How did these once wild ideas become part of the very fabric of modern<\/strong> finance and government? Trial and error.<\/strong> It was not the case that smart people figured everything out at once and implemented it simultaneously, as Law tried to do. The modern economic system evolved, and evolution involves innovations, repetitions, failures, and dead ends. In finance, it involves busts and panics and crashes<\/strong>, because, as James Grant says in his lively new biography of the Victorian banker-journalist Walter Bagehot, \u201cin finance and economics, we keep stepping on the same rakes.\u201d<\/strong><\/p><\/blockquote>\n <\/p>\n
In a sense, this highfalutin hypocrisy and lack of principle is the point of Bagehot. His work on the English constitution focussed on a paradox: the pomp and circumstance of monarchy had an important function, he argued, precisely because the monarch had no real power. Bagehot\u2019s work on banking similarly focussed on the difference between appearances and realities, specifically the gap between the air of solidity and respectability cultivated by Victorian banks and the evident fact that they kept collapsing and going broke<\/strong>. There were huge bank crises in 1797, in 1825, in 1847, and in 1857, all of them caused by the oldest and simplest reason of bankruptcy in finance: lending money to people who can\u2019t pay it back.<\/p><\/blockquote>\n <\/p>\n
In theory, all the money in circulation during the era of Victorian banking was backed up by deposits in gold. One pound in paper money was backed by 123.25 grains of actual gold. In practice, that wasn\u2019t true.<\/strong> \u2026 That phenomenon, the dreaded \u201cbank run,\u201d was a direct outcome of the fractional-reserve banking prefigured by John Law<\/strong>. A system in which banks don\u2019t hold cash reserves equivalent to their outstanding loans works fine, unless enough people turn up at the bank and simultaneously want their paper money turned into its metal equivalent. Unfortunately, that kept happening, and banks kept going broke. The issues at stake were the same as those that had shaped the career of John Law, and which are on people\u2019s minds again today: What is money? Where does it derive its value? Who finally guarantees the value of <\/strong>debts and credits?<\/strong><\/p><\/blockquote>\nBagehot had answers to all those questions. He thought that money, real money, was gold, and gold alone.<\/strong> All the other forms of currency in the system were merely different kinds of credit. Credit was indispensable to a functioning economy, and helped make everybody rich, but in the final analysis only gold was legal tender, according to the strict definition of the term\u2014money that cannot be refused in settlement of a debt. \u2026 Bagehot loved a paradox, and this was one: all the credit in the system was essential to the economy, but it wasn\u2019t really money, because it wasn\u2019t gold, which underpinned the value of everything else<\/strong>.<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"worth read article on this interesting system we all live into, built upon trial and error. \u2026the man who almost bankrupted a country and the supreme advocate of bankers\u2019 bailouts would be amused to see just how little we have learned\u2026 Origen: The Invention of Money | The New Yorker How did these once wild […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[32,26,5,163,6,31,56,33],"tags":[299,11],"class_list":["post-3829","post","type-post","status-publish","format-standard","hentry","category-economia","category-el-critico-como-artista","category-financial","category-funding","category-governments","category-la-vida-misma","category-lecturas","category-politica","tag-economy","tag-finance"],"jetpack_featured_media_url":"","jetpack-related-posts":[],"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/silta.es\/juantatay\/wp-json\/wp\/v2\/posts\/3829","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/silta.es\/juantatay\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/silta.es\/juantatay\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/silta.es\/juantatay\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/silta.es\/juantatay\/wp-json\/wp\/v2\/comments?post=3829"}],"version-history":[{"count":4,"href":"https:\/\/silta.es\/juantatay\/wp-json\/wp\/v2\/posts\/3829\/revisions"}],"predecessor-version":[{"id":3833,"href":"https:\/\/silta.es\/juantatay\/wp-json\/wp\/v2\/posts\/3829\/revisions\/3833"}],"wp:attachment":[{"href":"https:\/\/silta.es\/juantatay\/wp-json\/wp\/v2\/media?parent=3829"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/silta.es\/juantatay\/wp-json\/wp\/v2\/categories?post=3829"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/silta.es\/juantatay\/wp-json\/wp\/v2\/tags?post=3829"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}