NoNonsense The Money Crisis - Peter Stalker

Скачать книгу

the contents of their vaults. And nowadays their heirs, the commercial banks, similarly create money out of thin air, or out of flows of electrons. Governments have tried to manage this financial fecundity through their central banks but have never fully succeeded.

      Having pondered on the origins of cash and coinage, it is now time to take a closer look at banks. Banking too has an ancient history regularly punctuated with sorry tales of greed and disaster. The money-changers in Rome were some of the earliest practitioners. Mostly, however, they did not lend money but just changed some of the gold or silver coins of foreign traders into the denarii that could be used when operating in Rome. Indeed the word ‘bank’ derives from the benches, called ‘bancu’, from which these and other proto-bankers plied their trade. You will not be surprised that they soon also needed a term for a bank failure – ‘bankrupt’ – which corresponds to someone taking a sledgehammer to the aforementioned bench to signal the demise of the enterprise.

      Banks lend money, charging varying prices for their services through rates of ‘interest’. This word derives from medieval Latin, from ‘inter’ meaning ‘between’, and ‘esse’ to ‘be’. The lender was said to ‘have an interest’ in the transactions for which their money had been borrowed, and interest subsequently came to refer to the level of compensation they charged for being deprived of the funds while someone else used them. The more devoutly religious considered this process abhorrent since it involved monetizing time – over which only the deity should have domain. They thus considered charging interest as an attempt to usurp divine power and condemned it as the sin of usury. It should be noted, however, that interest does not just involve considerations of time, but also takes into account the risk that the borrower might never repay.

      Christians became more relaxed about the concept of interest from around the 11th century, not least because they wanted to borrow funds to finance wars against other religious groups – Muslims primarily, but also Jews or Orthodox Christians, or indeed anyone who rejected the authority of the Pope. This involved a series of crusades, the first of which aimed to retake Jerusalem from its Islamic occupants. From the 13th to the 15th centuries, these punitive expeditions were financed by wealthy enterprises in Venice and Genoa.

      Pious though they may have been, these financiers required compensation, so they carefully devised ways of charging that made lending seem less sinful. Eventually the word usury became confined to lending at rates of interest that are excessive, though what constitutes excess is always a matter of judgment. Payday lenders are notorious for charging stratospheric rates of interest of 2,000 per cent or more – usury by any standard – but even people borrowing from Visa or MasterCard will face annual interest rates of 25 per cent or more. To this day, Islam forbids charging any interest, though Islamic scholars will advise financiers on how to get round this constraint, for a fee.

       The making of modern banking

      By the 17th century, elements of modern banking were starting to emerge. At that time one of the main centers of international trade was Amsterdam. The busy merchants of the city, who had money pouring in from all directions, soon found themselves dealing with a baffling array of coinage. The Dutch Republic alone had at least 14 mints that were turning out coins of all different sizes, shapes and qualities – which were then mingled with all the cash arriving from overseas. In 1606 the Dutch parliament issued a guide for the perplexed – a money-changer’s manual which listed no fewer than 341 silver and 505 gold coins.

      This period amply demonstrated that ‘bad money drives out good’ – a principle articulated in 1558 by the financial agent of Queen Elizabeth I of England, Thomas Gresham, and known thereafter as Gresham’s Law. If, for example, you have what you consider an iffy dollar bill, you will be tempted to palm it off on someone else as soon as possible, while keeping in your wallet all the other bills you believe to be the genuine article. In the 16th century people had much the same attitude to coins, especially those which looked as though they might have had some of their gold clipped off. The clipped coins naturally circulated the fastest. One of the neatest anti-clipping measures was devised by the ever-busy Sir Isaac Newton who, in addition to explaining the laws of motion, and devising the infinitesimal calculus and so much more, also became warden of the Royal Mint in 1696 and suggested milling fine lines into the edges of coins so as to make any clipping more obvious.1

       Dodgy coins

      Coping with all this dubious coinage was at best inconvenient and at worst exposed the merchants and their customers to fraud. To cut through this financial clutter, in 1609 the City of Amsterdam established what we might now call a public bank. This cheerfully allowed people to deposit all their coins, but did so with due skepticism, evaluating their true worth by checking their weight and quality. After making a deduction for expenses, the bank would then note the true value of the coins and keep them in storage. The depositor could use these verified coins to make payments to another customer by asking the bank to shift them to that person’s storage box. The owners of the coins thus had simple ‘bank accounts’. This proved such a useful function that similar banks were established in other cities across Europe.

      This also opened up opportunities for lending. If one Dutch merchant was short of cash, he or she could negotiate directly with another of the bank’s customers for a loan at an agreed rate of interest. The lender could thus instruct the bank to move the coins to the borrower’s storage box or, more likely, just to transfer ownership by changing a few numbers in their ledgers. Once the transfer had taken place, the lender started to earn interest, but also had to accept the risk that the borrower might default. The banks soon realized, however, that with so much unused cash in their vaults they too could use it to make loans, with or without the explicit consent of the depositors.

      Something similar was happening with goldsmiths and pawnbrokers. In London in the 17th century, faced with multiple risks of plague, fire and war, many people would leave their gold coins and other valuables with various businesses for safekeeping – in particular those with strong vaults. To this day the official arbiter of British coinage is the Goldsmiths’ Company of the City of London.2 To recognize that they held these valuables, the goldsmiths would issue receipts or ‘notes’. If the depositor later wished to ‘spend’ their valuables for some purpose they could present the note and ask for them back. However, they might find it more convenient just to spend the notes. If the goldsmith was reputable, the receipt itself was ‘as good as gold’ and anyone holding it could go to the goldsmith and take the metal itself. This is thought to be the origin of the ‘promissory note’ – what we would now think of as a banknote.

      Then some enterprising goldsmith took an important new step by handing notes not just to depositors but also to people who wanted to borrow money and were prepared to pay interest. These notes did not correspond to any particular deposit of gold but rather reflected the fact that there was a lot of gold in the vaults. Nevertheless, the goldsmiths still required a reassuring amount of gold and needed to attract more deposits. They thus started offering interest to the depositors.

      You will have noticed a sleight of hand which, if not actually dishonest, is at best risky. If everyone awkwardly shows up with their notes simultaneously demanding the equivalent in gold or coins they might be disappointed. Once depositors suspect their funds may not be available for withdrawal, they are apt to bang on the doors, asking for their money back – and thus triggering a ‘run on the bank’. Regrettably, that was the ultimate fate of the Bank of Amsterdam. Having lent out too much to the Dutch East India Company and to the City of Amsterdam, it was forced to limit withdrawals and in 1819, after two decades of operation, had to be wound up.

      Nevertheless, it had helped to establish a general model of banking that has survived largely intact. This is partly because it has proved useful for both borrowers and lenders. When Willie Sutton, a notorious bank robber in New York in the 1930s, was asked why he robbed banks, he famously replied: ‘Because that’s where the money is.’

      To disguise the inherent risk, banks have done all they can to appear solid institutions. In the past, they tended to construct even their smallest branches to look as imposing as possible – sometimes with stout Greco-Roman porticos that looked as though they could withstand several earthquakes. And bank managers,

Скачать книгу