Coined is like Malcolm Gladwell for investment bankers, with intriguing anecdotes to close the quick sale while obscuring the larger picture. Money matters: Over the last half-century, the world economy has swung from high inflation to financial crisis to zero interest rates. But Kabir Sehgal, an investment banker, offers “a multi-dimensional and interdisciplinary portrait of currency through the ages” without much ability to tie it together.
Sehgal recounts the historic views of money as something with intrinsic worth (precious metals) and as a store of value (paper money). “Alas,” he says, “money can clearly be both—as long as it remains a symbol of value.” Why the sadness for a debate that’s over? Even the ultra-hard-money James Grant argues for paper backed by redeemable gold reserves as a rule for constraining the money supply, rather than suggesting that we transact all business in coins. Sehgal’s evidence suggests that all civilizations have needed a stable basis of short-term value—and have adjusted the money supply to prevailing economic conditions.
“The arc of monetary history,” Sehgal says, paraphrasing Theodore Parker/Martin Luther King Jr., “bends toward soft money.” In his bouffant Whig theory of history, the quantity of money has expanded at the expense of its value. It fails to account for the concurrent growth of economic activity, population, and real incomes. A Sumerian sila of barley (an early monetary unit) isn’t worth what it used to be worth, representing a much smaller portion of today’s gross domestic product. But a Sumerian swimming in silas 5,000 years ago still couldn’t buy a smartphone.
Lacking a framework for how societies have managed their monetary bases, Sehgal launches factoids. The incorporation of mitochondria into cells, a biological example of cooperation, says little about human economic exchange. Because behavioral economics is currently cooler than a selfie stick, Sehgal asks, “If economists better understand the mind, could they make more accurate forecasts?” No. While behavioral economics shows how individual decisions depart from the “rational actor” model, it is nowhere near aggregating those individual decisions into macroeconomic predictions.
Regrettably, Sehgal fails to report experiments in which rats, offered a lever that releases cocaine, press for more and more stimulus until they die, even though this model would explain the Federal Reserve’s approach to interest rate cuts. The book seems primarily to address circulating currency, but money is much broader. Sehgal extolls the technological marvel of bitcoin, which claims to be a virtual currency created through computer algorithms, but he fails to analyze it against earlier virtual currencies, such as the ancient Mesopotamian debt accounts he discusses early on. He ignores the virtual money that fueled Europe’s economic expansion in the later Middle Ages and Renaissance: bills of exchange issued by private merchant banks such as the Medici and used for long-distance trade.
Currency has historically been only a small fraction of units of exchange—today around 7 percent of the American money supply. Checking accounts, repos, and money market funds—to name just three virtual, privately created units of exchange that economists regard as money—are discussed nowhere here. The focus on legal tender buries a paradox: Even hard money is always in flux.
In Sehgal’s account, when precious metal coins originated in the 7th-century-B.C. kingdom of Lydia (in present-day Turkey), they established a fixed unit of exchange. But once the coins were assigned a set value, there was an incentive to mine more gold and silver, increasing the money supply—a pattern seen repeatedly over the millennia. The later legend of King Midas (ruler of the adjacent kingdom of Phrygia), who nearly starved because his touch turned everything to gold, could be an allegory about excessive minting leading to gold’s loss of value and hyperinflation. Nearer to our own time (but also left unmentioned), Spain’s 16th-century discovery of the Potosí silver mountain in today’s Bolivia fueled an inflation that ultimately wrecked the Spanish economy.
Even if the monetary base stays constant, the real economy does not. Sehgal moralizes about ancient Rome’s debasement of the coinage, which kept denominations constant while gradually reducing the silver content down to a surface wash by the third century a.d. But by the latter stages of the economic expansion, which ran from the early classical period through the peak of the Roman Empire, the gold and silver monetary base was too small. Debasement was just one tool for creating fiat money: Elites also created fiat money with bronze coins for smaller local transactions and, based on evidence in literary sources, by issuing drafts to settle long-distance high-value transactions.
Of course, elites also have an incentive to manipulate the monetary system to cover up fiscal strains. As the Roman Empire declined, debasement-fueled inflation helped fund a bigger military than Rome could afford. Before the 20th century, people accepted fiat money on the promise that they could redeem it for precious metal. The precious metal base was only a fraction of the money supply, so when wars increased inflation or government default risk, people would trigger bank runs by seeking to exchange their fiat money for precious metal.
Central banks, beginning with the 17th-century Bank of Amsterdam, often had to limit convertibility from paper to precious metal. Yet Sehgal reports, in apparent surprise, that the value of American currency crashed during the American Revolution after the Continental Congress penalized redemptions with a 45 percent tax (effectively a 45 percent devaluation). In the post-Civil War deflation, he finds it similarly surprising that, once the federal government bulked up precious metal reserves, there was little demand to convert greenbacks to gold. But why convert if you’re confident in the reserve?
The real modern change is not an arc bending toward soft money but an acknowledgment that economies run on fiat money and that the monetary base can be changed. Early in the New Deal, Franklin D. Roosevelt manipulated the gold price of dollars, one day raising the price by 21 cents “on a whim,” according to Sehgal. That was no whim: The eminent economist Irving Fisher claimed that the economy could be reflated by randomly moving the price of gold, so FDR dutifully chose a number each morning before getting out of bed. (He never believed this would work and ultimately abandoned the experiment.)
As Coined approaches the present, the focus on softness resembles a television commercial. When a Spanish online retailer resorted to barter during the 2010 euro crisis, Sehgal argues that it was because “people lose faith in a soft currency”—the first time anyone outside a padded cell in the Bundesbank has claimed the euro was too soft. Although a fiat currency, the euro has actually been far too hard (that is to say, overvalued) for depression-plagued southern European economies. As Greece currently demonstrates, in a crisis, people don’t lose faith in hard-money euros: They demand them, draining liquidity and collapsing the banking system.
Readers seeking an accessible history of this subject have an alternative. Niall Ferguson’s The Ascent of Money (2008), issued in connection with his PBS series of the same name, also takes the whole of human history as its subject—although he omits the mitochondria. Ferguson coherently explores the tension between money as a stable store of value, the creation of fiat money, and the impact of rent-seeking elites. People spending their own coin (bit- or otherwise) should look there.
Jay Weiser is associate professor of law at Baruch College.
