Till debt us do part

Paper Promises: Money, Debt and the New World Order, by Philip Coggan, Allen Lane, RRP £20, 304 pages

History is a battle between creditors and debtors over the nature of money. The former want sound money and the latter want easy money.

That is Philip Coggan’s thesis in his new book, Paper Promises, and it leads naturally to an explanation of the current credit crisis, along with all the great financial crises of the 20th century. Crises occur, in the Coggan view of history, when debtors fail to repay. At this point, because their interests have been reflected in the very nature of money, the financial system itself must be reformed. This happened in the 1930s, when the Great Crash led to the end of the gold standard, and again in the stagflationary 1970s, with the end of the Bretton Woods agreement.

We are now living through another such crisis. Its resolution remains unclear but none of the available routes is palatable. Either the world must suffer through prolonged stagnation or see a massive default, or the accumulated debts of the past four decades must be inflated away.

But the identity of the country around which the next financial system will be built is not in any doubt. That will be the world’s largest creditor, China. Coggan points out that the system always hinges on the greatest creditor, just as the US led the world during the Bretton Woods era and Britain led in the gold standard era.

As for the repeated bubbles and crises of the past four decades, they can be traced to the ease with which money can be printed following the end of the last Bretton Woods tie to gold, and to the unprecedented growth of the financial sector, both in absolute size and in its share of the economy.

These are bold and confident historical abstractions. But they do not seem so when reading the book. Coggan, a former Financial Times journalist and my predecessor as regular writer of the FT’s “Long View” column, covers the terrain with characteristic calmness and objectivity, avoids over-simplification, and laces his arguments with his trademark erudition.

His references are wide-ranging. Shylock’s loan to Bassanio in The Merchant of Venice comes up. So do the family finances of the Forsytes in The Forsyte Saga (they lived off consols, a form of perpetual UK government debt). And so do the South Sea islanders who once threw a chest of gold into the sea, thinking it worthless, and kept on looking for precious cowrie shells, the basis of their own financial system.

Most of all, William Jennings Bryan, the turn-of-the-century populist who ran three times for the presidency, functions as the book’s hero, or anti-hero. Ever since he made it his rallying call that Americans must not be “crucified on a cross of gold”, his spirit has lived on; debtors, Coggan points out, have always passionately campaigned for adulterated money.

The writing is clear and concise. It is aimed at lay people, not professionals. The extremely technical concepts that necess­arily arise in discussing the credit crisis are carefully explained from first principles. The alphabet soup of acronyms, from SIVs to CDO Squareds, is blissfully lacking.

Finally, the book is free from the shrieking ideology that afflicts virtually all contemporary debates over money. Indeed, it offers a clear explanation of the fresh ideological divisions that have arisen over how to deal with the crisis.

The US now has powerful populist impulses on both sides of the political divide, with the libertarians (or creditors, in the Coggan view) of the Tea Party on one side and the leftists (or debtors) of Occupy Wall Street on the other. Beneath the passionately held principles, a division of the populist movements into defenders of debtors and creditors makes sense. The first call for a “Tea Party” came from a commentator on CNBC railing against the Obama administration’s plan to give aid to “losers” who could not repay their mortgages; while Occupy’s founding principles rail against “an unfair global economy that is foreclosing on our future”. Paper Promises shows that both Occupy and the Tea Party have real reason to be angry. Indeed, either side could cite large chunks of Paper Promises in its favour.

Coggan is clear that doing away with the dollar’s peg to gold in 1971 gave governments the power to create money at will, that they abused it, and that this created the bubbles of the past four decades. This is a central narrative of the Tea Party.

Yet he is scornful of Ayn Rand, the libertarian philosopher much beloved by Tea Party followers, and is clear that the growth of the financial sector in the past generation was a harmful development. He suggests the financial sector “has become what economists call a ‘rent-seeker’, charging excessive prices for its services”. That might be thanks to lack of competition, as implicit guarantees from governments make it hard for new banks to enter the market, or it might result from banks’ own deliberate lack of transparency. And plainly the Occupy movement, representing debtors, does have a point.

The chances of our minimising what Coggan rightly argues is an inevitable dose of severe pain would be much greater if people on both sides of this latest debtor-creditor divide could approach the problem in his own well-informed and dispassionate way.

However, I fear many people who should read this book will not do so, because its ultimate message is not uplifting. Coggan’s prediction is that the crisis can only be resolved by some combination of “inflation, stagnation and default,” which will drive a crisis “at least as severe as the one in 2008”.

As for the future, Coggan has the honesty to admit that he cannot foresee it. But his central prediction, of the ultimate ascendancy of China as the world’s greatest creditor, is both hard to dispute and unlikely to be popular. After patiently examining and dismissing various possibilities, such as systems based around a Chinese “renminbi standard” or IMF “special drawing rights”, he suggests the most likely new system will revolve around capital controls, exchange rate pegs and “financial repression” – measures to force creditors to lend to governments at cheap rates. “Something will turn up but it may take 10 or 15 years and it will not necessarily be to the west’s liking. A new order will emerge. And, like so many of the goods sold in western supermarkets, it will be made in China.”

Paper Promises lacks either an upbeat conclusion or a narrative to support the prejudices of one side or the other. This might not help sell copies but it is all the more reason why the book should be taken very seriously.

John Authers is the FT’s senior investment columnist and author of ‘The Fearful Rise of Markets’ (Financial Times/Prentice Hall)

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