbered locker to another, settling purchases and sales. This movement of gold bullion over a short distance once signaled major changes in the fortunes and wealth of countries and kings.

In all human history, only about 161,000 tons of gold have been extracted, equivalent to about two Olympic standard swimming pools. Gold’s monetary role confers extraordinary riches on those who control it and was once the key to wealth and economic dominance.

In the 1890s, the issue of gold became central to the U.S. presidential campaign of William Jennings Bryan. Southern farmers in the United States borrowed from north-eastern bankers to finance their farms, equipment, and crops. The debt had to be repaid in gold. As gold prices rose and the price of farm produce fell, the farmers’ earnings fell, and their debt repayments grew, fueling resentment. The farmers wanted more money in circulation and advocated silver as well as gold currency—known as bimetallism.

At the 1896 Democratic Convention, Bryan spoke passionately: “You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”⁹ Bryan was defeated in the 1896 and 1900 election by William McKinley and the United States adopted the gold standard in 1900.

The bimetallism debate spawned Frank Baum’s satire on the currency debate, the Wizard of Oz (actually the Wizard of Ounce—of gold). Dorothy, the Kansas farm girl, represented rural America. The Scarecrow, Tinman, and cowardly Lion represented farmers, factory workers, and Bryan respectively. Dorothy and her companions’ journey down the golden road is the 1894 Coxey march of unemployed men (named after its leader Jacob Coxey) to secure another public issue of $500 million of paper money and to obtain employment. Baum’s plot has Dorothy and her companions exposing the fraud of evil wizards and witches, representing bankers and politicians, and establishing a new monetary order based on gold and silver. Dorothy returns to Kansas City courtesy of her magic silver slippers. In the film, Dorothy’s slippers are red rather than silver, a concession to Hollywood cinematography.¹⁰

In Ian Fleming’s 1959 novel Goldfinger, James Bond, Agent 007, is sent to investigate Auric Goldfinger, the mysterious Swiss financier who is smuggling gold. Goldfinger’s plot is to boost the value of his gold through an audacious attack on the Fort Knox gold depositary. Goldfinger plans to contaminate the gold by exploding a nuclear device—a dirty bomb. Goldfinger’s own stock of uncontaminated gold would increase in value astronomically. Bond discerns the plot through dazzling mental arithmetic—Fort Knox’s $15 billion dollars of gold equated to more than 400 million ounces, which would weigh over 12,000 tons, making it difficult to carry off.

Thirst for gold fueled war and conquest. The Spanish, who followed Columbus, took approximately half a century to strip the major treasures of gold and silver accumulated by the indigenous people of South and Central America. In the process, the Spanish enslaved and virtually wiped out the native population until they literally ran out of things to loot. Today, armed groups fight for control of gold mines in the Democratic Republic of Congo to purchase weapons and finance wars. As the more easily accessible rich deposits of gold have been exhausted, mining gold in more remote, inhospitable, and fragile environments leads to irreversible damage.

Gold’s mythological power has fueled the imagination of mankind for much of its history. Financial historian Peter Bernstein wrote: “Gold has...this kind of magic. But it’s never been clear if we have gold—or gold has us.”¹¹

In India, gold is the ultimate store of wealth that can be pawned or used as security to raise money quickly. A child’s baptism or eating of its first solid food, usually rice, requires offerings of gold. Marriage traditions require a dowry of treasure—heavy necklaces, ornate bangles, dangling earrings, jewel-encrusted rings, delicate headpieces, and saris woven with gold thread. For Indian women, gold may be the only real property they own—their only nest egg.

Although few believe in its once assumed magical properties, the attachment to gold has persisted into the twenty-first century. In Goldfinger, Colonel Smithers explained the monetary role of gold: “Gold and currencies backed by gold are the foundation of international credit.... We can only tell what the true strength of the pound is...by knowing the amount of [gold] we have behind our currency.”¹² As the global financial crisis consumed the world in 2007 and 2008, individuals purchased 150 tons of gold in the form of coins. Investors poured money into special funds that bought up 1,000 tons of gold. Gold prices increased from around $800 per troy ounce in December 2007 to more than $1,400 per ounce by early 2011.

Harry “Rabbit” Angstrom, the central character in John Updike’s 1970s novels about American suburban life, spent $11,000 on the purchase of 30 gold krugerrands (a South African minted gold coin). Rabbit explained the purchase to his wife: “The beauty of gold is, it loves bad news.”¹³ John Maynard Keynes famously described gold as “a barbarous relic.”

The Real Thing

Adam Smith captured the essence of paper (or fiat) money—the promise that it can be exchanged into real goods and services:

When the people of any particular country has such confidence in the fortune, probity, and prudence of a particular banker, as to believe he is always ready to pay upon demand such of his promissory notes as are likely to be at any time presented to him; those notes come to have the same currency as gold and silver money, from the confidence that such money can at any time be had for them.¹⁴

Paper money is now the dominant currency, and the dollar is the dominant form of paper money. The word derives from a large silver coin worth three German Marks—taler. American economist John Kenneth Galbraith observed that: “If the history of commercial banking belongs to the Italians and of central banking to the British, that of paper money issued by a government belongs indubitably to the American.”¹⁵

The U.S. dollar is sometimes referred to as the greenback, a reference to the green-inked backs of one of the first currencies authorized by the Legal Tender Act of 1862 during the U.S. Civil War. Greenbacks were not convertible into anything but constituted legal tender, that is, a creditor could not legally refuse to accept them as payment for any debt.

The current dollar, introduced in 1914, is three-quarters cotton and one-quarter linen. Approximately half the bills are one dollar denominations. The average life span of a bill varies—a $1 note lasts a mere 18 months whereas a $100 bill can last several years. Each bill is designed to be folded 4,000 times before it tears. Four hundred and ninety $1 bills weigh 1 pound (454 grams). One million dollars in $1 bills would weigh more than one ton. One trillion dollars in $1 bills would weigh one million tons.

Less than 8 percent of all dollars are in the form of paper money or coins. The vast majority of dollars exists in the form of entries in the accounts of borrowers or lenders. Paper money is an abstraction or, as most of it does not exist physically, the abstraction of an abstraction. Its sole reason for existence is as a medium of exchange. There are no limits to the amount of money that can be created.

Paper money can be easily damaged or destroyed. There is counterfeit money—a fake imitation of real money passed off as the real article. The real problems with paper money are subtler. As Baron Rothschild once boasted: “Give me control over a nation’s currency and I care not who makes its laws.”

In 1716 John Law, a self-taught banker, inveterate gambler, and convicted murderer, established the Compagnie d’Occident (the Mississippi Company) to exploit the wealth of Louisiana, then a French colony. In his pamphlet Money and Trade Considered with a Proposal for Supplying the Nation with Money, Law advocated using paper money to create wealth.

Law’s Banque General printed money by lending large sums to investors to purchase shares of the Mississippi Company, so driving the price higher. The vast quantities of paper money were supposedly guaranteed by reserves of gold coin. Law, now the duc d’Arkansas, actually issued paper money equal to over twice the gold available in the country. He was using the two companies to create vast fictitious profits for both. The pyramid scheme, where investors in the Mississippi Company received profits from subsequent investors, eventually collapsed. Today, governments have a monopoly in printing money.

Fear of reduction in the value of paper money meant that it was backed by gold for much of its history. The strange thing is that gold has almost no value as a commodity and is not itself a great store of value.

In 2009, gold bugs excitedly speculated about gold prices reaching $2,300. Even at that price gold would merely match its January 1980 value, after adjusting for inflation. The holder had earned nothing on the investment over almost 30 years! The gold price in 2010 adjusted for inflation was the same as the price in 1265. Dylan Grice of Société Générale summed up the case for gold as a store of value:

A fifteenth-century gold bug who’d stored all his wealth in bullion, bequeathed it to his children and required them to do the same would be more than a little miffed when gazing down from his celestial place of rest to see the real wealth of his lineage decline by nearly 90 percent over the next 500 years.¹⁶

The Hotel New Hampshire

The Hotel New Hampshire, written by John Irving, the author of The World According to GARP, is populated with unlikely characters—Egg, Win, Iowa, Bitty Tuck, a Viennese Jew named Freud, and Sorrow, a dog repeatedly restored through taxidermy. In July 1944, a similarly dysfunctional group of politicians, economists, and bankers gathered in Bretton Woods, New Hampshire, at the Mount Washington Hotel, to establish the post-Second World War international monetary and financial order. The pivotal figures were John Maynard Keynes, representing the UK, and Harry Dexter White, representing the United States.

Selected as one of Time’s 100 most influential figures of the twentieth century, John Maynard Keynes was the author of General Theory of Employment, Interest, and Money and one of the fathers of modern macroeconomics. A product of the English elite and a member of the Bloomsbury group, Keynes was equally at home among academics, politicians, businessmen, bankers, philosophers, and artists. An incorrigible pamphleteer and prolific author, he influenced public policy in a manner that has rarely been surpassed. Keynes was also a successful investor. Managing the endowment fund of King’s College, Cambridge, he outperformed the stock market over two decades, increasing the value of the portfolio by around ten times. A study concluded that: “On the basis of modern portfolio evaluation measures...Keynes was an outstanding portfolio manager ‘beating the market’ by a large margin.”¹⁷

Harry Dexter White, a descendant of Jewish Lithuanian Catholic immigrants, was an economist and a senior U.S. Treasury department official. White may have also been a Soviet spy, who passed confidential information about the negotiations to the Russians.

Bretton Woods took place against the background of a still raging brutal war, the rise of fascism, and the economic experience of the Great Depression. The focus was on establishing free trade based on convertibility of currencies with stable exchange rates. In the past, this problem was solved through the gold standard where the standard unit of currency was a fixed weight of gold. Under the gold standard, the government or central bank guaranteed to redeem notes upon demand in gold.

The gold standard was not feasible for the post-war economy. There was insufficient gold to meet the demands of growing international trade and investment. The communist Soviet Union, emerging as a rival to the United States in the post-war order, also controlled a sizeable proportion of known gold reserves. Keynes’ bold solution was a world reserve currency (the bancor) administered by a global central bank. White rejected the proposal: “We have been perfectly adamant on that point. We have taken the position of absolutely no.”

The United States was the undisputed preeminent economic and military great power as well as the world’s richest nation and the biggest creditor. The British and the French, devastated by two world wars, needed American money to rebuild their economies. White’s view prevailed.

Bretton Woods established a system of fixed exchange rates where countries would establish parity of their national currencies in terms of gold (the peg). All countries would peg their currencies to the U.S. dollar as the principal reserve currency and, after convertibility was restored, would buy and sell U.S. dollars to keep market exchange rates within plus or minus 1 percent of parity (the band).

The U.S. dollar was to have a fixed relationship to gold ($35 an ounce). The U.S. government would convert dollars into gold at that price. The dollar was as good as gold. It was more attractive because dollars—unlike gold—earned interest. The U.S. dollar reigned supreme as the world’s currency, taking over the role that gold had played in the international financial system.

Barbarism—gold—had triumphed. George Bernard Shaw would have been pleased: “You have to choose between trusting the natural stability of gold and the...honesty and intelligence of the members of the government...I advise you...to vote for gold.”¹⁸ The gold standard would remain in place until 1971.

Collapse

The Bretton Woods system was ultimately undermined by the decline in U.S. power. In 1944, the United States produced half of the world’s manufactured goods and held more than half its reserves ($26 billion in gold reserves out of an estimated total of $40 billion globally). Over time, the burden of the Cold War and being at the center of the global financial system weighed heavily on the United States.

In the 1960s, President Lyndon Johnson’s administration ran large budget deficits to pay for the Vietnam War and its Great Society programs. This created inflation and increased dollar outflows to pay for the expenditures. The dollar became overvalued relative to the German Deutsche Mark and the Japanese yen. Faced with the choice of devaluing the dollar or imposing protectionist measures, President Johnson argued: “The world supply of gold is insufficient to make the present system workable—particularly as the use of the dollar as a reserve currency is essential to create the required international liquidity to sustain world trade and growth.”¹⁹ It was the Triffin dilemma, identified by Belgian-American economist Robert Triffin in the 1960s. As the dollar was the global reserve and trade currency, the United States had to run large trade deficits to meet the world’s demand for foreign exchange.

By the early 1970s, the ratio of gold available to dollars deteriorated from 55 percent to 22 percent. Holders of the dollar lost faith in the ability of the United States to back currency with gold. On August 15, 1971, President Richard Nixon unilaterally closed the gold window, making the dollar inconvertible to gold directly. The Nixon Shock was announced in an address on national television on a Sunday evening. The President risked antagonizing fans of the popular TV program Bonanza to make the announcement before markets opened.

Frantic efforts to develop a new system of international monetary management followed. The Smithsonian Agreement devalued the dollar to $38/ounce, with 2.25 percent trading bands. By 1972, gold was trading at $70.30/ounce. Other countries began abandoning the link between their currency and the dollar. In February 1973, the world moved to the era of floating currencies with no link to dollars or gold. It was the final transformation of money. The last link to something tangible was severed. The greenback was no longer as good as gold. It could not be exchanged into anything except identical notes—itself.

Max Weber, the father of social science, defined the state as the agency that successfully monopolizes the legitimate use of force. Now the state, through its monopoly over the printing presses, controlled money and the economy. Money would be henceforth a matter of pure trust. American dollars still bear the words: “In God We Trust.” But God was not directly responsible for control of money; it was governments and central banks.

In Lewis Carroll’s Alice in Wonderland, Humpty Dumpty observes: “When I use a word it means just what I choose it to mean—neither more nor less.” Alice responds: “The question is whether you can make words mean so many different things.” Unhesitatingly, Humpty Dumpty cuts through to the heart of the issue: “The question is which is to be master—that’s all.”²⁰ Governments could create money, making them undisputed masters. Keynes recognized the risk: “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”²¹

Some found the prospect of governments controlling money disturbing. In his study of the human unconscious, Sigmund Freud noticed a striking association between money and excrement: “I read one day that the gold which the devil gave his victims regularly turned into excrement.”²² Many feared that governments would turn their money into human waste.

Former U.S. Federal Reserve Chairman Alan Greenspan once flirted with this problem:

Under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth.... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit.... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.²³

Money Machines

The word bank has its origins in the word for the table or bench on which bankers did their transactions. Originally, the table or bench may have been an altar. The Templars, a military order of religious knights dedicated to the task of liberating the Holy Lands from the Infidels, can lay claim to being the first truly global financial supermarket.

Modern banking practice began in Italy in the Renaissance. Great banking families in Venice, Florence, Genoa, and Pisa profited from financing growing trade. To avoid religious prohibitions on usury, the banks dealt in bills of exchange—documents, traditionally arising from trade, that order the payment of a known sum of money to a designated person at a specified time and place. Banks bought and sold these documents, effectively lending (buying a bill of exchange with money) and borrowing (selling a bill and receiving money). Bills of exchange overcame the need to transport gold. They were faster and more secure. The bills circulated as an early form of pure money.

Banks allowed idle gold or money to circulate freely. It would be deposited with a bank or used to buy a bill (a debt collectable at a future date with interest). The original holders of $100 still had their money, but the bank and whoever it lent to also had the $100. The money that was lent would come back to the bank or another bank as a deposit. The money could then be re-lent and recirculated in a continuing, endless process.

This process—reserve or fractional banking—is the quintessential element of modern finance. Banks keep only a fraction of their deposits in reserve to meet the needs of withdrawals by depositors and lend out the rest. The practice expands the supply of money, allowing merchants, businesses, and investors to increase the scale and scope of their activities. The only limit is the requirement for banks to keep a minimum fraction of their deposits as reserves.

The banking system that evolved in the Renaissance survives remarkably unchanged to this day. It is the basis of money machines—a financial perpetual motion device. John Kenneth Galbraith summed it up:

The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple that the mind is repelled.²⁴

Not everybody supported these developments. In 1802, Thomas Jefferson in a letter to Albert Gallatin, secretary of the Treasury, warned:

If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.²⁵

Debt Clock

Paper money represents a claim on itself. Debt or credit money is a future claim against a person or entity that can be used today for the purchase of goods. Credit is a world of sweet nothings, mere promises. The word credit is from the Latin credere, to trust. Keynes recognized this aspect of debt: “The importance of money flows from it being a link between the present and the future.”²⁶

Debt enables borrowers to consume in excess of their earnings or available resources. Credit also provides the essential mechanism for making money from money. The lenders charge for the money borrowed, enabling them to become rentiers—people who live from income derived from interest, rent, or gains from trading. The German poet Heinrich Heine understood the significance: “Men can choose whatever place of residence they like; they can live anywhere, without working, from the interest on their bonds, their portable property, and so they gather together and constitute the true power.”²⁷ To Karl Marx, the author of Das Kapital and father of communism, this was another “ism”—parasitism.

Debt introduces new risks. The person on whom your claim is may be unable to pay. If the interest rate on the borrowing is too low, then the lender will lose, as the money received back will be insufficient to compensate for the effects of the rising prices (inflation). But the ultimate risk of debt is subtler still.

Charles Ponzi, an Italian immigrant, created an eponymous fraudulent scheme that paid very high returns to investors—not from actual profits, but from their own money or money paid by subsequent investors. Originally, Ponzi had the idea of arbitraging international reply coupons (IRCs). Postal reply coupons can be sent from one country to a correspondent in a foreign country to be used to pay the postage of a reply. IRCs were priced at the cost of postage in the country of purchase but were eligible for exchange into stamps to cover the cost of postage in the country where redeemed. After the First World War, the fall in the value of the lira decreased the cost of postage in Italy in U.S. dollar terms. This allowed an IRC bought cheaply in Italy to be exchanged for U.S. stamps of a higher value. Ponzi’s company—the Securities Exchange Company—raised money to exploit this difference in prices by offering a 50 percent return on investment in 45 days. About 40,000 people invested $15 million in the scheme.

On July 26, 1920, the Boston Post and Clarence Barron, a financial analyst who published the Barron’s financial paper, revealed that there were only about 27,000 coupons actually circulating, whereas the investments made with the Securities Exchange Company required 160,000,000 postal reply coupons. The U.S. Post Office confirmed that postal reply coupons were not being bought in any great quantity at home or abroad. Ponzi had diverted the investors’ money to support payments to earlier investors and to support his extravagant personal lifestyle. Ponzi was indicted for fraud and ultimately deported. He reportedly said, “I went looking for trouble, and I found it.”

Debt can be a monetized Ponzi or pyramid scheme. To be self-sustaining, the modern monetary system—printing money, reserve banking, and debt—requires a Darwinian scheme in which the only ones who survive are those who can induce others into even greater debt.

Borrowers have to pay interest and ultimately repay the amount borrowed. But the interest and the amount borrowed may not be paid back, therefore requiring more borrowing that continues until the borrower collapses under the weight of debt. The only way out is for borrowers to induce new borrowers into larger amounts of debt to allow them to pay off their own debts. The system works, like any Ponzi scheme, as long as everyone believes the debt can be paid back and the market value of assets bought with that debt keeps rising. The economy inexorably gravitates toward debt-fueled consumerism, inflation, and increasing debt. This leads to a constant cycle of credit booms and bust.

In the second half of the twentieth century, credit money gradually became the primary form of money, leading to an explosion of debt.

In 1947 the directors of the Bulletin of Atomic Scientists at the University of Chicago created the doomsday clock. The minutes to midnight represent the time remaining to catastrophic destruction (midnight) of the human race from global nuclear war. In 1989 Seymour Darst, a New York real estate developer, created the financial equivalent. He installed the national debt clock—a billboard-size digital display on Sixth Avenue (Avenue of the Americas) in Manhattan, New York, that constantly updates to show the current U.S. public debt and each American family’s share of it.

When this clock was originally erected, the U.S. national debt was under $3 trillion. The clock was switched off from 2000 to 2002 when the national debt briefly fell. Subsequently, as the debt started to rise, the clock was restarted. By 2009, the debt exceeded $10 trillion, requiring Douglas Darst, Seymour’s son, to arrange for a new clock with extra capacity.

In the 1950s, Herman Kahn, a strategist at the RAND Corporation, and Ian Harold Brown, a risk analyst, proposed a doomsday machine. It consisted of a computer linked to a stockpile of hydrogen bombs, programmed to detonate them and bathe the planet in nuclear fallout at the signal of an impending nuclear attack from another nation. In Stanley Kubrick’s film Dr Strangelove or: How I Learned to Stop Worrying and Love the Bomb, there is speculation about whether the Russians possess this technology.

Currently, the doomsday clock reads around 5 minutes to midnight. In 2008, as the global financial crisis gripped the world, the financial equivalent of the doomsday machine—an unstable system of money and unsustainable levels of debt—reached midnight and imploded.

Money Is Nothing

At each step of the transition from commodity to paper to credit, money became more unreal, and detached from the real goods and services that money can be exchanged for. Money transformed itself from a mechanism for trade into an object in its own right. Modern technology—digital money—further stripped money of corporeality. Money exists as pure information, with no intrinsic value. It is nothing and everything. Making money, lending it, borrowing money, and making money from money is central to human existence and activity. As the Roman poet Horace noted eons ago: “Make money, money by fair means if you can, if not, by any means money.”

Modern money is inherently worthless, but everybody accepts it as real. Paul Seabright, a professor of economics, identified two traits that underpin systems of trust including money: the capacity to weigh up the costs and benefits of trusting others and the instinct to return favors in kind or seek revenge when trust is betrayed. When it is working well, the system enables strangers to deal with each other safely. When the fragile trust fails, people withdraw their money from banks, and they seek the refuge of cash. Ironically, in times of crisis, people seek paper money that has no intrinsic worth, illustrating the power of the monetary illusion.²⁸

The trust that underlies money sometimes works in reverse—alternative paper money. Irving Fisher, a prominent American economist of the early twentieth century, suggested an alternative currency—stamp scrip—which would be periodically taxed with a stamp, forcing holders to spend rather than hoard it. The idea was based on the Wära, an alternative currency used in Schwanenkirchen, a Bavarian coalmining village, in 1931.

Today, Bavaria has the Chiemgauer, introduced in 2003, which can be used alongside the euro in more than 600 shops and firms. In England, in Lewes, Sussex, the Lewes pound circulates alongside the pound sterling. (One Lewes pound can be exchanged for one pound sterling.) The notes feature Thomas Paine, the eighteenth-century activist reformer, not the Queen. In the United States there are at least 12 local currency schemes. The largest is the Berkshares program in the rural region of southern Massachusetts.

These alternative currencies encourage local business and emphasize community values. They are a gesture of defiance against the control of governments, banks, and global money. At their heart is a quaint but powerful notion of ordinary people supporting each other in a complex and often alien world.

The Mirrored Room

The genius of money made possible the modern economy and the money culture. Georg Simmel, a German sociologist and contemporary of Freud, argued that money imitated the world around it: “There is no more striking symbol...of the world than that of money.”²⁹

Money is the ultimate Faustian bargain—a pact with the devil in return for earthly power, wealth, or knowledge. In the second part of Faust, Johann Wolfgang von Goethe has Faust and Mephistopheles visit the Emperor who lacks the money to pay his retinue of soldiers and servants as well as his lenders. Mephistopheles comes to the aid of the Emperor, obtaining his permission to print paper money. Faust has the Emperor sign a note that anticipates modern money: “To whom it may concern, be by these presents known, this note is legal tender for one thousand crowns and is secured by the immense wealth safely stored underground in our Imperial States.” The Emperor is incredulous: “And people value this the same as honest gold?”³⁰ Mephistopheles arranges for thousands of notes to be printed and uses this to pay off the Emperor’s creditors.

Money, ultimately, is the truest mirror for the times and human beings. The benign surface reflects back the image of the world that money can make possible. Money, like a mirror, is nothing but takes on the reality of things it can be converted into. Money reveals something of the original that is not otherwise evident. As William Shakespeare wrote: “And since you know you cannot see yourself, so well as by reflection, I, your glass, will modestly discover to yourself, that of yourself which you yet know not of.”³¹

In 1966, the artist Lucas Samaras, in his construction Mirrored Room, created the ultimate metaphor for modern money. The work consists of a small room containing one door, a table, and a chair. All surfaces of the room—walls, floor, ceiling, the table, and the chair—are covered with mirrors. Entering the room, the viewer sees their image reflected, fragment by fragment, expanding in number and detail but dwindling in size until it is no longer identifiable. The work is a statement of isolated, narcissistic splendor. Samaras described the feeling as “suspension.” The striking feature of the Mirrored Room is the feeling of infinity and abstraction.³²

If money is a mirror of the times, then Mirrored Room is the ultimate symbol for extreme money. Money now is endless, capable of infinite multiplication and completely unreal. The world is involved in creating, manipulating, and chasing reflections of real things. Finance is the interplay of the real and its endless reflections. In the end, money would change the real world—financialize it.