Money: Whence it came, Where it went (Quotes and comments)

John K. Galbraith

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.”  P.5

Comment: In any research, complexity is used to disguise or evade truth, not to reveal it.

The message from the Americas was not one that brought uniform joy. In Spain the new wealth led also to a bidding up of wages; there wages seem to have keep pace,more or less, with prices. Elsewhere in Europe they lagged far behind, differences in population growth being a possible influence. (P 12)

Not for the last time — and the probably not for the first — inflation had a profound effect on the distribution of income, with a particular tendency to punish most those who had least. The loss of those who receive the lagging wages was in turn the gain of those who paid them and to receive the high and increase in prices. The result was high profits, and the further result was a general quickening of commercial and, in more elementary manifestation, industrial capitalism. Historians have for long talked, often with more grandeur than personal comprehension, of how the American treasure financed, lubricated, stimulated or otherwise enhanced the early development of European capitalism. In one view it was the gold and silver per se that nurtured that capitalism. In fact, it was not the metal but its consequences, and these were not at all mysterious. The high prices and low wages meant high profits. From high profits came high savings and a strong incentive to their investment. additionally the rising prices made it easy to make money, to the natural reward of shrewd trading or efficient manufacture was added the gain, with the passage of time, from the ability to sell the same thing for more. (P. 13)

War, it is well to recall, was an important occupation of the age, with a major claim on public revenue. (Max Weber estimated that in this period about 70 percent of Spanish revenues and around two thirds of the revenues of other European countries were so employe.). P 15

Then, as since, it was uncertain what made a man a monetary expert. P. 36

Comment: It is always uncertain what makes a man an expert. Don’t be intimidated by a so called expert.

By far the most memorable participant in this debate was a London stockbroker of Jewish provenance who, unknown to himself or anyone else, was, by this discussion, launching one of the most famous careers in economic thought. Some would later count him as the greatest of all economists. This was David Ricardo.   P. 37

Comment: When we have ideas about something, we should join the discussion and write them down, we should develop them into a concrete product. It is through discussion that we clarify our thinking. It is through producing a poem, a video, an app that we develop our skills. It is by solving math problems that we become brilliant at thinking. If we let ourselves be suppressed, our seeds of ideas will not grow into great trees.

Few phrases have ever been endowed with such mystery as open market operations, the bank rate, the rediscount rate. This is because economists and bankers have been proud of their access to knowledge that even the most percipient of other citizens believe beyond their intelligence. Open market operations are the sale of securities just mentioned by the central bank which removes the loanable cash or reserves from the commercial or ordinary banks. The bank rate and the rediscount rate are the same; they are what prevent the banks from too painlessly recouping their cash by borrowing from the central bank. This is it.  P 40.

Paper money ... was a substitute for taxation. P. 46

On the whole, older communities are less inclined to monetary experiments than newer ones.  P. 56

Comment: On the whole, older communities are less inclined to any experiments than newer ones. 

The Congress was without direct power of taxation; one of its first acts was to authorize a note. Issue. More states now authorized more notes. It was by these notes that the American Revolution was financed. ... Overwhelmingly the Revolution was paid for with paper money.  P. 59

Thus the United States came into existence on a full tide not of inflation but of hyper-inflation— the kind of inflation that ends only in the money becoming worthless. What is certain, however, is the absence of any alternative.   ...  It was not a thought to which later historians were attracted. As in the case of the colonial paper, the influential historians were men for whom hard money and the gold standard were matters not of economics but of morality. The exigent needs of a new country were secondary to what was right. P. 60

In the accepted, and it must be added, far from inspiring view of the monetary history of the United States, the years after 1832 were deplorable. Free banking, the resulting bank failures, then greenbacks, agitation for more greenbacks and the pressure, partly successful, for the coinage of cheap silver combined with the recurrent panic to make the financial system of the United States, as Andrew Carnegie held, “the worst in the civilized world”.

yet not everything could have been wrong. For those who spoke most despairingly of the monetary aberrations of the United States in the last century spoke always admirably  and sometimes ecstatically of the nation’s economic development. Nothing like it had ever been seen before. One of two things must be true. The monetary arrangements must have some redeeming aspect. Or else they were exceptionally unimportant.

In a more serious and slightly deeper view, the hundred years from 1832 on were ones of basic compromise. There existed, in effect, a dual monetary system. Each of the parts fitted the needs or predilections of the part of the country or economy that is served. Between the parts was an uneasy coexistence interrupted by occasional conflicts. Peace was based, in the main, on the inability of each side to destroy the system favored by the other. On each side this incapacity was the source of much righteous regret.

For the growing financial, trading and creditor community, mostly of the East but as always with the passing decades extending its influence west and south, the arrangement provided a basic hard money – gold and silver. And for this community, first under state, then under Federal regulation, there were increasingly reliable banks …

For the new parts of the country as they open up, there was the right to create banks at will and therewith the notes and deposits that results from their loans. No central bank tested the ability of these banks to redeem their notes; while there were state regulations specifying the cash to be held in reserve against notes and deposits, these were enforced with a light and gracious hand.  …

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste. … Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking. And they explained that the settlers, in their urge to get hold of bank notes and with their primitive view of economics, were confusing money with capital. The men of wisdom missed the point.

The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit could have done. And no naive confusion of capital and money was involved. For the settler the notes he got from the bank were capital, for they got him capital. It is not often that people misjudge their pecuniary interest on a large scale over a long time. ... what is called sound economics is very often what mirrors the needs of the respectably affluent. P. 86

In the United States one important tradition in economics runs less to conservatism than to a comfortable conformity.  ... the desire of numerous Harvard faculty members of much professional distinction to commute from home, wife and issue in an amiable suburb to office, computer and classroom with no disturbance or dismay from controversy, criticism or even unsettling thought. This preference for comfort excludes evidence when it is in conflict with convenience. ... Academic life would not, for certain, be improved if all its participants shared a compulsion to shake or change the world. P. 118

The effect of both corporate concentration and union strength was to make radically more unreliable the adjustments which were assumed to sustain Say’s Law and the full employment equilibrium. P. 221

“Hitler already found how to cure unemployment before Keynes had finished explaining why it occurred.” ... Thus the effect of The General Theory was to legitimize ideas that were in circulation. What had been the aberration of cranks and crackpots became now respectable scholarly discussion. To suggest that there might be oversaving now no longer cost a man his degree or, necessarily, his promotion. That the proper remedy for oversaving was public spending financed by borrowing was henceforth a fit topic for discussion — although it continued to provoke bitter rebuke. ...

Keynes was taken up, in the main, by younger scholars. Economists are economical, among other things, of ideas; most make those of their those of their graduate days do for a lifetime. So change comes not from men and women changing their minds but from the change from one generation to the next. P. 227

The difficulty was that market power and price administration were not a problem of a few firms; they were pervasive in the American economy. So the remedy required a complete restructuring of that economy. … And not many in the New Deal were willing to propose the logical companion step, which was to disintegrate the trade unions.  P. 229