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I
called this "book notes" because it really doesn't qualify to be
called a "review." These are just my impressions from the book,
which I did not read in its entirety. I suggest that you do not either.
Most books about economics are like that. The author is so confused that
their text is basically unreadable. Most books are useful as a source of what
you could call raw material: facts and bits of narrative about the economic
conditions of a certain place and a certain time. From these facts and bits
of narrative, you piece together the real story, which is typically quite a
bit different than the story in the book.
As a source of raw material, this book is very, very useful, and I do suggest
that you buy a copy for your personal economics library, if you are the sort
-- like me -- who has a shelf for such things.
The heart of the book, and its most useful and interesting material, is what
amounts to a list of various sovereign defaults and nationwide banking crises
in the world -- developed and developing -- dating back to 1200 or so,
although most of the material dates from 1800. There weren't really
"countries" in the contemporary sense until the 19th century, when
the great European empires began to break up, led notably by the United
States in 1789. Sovereign default goes back as far as there have been
sovereigns (kings) borrowing money, however, and the book notes defaults by
the king of England in 1340, 1472 and 1594; the king of France in 1558, 1624,
1648, and numerous times subsequent; and the king of Spain in 1557, 1575, and
four more times by 1647.
From these statistics on individual countries, the authors compile some
interesting aggregate statistics of the world as a whole. For example, you
can find, on page 99, that Russia has been in default or rescheduling on its
external debt for 39.1% of the time between 1800 and 2008. Greece clocks in
at 50.6%. Argentina scores at 32.5%, while Sweden pitches a no-hitter at 0%.
On page 72, we find that, in 1840, roughly 35% of all countries were in
default or restructuring. This fell to about 18% in 1900. In 1933, this ratio
was about 45%, representing about 25% of estimated world income.
This is what I mean by valuable raw material. For example, if you were
studying the Great Depression, don't you think it would be important to know
that 45% of all countries were in default on their debt, including Britain,
the country which practically invented the government bond, and which
apparently delayed or deferred some payments? That would go some ways to
explain the sudden burst of tax-hiking around the world beginning with
Britain and Germany in 1931, and leading to the U.S. in 1932 with the
infamous Hoover tax hike.
The authors also distinguish that the debasement or devaluation of the
currency in which debt payments are made constitutes a form of default. For
some reason, economists can see this clearly when they are dealing with the
19th century, but if you ask them to apply the same principle to the floating
currency system of today, which dates from 1971, everything becomes a lot
more confusing to them. On page 176, we find that the Austrian kreuzer lost
69.7% of its silver content between 1371 and 1499; the Bavarian pfenning lost
26% in 1685 alone. The French livre lost 56.8% of its silver in 1303, and the
British pense was cut in half in 1551.
Typical of economists today, the authors separate these devaluation events
from "inflation" events. "Inflation" is usually measured
in terms of "prices", something like today's CPI, although for
historical studies this usually means a basket of simple commodities like
wheat and wood, which is not the same thing at all. On page 183 we find that
Korea had inflation of 143.9% in 1787. (You have to love that false
precision. How the hell is anyone going to know that Korean
"prices" rose 143 point nine percent in 1787?) Between the
years 1501 and 1799, France had 20%+ "inflation" in 12.4% of those
years. Between 1704 and 1799, Poland had "inflation" of greater
than 40% in 31.9% of those years.
Of course, what we really want to know is: what were the value of these
countries' currencies compared to gold? This data is available, from
globalfinancialdata.com, but it costs some money and would have to be
compiled from separate sources. For example, you could have a time series on
the value of the British pound compared to gold, and then the value of the Polish
zloty compared to the pound, from which you could derive the value of the
zloty vs. gold. I would love to see a series of charts along those lines,
which show currency values in gold terms and versus major international
currencies, along with notes about currency reforms and introduction of new
currencies. You wouldn't need a lot of text, just one page per country. So,
if anyone wants a book idea, there you go.
The authors make a few generalizations about how countries end up defaulting
on their debt, which is rather confused. But, if you remember that Ken Rogoff
was formerly the IMF's chief economist, you would expect that. They seem to
have difficulty distinguishing between a country that simply borrows too much
money, and is unable to pay, and a country which borrows in a foreign
currency and then suffers a currency event, typically a large drop in the
value of the domestic currency.
It would be wonderful to have a bunch of Ph.D students look into, for
example, the history of individual countries such as Argentina's or Russia's
economy and sovereign finances during the 19th century, and do it in a
coherent and rational way, looking at the value of the currency vs. gold and
major international currencies, the tax system and changes to it, domestic considerations
and the international environment in which they operated. Something
definitive that could be relied upon, rather than used as a source of
"raw material" for someone else to find the real story. This study
of history would be much more useful than the typical career track of the
today's credentialed economic babbler, which involes something like: let's
assume that an economy is something like the physics of gases; (mathematical
argle bargle); from which we conclude that white is black, up is down, and
pigs fly. And -- let's not forget -- that governments should spend more
money, currencies should float and be devalued periodically, a tax hike is
"inevitable," and that banksters should be bailed out always and
forever. I think Niall Ferguson has done a lot recently to revive interest in
economic history -- which, in combination with some basic theoretical
understanding, is the real study of economics. This is probably why Ferguson,
although his theoretical understanding is rather weak in my opinion,
nevertheless makes a lot of sense these days. Plus, he is incredibly
prolific. Studying history -- real economies in the real world -- gives you
an idea of how things actually work, even if you may not exactly understand why
things work out the way they do.
From my perspective, this book helps describe the incredible turmoil and
disaster caused by unstable currencies, which has swept over countries time
and time again. Can you see now why I suggest stable, gold-linked currencies?
It also describes why conservatives are continually nervous about budget
deficits and ballooning debt, even when governments are far from the point of
default. It's just a bad habit to get into, and the ultimate consequences are
dire.
Nathan
Lewis
Nathan
Lewis was formerly the chief international economist of a leading economic
forecasting firm. He now works in asset management. Lewis has written for the
Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and
other publications. He has appeared on financial television in the United
States, Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada, call
800-567-4797.
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