Felix Martin Told Me What Money Really Is
He just wrote a book about it, so he was the right guy to ask.
This is what money looks like. (Photo via)
The G8 summit kicked off yesterday in Northern Ireland. And, as with any G8 summit, the build-up has been tense, with protesters making it very clear that they don't like the idea of a bunch of wealthy nations meeting up to discuss how to be better capitalists and continue being wealthy. In fact, some 56 protesters had been arrested before the G8 had even started, as riot police swooped on anti-capitalist protesters in London last weekend.
But are their simplistic protests against "capitalism" misguided? Is there something more fundamental that needs to change?
Felix Martin is a bond investor and associate for the Institute of New Economic Thinking. He has written for the Financial Times and the New Statesman, worked at the World Bank between 1998 and 2008 and somehow found time to complete degrees in Classics, Economics and International Relations. His new book, Money: The Unauthorised Biography, argues that the orthodox way of thinking about money isn't just flat-out wrong, but also dangerous. Instead, he offers an alternative, with far-reaching consequences for economics, world governments and capitalism itself.
I spoke to Felix about why everyone needs to change their perspective on money.
VICE: Hi Felix. So what do most people think money is?
Felix Martin: I would say that most people think of money as a thing like a table, a car or a book – a thing that you can own. So when I have money in my bank account, it means I own something. Going along with this idea is a certain presumption about where money came from. Way back in the past, people used to barter their goods, but that system was very inefficient because you could only trade if you had the item that someone else wanted, and they in turn possessed what you needed. Therefore, some bright person came up with the idea of having one thing that would be acceptable to everyone – even though you don’t actually need it for its own sake – that could be a so-called "medium of exchange".
The beginning of currency.
Yeah, it was usually gold or silver, for various different reasons – convenience, durability, rarity and so on. Then, at some point, someone came up with the idea that you could lend and borrow this stuff, and that was the invention of credit. Then, later still, you had certain kinds of institutions that actually specialised in building these constructions of credit, and that was the invention of banking. That’s a story that’s very plausible. It’s easy to believe and it sort of has its own logic. The problem is that it’s historically false and it’s been known to be historically false for a long time by historians and anthropologists, but not economists.
But what does it matter that we're wrong about money if we all know how to use it? Is it important that we're clear about it?
Most definitely. One reason is a historical one. If you want to understand our history – how our society has evolved, where capitalism came from and why we’ve ended up with the distribution of wealth that we have – you need to have a proper understanding of how the concept of money came about and what it means today.
And money has such a huge impact on our lives, I guess.
Yeah, so many aspects of our lives are now measured financially. The idea that you can apply the concept of monetary value to anything is now widespread. You can apply it to human life, to someone doing housework – to all kinds of services that weren’t measured economically even a generation or two ago – and that’s an important change. If you think of money just as a thing, and if you think of the effects of the markets as totally separate from such a thing, you won’t be able to understand what’s going on. So this is one reason: If we want to understand our own past, if we want to understand how we got to where we are today, we need to take the right view.
What about the recent financial crisis? Does our misunderstanding of money have any bearing on that?
There’s a crucial difference between crises that happen when people have a clear understanding of how the system works and what went wrong, and those that happen when they don’t. The last crisis was definitely an example of the latter. This can lead to the stage where people say that there’s something wrong with our system, which isn't true – it's a great system. But our system only works when people understand it; when something goes wrong, people can see who and what institutions are responsible. And at the bottom of this misunderstanding is a misconception of what money is. It’s a problem that must be changed, and in order for it to be changed, the general public needs to know about it and needs to make the demand for it.
What are the alternatives?
Some people, after criticising the system, think we should switch to something else entirely – communism, broadly. Indeed, there are calls to make a switch to a non-monetary society, but you only have to look at Soviet Russia to see that’s not a route we want to go down. The good thing about money is that it enables people personal freedom: from social hierarchy, from restrictive family hierarchy and so on. These are good things that we want to encourage.
Okay, but can you explain what money is, then?
There's an island called Yap in the Pacific that's as remote as one could have got in the 20th century. Explorers anticipated that the society on this island would be financially primitive and probably be using some sort of barter system. What they found was exactly the opposite. The inhabitants had a form of currency: fei, which were large, solid thick stone wheels ranging in diameter from a foot to 12 feet, with a hole in the centre. But they were rarely physically exchanged in the way that our paper notes are. Instead, the debts incurred from transactions were just offset against each other, with any outstanding balance carried forward until the next exchange.
The truly incredible thing is that one of the fei hadn’t even been seen in generations, as it had sunk to the bottom of the sea. So even though there was no currency to be seen, there was money – the underlying relationships of credits and debts to one another. That's what money is; not a thing or an object, but a set of ideas that allow for trade relationships.
Gold bullion, which – contrary to popular belief – isn't in any UK banks. (Photo via)
Isn’t that like the gold sitting in our banks now? The same gold that "I Promise to Pay the Bearer" with when I use a £20 note?
There isn’t any gold sitting in our banks. Some of the old English banks, like Coutts, did indeed start out as goldsmiths, but the real history of modern banking is typically not from that sort of thing. It was all to do with merchants trading with one another, accumulating credits and debts against one another and off-setting these against one another. So it hasn’t got anything to do with anything physical. It’s actually exactly the same, albeit with less electronics, as what goes on in the City of London or Wall Street today. It’s not actually pieces of paper any more; it’s just bits and pieces of information on the screens. But what’s actually being done is the manipulation, the exchange and the offsetting of financial claims, of promises to pay.
Lastly, what do you think of BitCoin? Is it the revolutionary new currency some people think it is?
Advocates of BitCoin claim that it’s the first virtual, private money. The truth is that all money is virtual, because money – as opposed to the coins and notes and other stuff that is used to record and keep track of money – is a set of ideas and relationships. As for the private part, commercial banks aren't owned by the sovereign – they are private.
Follow Joseph on Twitter: @josephfcox
Mo' mo' money: