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May 4, 2012 / politicsbitesize

Is Owed Unto

The Governor of the Bank of England, Sir Mervyn King, gave The Today Lecture on Radio 4 on Wednesday 2nd May. He told the 300 invited guests and host Evan Davis that not enough was done to prevent the banking crisis and urged the UK government not to delay in changes to regulating the banks. Sir King expressed his regret at not having ‘shouted from the rooftops’ in 2008 about the impending economic crisis. He concluded that dealing with the consequences of the ‘bad banking situation’ is likely to be ‘a long, slow process’ and ‘the crisis has cast a long shadow’.

But how did we get into this situation in the first place? Why was the power to regulate taken from the Bank of England in 1997? In his book, Paper Promises: Money, Debt and the New World Order, Phillip Coggan examines the evolution of money and the economic breakdowns of the past and present. Below is a review of this title.


On all British bank notes from £5 to £50 the words ‘I promise to pay the bearer on demand the sum of …’ still appear. In eighteen-century Europe an experiment with paper money was begun by John Law, a Scottish mathematician and gambler, who moved to France toward the end of the reign of Louis XIV. The monarchy of France was, at this time, verging on bankruptcy and, as the successor to the King was still only an infant, the duc d’Orléans held the reins. John Law suggested to him that the creation of a bank that could issue paper money in lieu of gold and silver was the best way to get France out of debt. The Banque Générale was created and the duc d’Orléans decreed all taxes could be paid using Law’s new paper money.

Unfortunately, Law held the view that ‘it did not matter that paper money was not backed by an equal amount of gold and silver’ and it was this belief that Coggan cites as the downfall to this early experiment: ‘Had the scheme been kept on a modest scale, with banknotes backed by gold and silver, French economic growth might indeed have been boosted over the long run.’ However, Law’s experiment did not diminish the eventual power of paper money, primarily because precious metals are easy to steal, rare and cumbersome to manoeuvre.

In order to keep their gold and silver safe people began to store their valuables in safes at goldsmiths where they would receive a receipt for their deposit. This receipt was effectively an early banknote and the reason why we see the words ‘I promise to pay the bearer on demand the sum of …’ on our modern day equivalents. The difference between the original receipts and today’s notes is that these days the bearer cannot go into a bank (or a goldsmith) and demand the requisite amount of gold in return for the paper money. This is because in the 1930s the global economy broke with the gold standard, so today most of the world’s currencies are no longer linked to the amount of gold any given country holds in its reserves. Instead most currencies are pegged to the US dollar and worth as much as the exchange rate claims it to be.

In Paper Money Phillip Coggan charts the journey of money from its direct links with gold to the present day climate of abstract money, exchanged at the press of a button. This book provides a valuable insight into the field of economics for those of us who have never studied in depth the ins and outs of such a complex system. The author succinctly charts the story of money and outlines, in layman’s terms, the reason why we find ourselves in the current financial crisis. The reader is taken step by step through the Depression of the 1930s, the breakdown of Bretton Woods, asset bubbles, the problem with sub-prime mortgages, all the way to the collapse of Lehman Brothers and the vast debts the world is now drowning in. As Nassim Nicholas Taleb states on the front cover, ‘This book stands way above anything written on the present economic crisis’, and furthermore it explains it all in a way that anyone with any interest in the subject can understand.

Phillip Coggan, Paper Promises: Money, Debt and the New World Order, Allen Lane, ISBN 978 1846145100, £20.00


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