📑 The Invention of Money

Bookmarked The Invention of Money (The New Yorker)

Marco Polo was right to be amazed. The instruments of trade and finance are inventions, in the same way that creations of art and discoveries of science are inventions—products of the human imagination. Paper money, backed by the authority of the state, was an astonishing innovation, one that reshaped the world. That’s hard to remember: we grow used to the ways we pay our bills and are paid for our work, to the dance of numbers in our bank balances and credit-card statements. It’s only at moments when the system buckles that we start to wonder why these things are worth what they seem to be worth.

John Lancaster looks at the invention of money and its influence on today’s economy through two historical figures: John Law and Walter Bagehot. Through Law’s work in France, he laid the foundation for the use of money to facilitate trade and commerce.

This idea of Law’s led him to the idea of a new national French bank that took in gold and silver from the public and lent it back out in the form of paper money. The bank also took deposits in the form of government debt, cleverly allowing people to claim the full value of debts that were trading at heavy discounts: if you had a piece of paper saying the king owed you a thousand livres, you could get only, say, four hundred livres in the open market for it, but Law’s bank would credit you with the full thousand livres in paper money.

Law’s notion of centralised banking is what continues today:

Today, we live in a version of John Law’s system. Every state in the developed world has a central bank that issues paper money, manipulates the supply of credit in the interest of commerce, uses fractional-reserve banking, and features joint-stock companies that pay dividends. All of these were brought to France, pretty much simultaneously, by John Law.

What Bagehot brought to the table was a focus on gold:

He thought that money, real money, was gold, and gold alone. All the other forms of currency in the system were merely different kinds of credit.

This was then held by the central bank.

What Lancaster highlights is how the successes and failures of both men continue to be played out again today. The central role of nationalism is therefore interesting to consider when thinking about the world of Amazon and Facebook.

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