Money: Whence It Came, Where It Went

317 Pages·1975·0.95 MB·English

by  John Kenneth Galbraith

JOHN KENNETH GA LBRAI T H
Money
Whence It Came, Where It Went
"It is with the lessons of history, rather than the history itself, that this
book is concerned. Its purpose is less in relation to the past than to the
present. But its purpose is also less than completely solemn. There is much
in the history of money that is fascinating. There is more that richly
illuminates human behavior and human folly. That the love of money is the
root of evil can, conceivably, be disputed . . . What is not in doubt is that
the pursuit of money, or any enduring association with it, is capable of
inducing not alone bizarre but ripely perverse behavior."
The author adds, "Those who talk of money and teach about it and make
their living by it gain prestige, esteem and pecuniary return, as does a
doctor or a witch doctor, from cultivating the belief that they are in
privileged association with the occult — that they have insights that are
nowise available to the ordinary person. Though professionally rewarding
and personally profitable, this is a well-established form of fraud. There is
nothing about money that cannot be understood by the person of reasonable
curiosity, diligence and intelligence. There is nothing on the following
pages that cannot be so understood."
JOHN KENNETH GALBRAITH, for many years Paul M. Warburg
Professor of Economics at Harvard, is a past President of the American
Economic Association, a former Ambassador to India, the author of the
noted trilogy, The Affluent Society, The New Industrial State and
Economics and the Public Purpose, and a veteran of the modern money
wars of the United States. In World War II, he was principally in charge of
price control and thus at the very center of the economic and anti-
inflationary strategy of that important time. He has been very close to the
center ever since. "Most things in life — automobiles, mistresses, cancer —
are important only to those who have them. Money, in contrast, is equally
important to those who have it and those who don't. Both, accordingly, have
a concern for understanding it. Both should proceed in the full confidence
that they can." So writes John Kenneth Galbraith in this book.
In it he offers a broad, professional view of the working of money as
illuminated by its history from the kings of Lydia down to the present
turmoil. No one has ventured such a sweeping and comprehensive look at
the subject before; certainly no one has brought to it such a combination of
literary skill, historical knowledge and professional economic competence.
Henceforth all who speak on money — and all who merely wish to know
about money — will have to read this book. And it will not be a chore.
They will find it an interesting, amusing, and rewarding task.
In the first chapter of Money: Whence It Came, Where It Went Professor
Galbraith speaks of history, the history of money, how the mysteries
associated with money are to be understood. Here he tells well, we think,
his purpose in this volume.
"It has long been fashionable for historians, except in the secret recesses
of their belief, to be modest about the lessons of history. Perhaps it teaches
only that it teaches little. Where money is concerned, this restraint is
unwarranted. The history of money teaches much or it can be made to teach
much. It is, indeed, exceedingly doubtful if much that is durable can be
learned about money in any other way . . . From history we can see, more
vividly than in any other way, how money and the techniques for its
management and mismanagement were evolved and how they now serve or
fail to serve. It is from their history that we see how institutions — corpora-
tions, trade unions, the welfare state — have altered the problems of
maintaining price stability in the present.
Acknowledgments
THIS BOOK was, in an innocent way, its own progenitor. Initially it was to
have been a long essay on the problems of economic management and
monetary stabilization, and their origins. It was a timely undertaking. I
could draw on a lifetime of reading, casual or otherwise, for these are
matters of which an economist is expected to have knowledge — and I had
always found the history of money, early and late, exceedingly engaging.
So interesting was the task that the essay became a book, and the book
became a long one. As may conceivably be evident, it was, as these things
go, a joyful task.
No small part of the pleasure was from my partners in the enterprise. One
of these was David Thomas, a highly faithful, intelligent and charming
assistant, now, alas, lost to me in the practice of law. He had a remarkable
ability to find both the things I needed and those on which I needed
correction. Any malefactor so fortunate as to fall in his hands will be saved
by David's discovery of some hitherto unknown statute or decision
exculpating him. As with almost everything I have written, Arthur Schle-
singer read, challenged and corrected. No one else does so out of such a
rich store of information and judgment. The errors that remain are all mine.
My friend and assistant, Emeline Davis, typed, retyped and corrected the
manuscript and generally managed its progress toward the printer. Nanny
Bers helped her and me. And as in the case of everything I've done for
years, all questions of adequacy of explanation, editing, style and
elementary good taste were subject to the unfailing eye and implacable au-
thority of Andrea Williams. To all, all thanks.
Contents
I Money 1
II Of Coins and Treasure 7
III Banks 18
IV The Bank 28
V Of Paper 45
VI An Instrument of Revolution 58
VII The Money War 68
VIII The Great Compromise 84
IX The Price 101
X The Impeccable System 116
XI The Fall 134
XII The Ultimate Inflation 146
XIII The Self-inflicted Wounds 164
XIV When the Money Stopped 183
XV The Threat of the Impossible 198
XVI The Coming of J. M. Keynes 216
XVII War and the Next Lesson 235
XVIII Good Years: The Preparation 253
XIX The New Economics at High Noon 268
XX Where It Went 283
XXI Afterword 302
Index 313
CHAPTER I
Money
"Mrs. Bold has twelve hundred a year of her own, and I suppose Mr. Harding means to live
with her."
"Twelve hundred a year of her own!" said Slope; —and very shortly afterwards took his
leave . . . Twelve hundred a year, said he to himself, as he rode slowly home. If it were the fact
that Mrs. Bold had twelve hundred a year of her own, what a fool would he be to oppose her
father's return to his old place. The train of Mr. Slope's ideas will probably be plain to all my
readers . . twelve hundred a year . . .
Anthony Trollope, Barchester Towers
NOT VERY LONG AGO one of the investigations into the typically intricate
affairs of the 37th President of the United States turned up a more than
normally interesting transaction. Mr. Charles G. Rebozo, Mr. Nixon's good
and reticent friend, had received for the then President's benefit, political or
personal, $100,000 from the even more reticent entrepreneur, Mr. Howard
Hughes. This considerable sum, it was claimed, had thereafter been kept in
cash in a safe-deposit box for rather more than three years before being
returned to Mr. Hughes. The curiosity concerning this transaction was not
over why anyone should return money to Mr. Hughes, which is something
like returning salt tears to the ocean. Rather it was why anyone should leave
so much money in storage. So left, as everyone knew, it lost radically in
value — a dollar of 1967 had the purchasing power of only 91 cents in
1969, the year Mr. Rebozo resorted to storage, and of less than 80 cents
when he retrieved and returned the money. (In early 1975, it was down to
64 cents.) The impact of this trend could not have been lost on the two
gentlemen. The partial compensation for this loss in the form of interest,
dividends or, one might even hope, capital gains,
2 Money: Whence It Came, Where It Went
which a minimally prudent man would have been expected to collect, was
forgone. The most retarded of the borrowers in the Parable of the Talents
had incurred rebuke for coming back with only the original advance.
Neither Mr. Nixon nor Mr. Rebozo was thought indifferent to pecuniary
concern; both had fallen well below the Biblical minimum for financial
performance. There was general disbelief and shaking of heads that they
should have been so bad.
There was in this episode a quite remarkable demonstration of what has
happened to attitudes toward money. Everyone expects it to depreciate in
value. No one suggested that the President, who was ultimately responsible
for maintaining the value of the currency, had been so rash as to bet
personally on his ability to do so. Like everyone else he was thought to
need a strategy for offsetting its deterioration, although with no expectation
that it would be successful. Nor was there any country in the non-socialist
world whose leader would have reposed more confidence in his ability to
maintain the value of the currency than the President of the United States.
Everywhere the tendency in these years was the same — for prices to rise,
the purchasing power of money to decline and at an uncertain, erratic rate.
Nothing is forever, not excepting inflation. But to many it must have
seemed that this tendency was distressingly persistent.
Nor were those who carelessly stored $100,000 in bills the major
victims. Far more disenchanting was the position of those whose small
wealth and income were fixed in dollars, pounds, marks, francs or other
coin and who could not tell what these would buy in the future, only that it
would be less. In the last century in the industrial countries there was much
uncertainty as to whether a man could get money but very little as to what it
would do for him once he had it. In this century the problem of getting
money, though it remains considerable, has diminished. In its place has
come a new uncertainty as to what money, however acquired and
accumulated, will be worth. Once, to have an income reliably denominated
in money was thought, as by Mr. Slope, to be very comfortable. Of late, to
have a fixed income is to be thought liable to impoverishment that may not
be slow. What has happened to money?
Money 3
It has long been fashionable for historians, except in the secret recesses of
their belief, to be modest about the lessons of history. Perhaps it teaches
only that it teaches little. Where money is concerned, this restraint is
unwarranted. The history of money teaches much or it can be made to teach
much. It is, indeed, exceedingly doubtful if much that is durable can be
learned about money in any other way. Attitudes toward money proceed in
long cyclical swings. When money is bad, people want it to be better. When
it is good, they think of other things. Only as matters are examined over
time can we see how people who are experiencing inflation yearn for stable
money and how those who are accepting the discipline and the costs of
stability come to accept the risks of inflation. It is this cycle that teaches us
that nothing, not even inflation, is permanent. We learn also that the fear of
inflation which inflation leaves in its wake can be as damaging as the
inflation itself. From the history we can also see, more vividly than in any
other way, how money and the techniques for its management and
mismanagement were evolved and how they now serve or fail to serve. It is
from the past that we see how new institutions — corporations, trade
unions, the welfare state — have altered the problem of maintaining price
stability in the present and how changing circumstances — movement to a
class structure in which fewer and fewer people are successfully taught to
take less, the changing political interest of the affluent — have greatly
complicated the task.
It is with the lessons of history, rather than the history itself, that this
book is concerned. Its purpose is didactic and expository, less in relation to
the past than to the present. But its purpose is also less than completely
solemn. There is much in the history of money that is fascinating. There is
more that richly illuminates human behavior and human folly. That the love
of money is the root of all evil can, conceivably, be disputed. Adam Smith,
for many a prophet of only slightly less than scriptural authority, thought in
1776 that of all the occupations on which man had to that time engaged —
war, politics, religion, violent recreation, unrequited sadism — the making
of money was socially the least damaging. What is not in doubt is that the
pursuit of money, or any enduring association with it, is capable of
inducing not alone bizarre but ripely perverse behavior.
4 Money: Whence It Came, Where It Went
There are good reasons. Men possessed of money, like men earlier
favored by noble birth and great title, have infallibly imagined that the awe
and admiration that money inspires were really owing to their own wisdom
or personality. The contrast between their view of themselves, as so
enhanced, and the frequently ridiculous or depraved reality has ever been a
source of wonder and rich amusement. Similarly there has always been
pleasure of a low sort in the speed with which the awe and admiration
evaporate when something happens to the individual's money.
Money bemuses in another way. Recurrently over the centuries men have
supposed that they have mastered the secret of its infinite amplification.
And as reliably as they have persuaded themselves of this, they have also
persuaded others. Invariably it involves the rediscovery, perhaps in slightly
novel form, of some infinitely ancient fraud. The span of time between the
transcendental heights of the financial genius and the nadir of the ensuing
collapse — from being John Law the savior of the French Regency to being
John Law the penitent in Venice, from being Nicholas Biddle the first
master of American finance and a fearsome figure to Presidents to being
Nicholas Biddle the most distinguished of Philadelphia bankrupts, from
being Bernard Corn-feld of the jet planes and sad-eyed concubines to being
Bernard Cornfeld of the prison of St. Antoine — is often only a few
months, at most only a few years. There is wonder and a certain wicked
pleasure in these giddy ascents and terrible falls, especially as they happen
to other people. Here, no doubt, it is the story and not the meaning that is
important.
A word must be said about the frame of mind in which one wishes the
reader to approach a book such as this. Much discussion of money involves
a heavy overlay of priestly incantation. Some of this is deliberate. Those
who talk of money and teach about it and make their living by it gain
prestige, esteem and pecuniary return, as does a doctor or a witch doctor,
from cultivating the belief that they are in privileged association with the
occult — that they have insights that are nowise available to the ordinary
per-
Money 5
son. Though professionally rewarding and personally profitable, this too is
a well-established form of fraud. There is nothing about money that cannot
be understood by the person of reasonable curiosity, diligence and
intelligence. There is nothing on the following pages that cannot be so
understood. And whatever errors of interpretation or of fact this history
may contain, there are, the reader may be confident, none that proceed from
simplification. The study of money, above all other fields in economics, is
the one in which complexity is used to disguise truth or to evade truth, not
to reveal it. Most things in life — automobiles, mistresses, cancer — are
important only to those who have them. Money, in contrast, is equally
important to those who have it and those who don't. Both, accordingly, have
a concern for understanding it. Both should proceed in the full confidence
that they can.
It will be asked in this connection if a book on the history of money
should not begin with some definition of what money really is. What makes
this strip of intrinsically worthless paper useful in exchange, leaves another
piece of similar size without any such worth? The precedents for such effort
are not encouraging. Television interviewers with a reputation for
penetrating thought regularly begin interviews with economists with the
question: "Now tell me, just what is money anyway?" The answers are in-
variably incoherent. Teachers of elementary economics or money and
banking begin with definitions of genuine subtlety. These are then carefully
transcribed, painfully memorized and mercifully forgotten. The reader
should proceed in these pages in the knowledge that money is nothing more
or less than what he or she always thought it was — what is commonly
offered or received for the purchase or sale of goods, services or other
things. The several forms of money and what determines what they will buy
are something else again. But that is the purpose of the pages following to
reveal.
A final word. This is a history of money; it is considerably less than a
history of all money during all time — something with which no historian
is likely soon to offend. So at all periods there