This is a book about debt, and why "money is debt" - one of those striking phrases that starts simple and gets murkier, so that even after reading Philip Coggan's intelligent analysis of the credit crisis, I'm left wondering just how much I've really understood. That's probably a good thing, given the combination of complexity, reflexivity and intangibility that is peculiar to economics, and given Coggan's own admission: "If there is a fundamental theme of this book, it is that there are no easy answers in economics."
Despite its familiarity, money remains "a nebulous concept". Fortunately, Coggan is not a nebulous author, and in this clearly written guide he coordinates detail and theory in terms that this non-economist could (just about) follow. It's worth persevering through the intellectual vertigo and the numerical indigestion provoked by trade figures and debt ratios, especially given how crucial these issues are to all our lives. However, just as there there are no easy answers, there is no happy ending. Promises will be broken, and the result will be economic turmoil, as both debtors and creditors suffer. "The global economy is changing; for many in the West, it will not be for the better." Many of us might welcome a new order, but we should be aware that, "like so many of the goods sold in Western supermarkets, it will be made in China".
Coggan balances abstruse talk of the Triffin dilemma and the trilemma of currency policy (how do we juggle fixed exchange rates, free capital movements and interest rates?) with the kind of historical detail that we can all grasp (John Law hiring tramps to boost confidence in his emerging markets fund). The text is peppered with characters like Law (both hero and villain: he was the first Keynesian, the first modern economist, he introduced paper money into France - and he duped investors) and also out-and-out villains like Bernie Madoff and Charles Ponzi. (Strangely, out-and-out good guys are few and far between in the world of finance.)
To those of us civilians not trained in economics, some lines of thought can seem to be leading us down the rabbit hole. Money is debt, and there has been a vast increase in debt since 1971, which means there's been a vast increase in money, and more money is usually a good thing, right? So how is it, as Coggan argues in this book, "that we have reached another of the great crisis points in history"? Borrowers will fail to pay back their debts and creditors will demand a new system to protect their rights.
For me, one of the strangest ideas is that we can create money out of thin air, "with the click of a computer mouse" ("fiat money"). Indeed, banks "can create money simply by extending an overdraft" - and "this money is clearly also a debt". Coggan's emphasis is on the ability of central banks and governments to do this (the "fundamental worry of creditors is that governments can issue as much money as they like"), rather than on commercial banks, which are responsible for the bulk of debt money in circulation.
Money is not a commodity dug out of the ground like gold but a public good, and while its creation is largely in the hands of private banks, Coggan does emphasize the ultimate role of the state and its central bank in backing any financial system. Money only works because "we have faith in the government that stands behind it" and "our faith in paper money is the key to its survival". Although there are plenty of quasi-theological debates in economics, the relevant meaning of "faith" here leans more towards "trust" and "confidence" than the religious "belief without evidence". Wherever we stand on the political spectrum in Britain, we have more reason to trust the state than does the population of, say, Zimbabwe (which is not to say we shouldn't be more active in holding our politicians to account).
The two main functions of money - as a medium of exchange and a store of value - pull in opposite directions: creditors want to restrict the supply of money; debtors want expansion. More money is good for trade, less is good for savings, and both creditors and debtors have their very own patches on the moral high ground from which to bellyache. Our economic history has seen a series of systems devised to diffuse this tension, with varying success. The gold standard didn't last long, and Bretton Woods got us as far as flared trousers.
One of the most important qualities we can bring to this subject is scepticism. Words like trust and confidence underpin how money works, but these ought always to be firmly grounded in reason, not blind faith: printing money is no substitute for the wealth that flows from manufacturing industry, for example. Questioning assumptions is a key habit of the sceptical mind, and, in my opinion, at least a couple have slipped a little too easily into this book. Coggan rightly highlights the role of credit in a modern economy, but his blanket statement that without it "businesses would be unable to grow and create jobs" ignores the German model of Mittelstand, in which firms grow over many generations and not as a result of bank loans taken out in a dash for profit.
A second assumption that ought to be questioned is that declining populations are necessarily a bad thing. In assessing our future prospects, Coggan comments that "the demographies of Western Europe are very poor indeed" - and yet the only logical alternative to declining populations is unsustainable increase.
These assumptions are not minor quibbles, of course, but they are not the focus of the book and do not detract from its main theme, which is "the ancient battle between creditors and debtors" and the explosion in the amount of debt that we have experienced in our generation. As a result, we in the West have gratified our desire to consume and to speculate. Central banks stood by and watched. Indeed, "by intervening when markets fell, but not when they rose, they encouraged speculation" and, inevitably, "the pyramid scheme ran out of new clients". Now the music has stopped, it may be that only the Chinese are sitting comfortably.
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