Paper Promises

Starred review from October 31, 2011
Coggan (The Money Machine) traces “history’s tug of war between monetary shortage and excess” in this engaging and timely book about the current financial crisis. From early stages of money forms, the author portrays a clash of opposing forces and ideologies: sound money or easy money, fixed rates or floating rates, creditors or debtors. Governments’ role in monetary policy is given particular attention with respect to the Keynesian/monetarist debate: do we use fiscal stimulus to interfere with the markets or do we give it free rein? Through many diverse topics—exchange rates (being “the history of paper money”) and the forces driving their wide and volatile swings, bubbles, “debt-fueled booms,” and the Minsky effect—Coggan outlines his main thesis: “Money (debt) expanded to gratify the desire of the consumers and businesses for greater economic activity (more trade).” The book concludes with a discussion of the consequences of the debt crisis, namely, “inflation, stagnation and default,” and outlines a new system. A history of economics is avoided; many major economists, such as Marx, Marshall, and Walras, never show up. However, these omissions prove expedient and allow this otherwise dense treatment to maintain direction and flow. A thoughtful and thorough book aimed at the layperson.

November 15, 2011
Will the rules of international finance be replaced; if so, what will be the terms? Economist columnist Coggan (Guide to Hedge Funds, 2008, etc.) tackles these questions and others in this comprehensive treatment of money and debt. As an award-winning financial journalist, the author writes for the layperson, refusing to shelter behind the jargon of the dismal profession. Further, he doesn't claim to know with certainty how the current crisis will play out. Coggan states forthrightly that the confusing mess in which we currently find ourselves--initiated in 2007-08 by subprime mortgages--is not just another upheaval in American finance but the end of an era, a major turning point. He does not think there can be a return to the status quo because the promises to pay made in earlier times cannot be honored. The author situates his conclusion in a discussion of the longer-run history of booms and busts of monetary systems, and their related structures of indebtedness. The extremes in this series included phases associated with the word "bubble"--e.g., the Mississippi and South Sea Bubbles--and the hyperinflation of Weimar Germany. The rapid expansion of paper credit secured only on promises to pay from the proceeds of anticipated future growth caused crises when they outran the possibilities of growth. As a result, leaders reacted with draconian austerity to rebalance financial excess, often with gold-based monetary systems. Unfortunately, the United States has fallen from its once-lofty perch. "The US," writes the author, "so long the dominant power, is watching nervously in its rear-view mirror as China catches up. In short, the confidence needed to borrow and lend is diminishing." A helpful analysis for anyone who wants to know how the world got into the present financial mess, which issues need to be addressed and what the consequences might be.

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