Money (27 page)

In the Athens of the late seventh century
BC
, money and its spread was the social problem of the age.
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Until recently, Athens had still been organised along traditional lines with a small class of land-owning aristocrats leasing land to sharecroppers in return for a portion of their harvest. In the days when the aristocrats had supplied the ranks of the army, there had been a compact of mutual aid with their tenants. But in the competitive, atomising world of monetary society, the peasant farmers, with the prospect of social mobility now opened to them and the requirement to fight now imposed on them, resented the aristocrats’ traditional rents. The aristocrats, meanwhile, saw their land-holdings not as hereditary estates to which they owed a duty of care but as potential sources of financial gain. Money was tearing the social fabric apart. “The citizens themselves in their wildness wish to destroy this great city,” lamented the poet Solon, “trusting as they do in wealth.”
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It was a situation ripe for a financial crisis if ever there was one. As the creditor class of aristocrats attempted to maximise their profits, they met with increasing resistance from their insubordinate clients. Disputes multiplied, but there was no such thing as property or contract law to adjudicate them—only customs and taboos that were fast disintegrating. As for a property registry, there were nothing but worn and faded marker stones to settle arguments over ownership. The transition from traditional to monetary society was provoking a messy class war, driven by a debt crisis fuelled by the very shortcomings that the Greeks knew to plague money’s fantastic promise: financial obligations cannot fulfil every role that social obligations can; there is no intrinsic limit to ambition in monetary society; and, left unchecked, the exhilarating independence that money promises becomes destructive isolation. “The leaders of the people … are ripe to suffer many griefs for their great arrogance,” warned Solon, “for they know not how to restrain their greed.”
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Something had to be done to defuse the situation.

As it happened, there was a precedent. The great command economies
of Mesopotamia may never have assembled all the components of money—but they did have the institution of interest-bearing debt. As a result, they were no strangers to the crises that this could generate and were as concerned as the Greeks with the potential of debt to disable the martial capacity of their cities by demoralising a vital class of fighting men through foreclosure and therefore disenfranchisement.
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They understood this problem, and therefore its solution, in terms of their traditional and religious cosmology: it was the responsibility of the king, who was heaven’s divine representative on earth, to restore social balance by cancelling some or all of the debts. The earliest known examples of this Mesopotamian practice of proclaiming a clean slate when the burden of debt became socially unsupportable are almost as old as the earliest evidence for interest-bearing debt itself—dating from the reign of Enmetana of Lagash in around 2,400
BC.
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It was a tradition that survived in the Ancient Near East into biblical times, in the form of the institution of the jubilee, which the Book of Leviticus enjoined the Hebrews to declare every fifty years.
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There was, however, a fundamental problem with the application of this tried and tested oriental remedy in Athens at the turn of the sixth century
BC.
Athens was a society in the throes of scientific enlightenment. The religious cosmology of traditional society no longer cut the mustard as the definitive guide for the distribution of power on earth. “Man controls his destiny” was the spirit of the age.
²⁷
So man himself must determine the fair distribution of wealth and power by money. Once again, an oriental practice—this time, the institution of debt cancellation—was imported into Greece. And once again a critical innovation, peculiar to the distinctive political culture of the Greeks, was made. An ulterior ideal of social order would indeed be imposed upon the uncontrolled excesses of monetary society. But this ideal would not be a simulacrum of the divine order in heaven. It would be a human notion of fairness in society hammered out by man. It would be determined, in short, through politics.

The man who introduced this radical idea was none other than
the one who had done most to diagnose the problem: the statesmanpoet Solon. Elected chief magistrate of the city in 594
BC
, Solon proceeded to enact a series of social reforms known from then on as the “Shaking-off of Burdens.” Chief amongst these was a cancellation of debts—but one which differed fundamentally from the oriental practice of the jubilee. For the central decision of any debt relief—who should gain and who should lose—was a matter of political compromise. The leadership of a gifted politician was of course crucial. “In great matters, it is hard to please all,” wrote Solon in defence of his greatest legacy years later, but “[i]n between the two opposing sides, I stood like a boundary-stone.”
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Poet that Solon was, his choice of metaphor conveyed brilliantly the essence of the revolution he had wrought. If monetary society was to function, the old system of fixed boundary stones—the system that had regulated traditional society, with its immutable social obligations—would have to go. In its place would be a new system, in which the boundary markers—the standard of social justice—would have to be adaptable to the social change that money by its nature brings. And in the world in which mankind controlled its destiny, there could be only one source of legitimacy for that new standard of fairness: democratic politics.
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The Shaking-off of Burdens did not stop there. Share-cropping was abolished, taxation by economic category rather than class introduced, and the right to trial by jury guaranteed. More than two centuries later, Aristotle argued that this last reform was “said to have been the chief basis of the powers of the multitude … for the people, having control over the courts, thereby have control over the government.”
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But another aspect of Solon’s reforms was more important than any single measure. For the critical role to be played in future by political decisions regarding what was and was not economically fair called for a new and more formal system of recording such decisions and assessing compliance with them. What was required—and what Solon therefore supplied, inscribed on a famous set of rotating wooden tablets—was a comprehensive body of law.
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With Solon’s achievement of a democratic state under the rule of law, the formula for making money work was complete.

Scepticism about money has a distinguished pedigree—stretching all the way back to its invention—and radical strategies such as the Spartan or the Soviet have their supporters even today. The oldest sceptical strategy, however, is one which tries to remake money, rather than reduce it or remove it. It is the strategy that sees money as fundamentally a force for good—but one which left unmanaged will inevitably get out of hand. It is the strategy which superimposes on monetary society a periodic recalibration—as dramatic as a one-off jubilee or unilateral default, or as humdrum as a gradual depreciation of the monetary standard—or even, in the unprecedented experiment of John Law, attempts a structural fix by withdrawing money’s promise to deliver stability entirely. The focus of these strategies—the Scotsman’s strategy, and Solon’s long before him—is on the flexibility of the monetary standard. They require, therefore, an answer to a question that the others do not: on what grounds should adjustments to the standard be made?

It is in their answers to this question that the historical adherents of this strategy of managing money have diverged. The civilisations of the ancient Orient had their clean slates and their jubilees. For them the answer was given by divine law. Let money do what it will for fifty years, says Leviticus, and then “proclaim liberty throughout all the land unto all the inhabitants thereof: it shall be a jubilee unto you.”
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But this is the very view of the world as governed by divine law that the scientific revolution of the Greeks superseded—and it is that revolution whose children we are today. Nobody in today’s world would suggest to the participants at the next IMF board meeting or central-bank policy committee that they start to make their decisions based on their religious convictions. To the great innovator John Law, all this was quite clear. It is man, he argued, not God or nature, who must decide. This was the meaning of his great innovation, the fiat money standard: a regime in which the issuance and value of money became at all times a matter of deliberate policy, not of arbitrary chance.

But here too lay hidden the fundamental flaw in Law’s version of the strategy. For Law believed that an absolute monarch should make this policy. He believed that the king should determine the standard conducive to economic efficiency and social justice, and that money-users would trust him to do so. Indeed, he thought only an absolute monarch could do all this. Democracies and republics, he believed, could never manage money properly—they would always be arguing about who should win and who should lose, and no one would ever trust them to keep their word. Absolute monarchs were different. “A wise Prince infinitely shortens all these Difficulties,” wrote Law,

It is an old and tempting trap—the belief that only the strong arm and single mind of “Despotick Power” can really generate loyalty in politics and credibility in finance. The reality, as history was beginning to show even as Law was writing, was exactly the opposite. In time, his contention that “Kings have never fail’d, and never will fail in the Payment of their Debts” would come to seem as quaint and obsolete as absolute monarchy itself.
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Rather, it was Solon who had seen how the strategy might work, all the way back at the beginning. Only the compromises of democratic politics can durably decide what is fair; and only the promises of democratic governments can reliably last. This was the secret of the recalibration of the standard—the secret of harnessing money’s benefits while avoiding its flaws. The tribal society of Dark Age Greece knew the fundamental equality of the individual. This was the invaluable idea that furnished a universal standard of value, which, combined with the Eastern technology of accounting and
the scientific revolution in archaic Greece’s intellectual worldview, led to the invention of money. From the beginning, however, the Greeks were sceptical of money’s prodigious claims—and the earliest experience of monetary society seemed to confirm their fears. The contradictions inherent in money’s promise to combine freedom and stability threatened to overwhelm Athens’ newly enlightened state. Solon showed the way to square the circle. The original standard of economic value—the standard that had allowed money to serve, not only as a device for organising one line of trade or one part of the bureaucracy, but the entire economy and the whole of society—expressed a political ideal: the equal social value of the individual member of the tribe. But by its nature, money permits social mobility and the accumulation of wealth and power over others. Any fixed standard of monetary value will therefore necessarily become obsolete—and that obsolescence spells mortal danger, for it is the root of civil strife. Instead, the state must be always vigilant to ensure that the architecture of financial obligations reflects what society believes to be fair. Only politics—democratic politics, in constant activity—can furnish such an evolving standard. And only law—its debate, codification, and rule—can enact it.
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It is a strategy for harnessing money’s potential as relevant today as it was two and a half millennia ago. But the entire sceptical tradition in monetary thought has been thoroughly eclipsed by the conventional understanding of money and the new discipline of economics that was constructed on its foundations. We have already discovered the blind spot in moral reasoning that this unfortunate neglect has generated. In the immediate aftermath of the global financial crisis, it is the shortcomings of practical economic policy that are the starkest evidence of the problem. So it is to investigate the consequences of the conventional understanding of money for our current economic predicament that we turn next.

On 5 November 2008, Queen Elizabeth II was at the London School of Economics to conduct the official opening of a £71 million extension to the world’s oldest academic institution devoted to teaching and research in economics.
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After a tour of the magnificent new building, the Queen was presented to the School’s faculty. The ceremony had been arranged months before—but a mere seven weeks previously, the leading U.S. investment bank Lehman Brothers had collapsed into bankruptcy, sparking a global economic crisis of unprecedented severity. It was an instance of serendipity too good to pass up. The Queen asked the international aristocracy of economists assembled before her an obvious question: why had none of them seen the crisis coming?