It’s the culture, stupid

Bill Clinton of course said, It’s the economy, stupid. But this week I heard a fantastic reminder that culture trumps everything. My nephew, who works in Nairobi, came to dinner this week & told a story about when he was developing an app to teach personal finance. His script said: There are two things you can do with your money. You can spend it or you can save it.

The boss took him aside and said, Actually, you know there are three things you can do with your money. You can spend it, you can save it, or you can share it.

Our chastened nephew re-wrote his script.

Which is a good opportunity to big up a terrific book about poor people and their money, . I love this book because it is based on asking poor people about how they use money, and what services they would like. Above all, the answer is secure savings.

[amazon_image id=”0691148198″ link=”true” target=”_blank” size=”medium” ]Portfolios of the Poor: How the World’s Poor Live on $2 a Day[/amazon_image]


Funny Money

I’ve been enjoying what author Dave Birch of Consult Hyperion calls a blook – this year’s reader of his tomorrow’s transactions blog posts. Any regular reader of the blog, or indeed Dave’s book , will know how astoundingly entertaining retail payments and electronic ticketing can be. His historical knowledge is extensive, as is his range of cultural references.

The blook also gathers in one place so many examples of the dimness of the financial services industry, explaining why there is so much fraud around. Why do chip and pin cards still get issued with magnetic stripes on the back – “trivially counterfeitable”? Why do we still need to sign the back? (Dave never signs with his real name – “I don’t want theives who steal my card to have a copy of my real signature to practice with.” It’s also from him that I learned never to sign up for free wifi with my real email address because that just results in more spam. They don’t know my name isn’t Doris Day.)

But above all, it’s very funny. I can’t see the 2015 reader on Amazon yet, , but no doubt it will be there soon. Or there’s always the tomorrow’s transactions blog.

[amazon_image id=”B00K86O66A” link=”true” target=”_blank” size=”medium” ]Identity is the New Money (Perspectives)[/amazon_image]  [amazon_image id=”B00JVXFN4K” link=”true” target=”_blank” size=”medium” ]Tomorrow’s Transactions – the 2014 Reader[/amazon_image]


Policy pickles redux

History repeats itself, with variations; as the famous Reinhart and Rogoff book on sovereign debt crises argues,  – not! I’ve just been reading a fascinating book by Bill Allen on UK macro policy history, . The 1950s were preceded by a period remarkably like today’s context in important ways. The Bank rate – the key policy rate of the period – had been kept at 2% for nearly two decades, to combat the Depression, finance the war, and keep the economy growing in the post-war years. With a new government in 1951, monetary policy was ‘reactivated’.

[amazon_image id=”113738381X” link=”true” target=”_blank” size=”medium” ]Monetary Policy and Financial Repression in Britain, 1951 – 59 (Palgrave Studies in Economic History Series)[/amazon_image]

The author – formerly a senior Bank of England director and now at Cass Business School – argues that the 1950s have highly relevant lessons for today. The Bank’s key rate has been at 0.5% for more than five years and will stay there for some time longer. With short-term government debt outstanding amounting to £342bn at the time he wrote (just over 20% of GDP), “This means that any increase in short-term interest rates would entail an immediate and substantial increase in government expenditure.” Yet, he continues, it is inconceivable that interest rates can stay so low for ever. The only way is up.

What possible paths are there out of this situation? Either higher interest rates will lead to a big increase in the fiscal deficit or (much) more austerity; or nominal GDP will have to rise substantially either via real growth or higher inflation to reduce the fiscal impact of higher interest rates; or banks will have to be forced to bear some of the cost of rising interest rates – as in the 1950s – by a requirement to hold very large non-interest bearing deposits at the Bank of England. The first option is unappealing, the second unlikely given present economic trends. “One fine day there will have to be a new reactivation of monetary policy, and the authorities will have to manage exactly the same problem that faced their predecessors.”

There are of course some very important differences between now and the 1950s, including the fact that the amount of private debt outstanding now is so much greater (141% of GDP vs 16% of GDP in 1951, the much lower liquidity ratios of banks now). Still, the parallels make this history extremely interesting. The bulk of the book consists of a chronological account of monetary policy and description of the techniques used and decisions made over the decade. The final chapters cover four themes: monetary policy tools, financial repression, power and influence, and an overall assessment of the monetary policy chosen.

The power and influence chapter is especially interesting. This was long before Bank of England independence so the Chancellor of the Exchequer took the policy decisions and was in principle answerable to the House of Commons. In practice, secrecy prevailed, and there was almost no communication about policy – quite a contrast to today’s situation of ample, and perhaps even excessive to the point of confusion, communication. The book places the blame for the prevailing secrecy on the dire state of Britain’s financial problems both in the 1930s and again after the war. “Formal post-war default by the UK would have been technically possible but politically poisonous.” Commentators on policy had to apply guesswork to figure out what the Bank of England had already done, never mind what its future actions might be – the book uses archive material to fill in the blanks.

One result was that academic discussions diverged from practice, a damaging divorce. For those who understood the institutional reality of money and those who developed theories about monetary policy on the whole stopped speaking to each other – something we arguably paid the price for in the recent crisis, by which time the non-institutionally grounded theories had reversed themselves into central bank thinking too. (I find the institutional detail explained in this book far more interesting than the abstractions of macroeconomic models, I must say. It brought back to me memories of reading parts of the Radcliffe Committee Report in my undergraduate days, and being intrigued by the practicalities of monetary policy – an interest thoroughly destroyed by subsequent exposure to real business cycle theories and representative agent models.)

My sole criticism of this fascinating account of the reality of a decisive decade in UK monetary history is that it’s priced for institutional libraries (£70); but anybody at all interested in how we might find a way out of the present policy pickle would do well to borrow a copy.


Money as a process, not a thing

Nigel Dodd’s  is fascinating. I’ve never understood money and don’t think I do yet. One of the signs of its abstraction as a concept is the way people bring their own interpretations to it, perfectly plausibly.

[amazon_image id=”0691141428″ link=”true” target=”_blank” size=”medium” ]The Social Life of Money[/amazon_image]

In my first ever job, in the Treasury in the mid-1980s, I had the task of looking at the properties of different linear combinations of deposits, all corresponding to different definitions of money – not that I over-thought it at the time. Economics textbooks over the years have blithely carried a completely fictional, institution-free account of the money multiplier, and give us probably the least plausible explanation, typically – and unhistorically – claiming money emerged from barter trade.

Information scientist Jaron Lanier’s book , which I’m currently reading, says, “Money is simply another information system.” Digital identity and currency guru Dave Birch tells us . This echoes Keith Hart in his classic : “The two great memory banks are language and money. Exchange of meanings through language and of objects through money are now converging in a single network of communication, the internet.” Another anthropologist David Graeber in his tome  rooted money in group cultures. Nigel Dodd is a sociologist so he gives us the sociological perspective.

[amazon_image id=”1861972083″ link=”true” target=”_blank” size=”medium” ]The Memory Bank: Money in an Unequal World[/amazon_image]  [amazon_image id=”1612191290″ link=”true” target=”_blank” size=”medium” ]Debt: The First 5,000 Years[/amazon_image]  [amazon_image id=”1907994122″ link=”true” target=”_blank” size=”medium” ]Identity Is the New Money (Perspectives)[/amazon_image]  [amazon_image id=”0241957214″ link=”true” target=”_blank” size=”medium” ]Who Owns The Future?[/amazon_image]

Dodd’s book starts by looking at the various origin myths and links each to current (sociological) monetary theories. It then takes money by theme: capital, debt, guilt, waste, territory, culture and utopia. The chapter covering the terrain most familiar to economists is that on debt, but it takes an entirely different perspective, with Keynes and Minsky the principal economists named here. The chapter’s conclusion gives its flavour: “A monetary system that i defined by an over-arching orientation toward the interest of creditors is inimical to democracy. …. Democracy, or society, now appears to be in open conflict with the needs of finance. Debt is no longer facilitating capitalism, it is driving it.”

In a way, I found this book very heavy going because it is written in the language of sociology, and with lots of references unfamiliar to me. But it’s good for any of us to look through the lens of a different discipline. I find Dodd’s conclusion persuasive – that money is not a thing but a social process. This tallies with Dave Birch’s argument that the combination of ubiquitous mobiles and their record of a dense social graph means digital identity is fast becoming the latest manifestation of money.

Dodd also presents the paradox that money is both outside the realm of values it describes, as the means of measurement, and inside it as a particular commodity with a value – he quotes  as saying money is both the measure and measured. And he links this self-referential character to the capacity for financial bubbles and crises to inflate themselves. True value lies in the social life of money, in the activities of human societies.

[amazon_image id=”B0092JLXJW” link=”true” target=”_blank” size=”medium” ]ThePhilosophy of Money by Simmel, Georg ( Author ) ON Apr-01-2011, Paperback[/amazon_image]

What this means for monetary policy is another matter entirely, and Nigel Dodd’s forays into economics are far less persuasive – not that there seems to be a more compelling approach to money on offer from the macroeconomists either at the moment. Sticking a bit of ‘institutional’ friction into DSGE models to represent the banking and shadow banking sectors can only be a sticking plaster until monetary economists start to take seriously the insights to be drawn from sociologists and others.


Virtual serendipity

Serendipitously, the day after writing about  by Vili Lehdonvirta and Edward Castronova, another new book by Edward Castronova arrived in the post, . It’s about the convergence of the ‘real’ and the virtual in the domain of money, although of course as money is already largely virtual, this is more about the crowding out of the previously public domain of money by private currencies: “Today anybody can be a central bank.” On a quick glance through,  looks like an accessible overview of the territory.

[amazon_image id=”B00KMUWRXG” link=”true” target=”_blank” size=”medium” ]Wildcat Currency[/amazon_image]

This is a hot subject of course. In which context , it would be remiss of me not to highlight another excellent recent book about the future of money, Dave Birch’s .

[amazon_image id=”1907994122″ link=”true” target=”_blank” size=”medium” ]Identity is the New Money (Perspectives)[/amazon_image]