Of Money and Men
To watch bacteria replicate endlessly under a microscope, to look up at the night sky and gaze at the distant stars, is to realise that man is the only animal trapped without a cage.
The trap is money.
There is little point lamenting – we live in societies that have to run. We can choose to live in isolation or shun contact and roam the forests and pluck fruits from trees and occasionally visit public libraries. But till such time we wish to interact with fellow humans and desire to attain a degree of comfort for ourselves, we need money.
Money is an invention, like the wheel and the computer – a working of our brain, a logical step in our evolution. But how did it come into being, and how did it manage to rule the lives of most of us? How much money do we need? Why do we need money at all? These are just some of the questions that are answered in Vivek Kaul’s brilliant new book, Easy Money, the first in a trilogy.
Vivek is something of an oddity. He writes for Firstpost where in the past two months, he has penned 38 articles, garnering a total of 1618 comments, and never once in all those columns has he used the magic word – Modi. Vivek writes on economy, but is not an economist. This at once makes him readable. “In order to write on matters of finance and economy”, he says. “I have to spend a great deal of time in understanding the subject myself. I break things down. My theory is, if a child cannot understand what I am writing, it is pointless.”
Vivek is kind enough to not specify the age of the child he has in mind – meaning his book cannot qualify yet as a return gift. But this unusual quality – unusual because so many writers are only too happy to confound their readers – brings a sparkle to his prose. In olden times, his columns could very well have been illustrated with drawings like Dickens’ were.
Easy Money is written in much the same fashion. So much so that I decided to try an experiment: reading it aloud to my little son. I mention this uneasily to Vivek. “Great!” he chuckles, “I have written this book essentially for my grandmother – if she can understand it, I’d have succeeded.”
The book begins at the dawn of human history as it were, when there was no paper money, only a rib-tickling barter system. Sugar was exchanged with salt that was bartered for some eggs and so on – until the cleverer among us felt cheated when what they thought was worth 2.5 eggs was valued at only 2 for obvious reasons. The initial chapters – that deal as much with human nature as they do with the history of money – are immensely entertaining, narrated as they are in the clear and lucid style of good story-telling.
We get to see not only the stockbrokers of yore, i.e. those who stocked sugar and salt and tobacco, but also hedge-fund managers: “In 1903, an American anthropologist William Henry Funess III visited the island of Yap and found something very peculiar when it came to what the locals used as money. The currency was called fei. It was essentially a large, solid, thick stone wheel which could vary from a foot to twelve feet in diameter. It had a hole in the middle, around one sixth the size of the diameter, where a pole sufficiently strong could be inserted to transport the fei with its weight on the shoulders of men. The fei in some cases could weigh as much as a modern day car and hence was difficult to transport. In such cases, the new owner of the fei would be happy with just the acknowledgement of its ownership and the stone wheel would continue to be undisturbed at its former owner’s home. In fact, there was even a family whose wealth was unquestioned and acknowledged, though nobody had ever seen it, including the family. The source of their wealth was an enormous fei that for the past two or three generations had been lying at the bottom of the sea.”
As the medieval Gordon Gekkoes arrived on the scene, desirous of pillaging whole nations and continents so they could bring back to their kings and queens unimaginable wealth, something strange happened. We fell in love with gold. VS Naipaul’s The Loss of El Dorado provides a consummate look into what led men to travel great distances over the harshest of terrains just so they could satisfy their hunger for gold. But a much bleaker picture is had from Bartolomé de las Casas’ A Short Account of the Destruction of the Indies. The systematic pillaging of nations and continents, the annihilation of fellow men and women by Columbus and his contemporaries, meticulously documented, sends shivers down one’s spine. These Gekkoes knew no limits in their quest for gold and they spared no one. Gold bars and coins had always been used as currency, in Egypt and other parts of the ancient world, but this was something else altogether. “Between 1500 and 1540”, writes Vivek, “nearly 1500 kg of gold came to Spain every year on an average from the New World.” This is an astonishing number and practically all of it exists still – Spaniards wear it, gawk at it, trade it. Very soon they’ll lose it. The irony is, they would’ve lost it earlier had Latin American countries and banks not helped them tide over the 2008 mess.
The love for gold endured and in time became central to an economic system wherein every currency was pegged to its value in gold. It was a standard most currencies were judged by. The US adopted the gold standard in 1900, when it decreed that one ounce of gold was worth $20.67. It is $1288.40 today.
What worked for this system, writes Vivek – “was its self-equilibrating nature. If the gold supply suddenly increased, the general price levels would go up. When this happened, it would become more expensive for gold mining companies to produce gold, leading to lower production. Lower production would mean reduced money supply, and hence return to price stability. Another beauty of the system was that no country could live beyond its means.”
But then came the advent of the Central Banks and money supply was delinked from gold reserves. The toes had started to peep out from under the chadar. History was about to be made.
The domino effect of economics on history and vice versa is something that is forever fascinating to the layman and Vivek narrates such instances with great élan. Continents turn into colonies, nations wish to become richer, war intervenes – and before you know it the price of the meal you’ve ordered doubles in cost by the time it is brought to your restaurant table, precisely what happened in Germany in the aftermath of World War I.
Many of the passages in Easy Money are reminiscent of flowcharts, something we associate normally with engineering. History, though, is nothing but a giant flowchart and one economic cascade that caught my attention was this: UK, France and Germany go off the gold standard at the start of World War I –> Germany starts to print money, currency loses value, inflation zooms –> US stays neutral through much of the war –> all wealth shifts from the “unsafe zone” to “safe zone” i.e. the US whose gold reserves shoot up –> US enters the war but it ends shortly afterwards –> France, UK, US demand reparations from Germany, the loser –> Too much liquidity in the US, everyone’s into stocks and day trading –> DOW shoots up 700% –> Europe complains it doesn’t have enough liquidity, wants US to increase interest rates –> US refuses, DOW zooms further –> but all liquidity is channelled into the stock market and not tangibles like farmland à first trigger: banks fail to back a buyout à bank runs a reality –> stock market crashes –> The Great Depression –> The Grapes of Wrath!
Every time nations ditched the gold standard, what resulted was an uninhibited supply of easy money, leading to inflation, debt and near bankruptcy. The pain of the Nixon shock – where President Nixon ordered the US to come off the gold standard – was never felt as acutely as during the financial crisis of 2008.
Easy Money spends considerable time on the concept of the gold standard. “I got a feeling you are partial towards it”, I tell Vivek.
“I think I am”, he says with a smile. “It is there to keep a check on a nation’s insatiable urge to spend more than it can afford to. Folks were worried last month, of the US defaulting – fact is it has defaulted numerous times before. It simply prints more money and gets into more debt.”
Near the end, Easy Money talks briefly of the current state of the world’s economy, drawing lessons from the US-China trade imbalance, lessons that, writes Vivek, have gone unheeded.
“Right now, China is the export powerhouse of the world. China exports much more to the US than it imports from it. The US, with nearly 25 per cent of the world GDP, is the biggest economy in the world. By virtue of that, it is also the world’s biggest market where China, Japan, and countries from South East Asia could sell their goods and earn dollars in the process.”
The billions of dollars earned by China were invested in American financial securities. The US was thus awash with easy money and with interest rates kept low, everyone was busy borrowing money. “The United States shopped, China earned, China invested back in the United States, the United States borrowed, the United States spent, China earned again and China lent money again. The way this entire arrangement evolved had the structure of a Ponzi scheme.”
And we know how Ponzi schemes end. In a bloodbath. “This arrangement”, writes Vivek, “only happened because the United States no longer needed to settle the difference between its imports and exports in gold, as was the case earlier.”
World trade is now pegged to the dollar. The United States, as and when it needs to pay the bills, simply prints more dollars. The chadar is well and truly off. How and why the dollar came to replace gold is the subject of the next book in the trilogy.
Easy Money offers its readers a dazzling story, of money and human history. It may be old hat for floor traders and qualified economists but promises to be indispensable for those of us who prefer our economics books to be bedtime reads. How often has this been achieved? Not very.
And as for my son, Harry Potter has just stepped aside for Uncle Kaul.
Easy Money is published in India by Sage Publications.