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25 of 26 people found the following review helpful:
5.0 out of 5 stars
Money, come back!, January 4, 2001
This is JKG holding forth on that most perennially fascinating of topics. The subtitle ("Whence it Came, Where it Went") may bear a relation to the question on everybody's mind during the early and mid-seventies: why is our money behaving so badly? "In the twenty years before the founding of the [Federal Reserve] System there were 1748 bank suspensions; in the twenty years after it ended the anarchy of unstable private banking, there were 15,502."(p144) "...the Democrats...could authorize it [the central bank] without being suspected of evil."(p239) "...the [German] inflation of 1923, with its euthanasia of the "rentier" class...had almost certainly a far greater [than the 1945 inflation] effect on relative wealth. ...The loss of assets makes a deep impression on an impressionable class of people. The loss of jobs is accepted more philosophically."(p303/304) "... the higher oil price [in 1973] was considered highly inflationary ... in fact, it was deflationary ... the revenues... accumulated in unspent balances. Thus they represented a withdrawal from current purchasing power..."(p363) (The rest of the paragraph is relevant. The basic point is that the oil producers took money out of circulation, since they made it far faster than they could spend it.)" And the piece de resistence: "To see economic policy as a problem of choice between rival ideologies is the greatest error of our time."(p368) MONEY OK, do I have your attention? Well, this book will not demystify money - like love it is resistant to that, but like love we can't let it go. And its progress through our culture is a fascination, attended by hopes, frauds, inventions, and, not least, desperate invocations. Galbraith is a writer of enormous wit, intelligence, learning, and sympathy. But he is, of course, a liberal, so to many anything he says will be suspected as not arising out of a proper deference to the efficacy of pure market forces. Just as daunting, his strong, ironical style requires a neophyte a few pages to adjust to syntax shock. Once comfortable with the language, though, one can sit back and enjoy the colorful cavalcade of rogues and fools, madmen and prophets, as they invent and wreck institutions, impoverish whole nations, and pay for wars with worthless paper. A Harvard economist, a former ambassador, and a leading Keynesian in the Roosevelt administration, John Kenneth Galbraith is at home in the twentieth century's public life as few others are, and has a firm intellectual grasp of his sometimes slippery subject. This book is a witty, but intellectually serious, history of a concept absolutely central to what we are pleased to call modern life, and how it has grown and changed from exchanging pieces of something shiny to now encompass powerful banks, puzzling foreign exchange markets, and tottering Ponzi schemes. Vast frauds separated by centuries appeal to the same base motives and use the same crude stratagems to separate us from our bit of money in hopes we'll get more. With money, like love, it seems we will never learn. But there is much enjoyment in the lessons, anyway.
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9 of 9 people found the following review helpful:
4.0 out of 5 stars
An introduction to money by an old-school Keynesian, June 7, 2008
On one side of the world is a broad swath of professional mystery-makers, who stand in awe at the world's complexity, quite often view it as unanalyzable or irreducible, and let it stand pretty much as it was before. Then there are people in this world who want very much to take apart all the world's complex systems and machines, show you what they're made of, and say, "See? It's not all that awe-inspiring after all." I've decided that John Kenneth Galbraith, on the basis of "Money", is one of the latter.
Among those peddling mystery rather than clear thinking around money are some of Galbraith's own economist colleagues, who enshround the topic in hefty terminology and bestow upon money men an authority that, as it turns out, they don't deserve. Here's Galbraith clarifying a couple often-heard terms from the world of finance (after another connected paragraph that I've had to leave out for brevity):
"Few phrases have ever been endowed with such mystery as open-market operations, the bank rate, the discount rate. This is because economists and bankers have been proud of their access to knowledge that even the most percipient of other citizens believe beyond their intelligence. Open-market operations are the sale of securities just mentioned by the central bank which removes the loanable cash or reserves from the commercial or ordinary banks. The bank rate and the discount rate are the same; they are what prevent the banks from too painlessly recouping their cash by borrowing from the central bank. This is it. Viewed in the context of their development in the last century it is hard to regard these mysteries as anything but a simple, even obvious, accommodation to circumstance."
That same tone, in a couple of particulars, is what makes "Money" such a tremendous book. First there's the persistently arched eyebrow, aimed at other economists. Then there's the urge to make the world clearer. The whole book is quite admirable in this way.
Money's pace is a little funny: perhaps 80 pages get us from the start of world history up to the Bank of England, then another 100 pages from the 19th century to World War I. The remaining 150 pages covering the practical collapse of the gold standard through the Depression and its aftermath. It's like Zeno's Monetary History.
Galbraith's central observation about banking is that, beyond its most primitive forms, all banks suffer from one single, ineradicable problem: they have more money on the books than they actually have on hand. And every now and again, panic spreads from bank to bank, justly or unjustly: a nearby bank fails, so all my depositors rush to empty out their accounts. They are all shocked to discover that I don't have a special bag of gold coins labeled "Doris's savings account." My bank fails, as do all the other banks. My bank wasn't necessarily any worse just before the failure than it was a week earlier, but expectations combined to make it collapse. If I'm not mistaken, observations of this form are distinctly Keynesian.
Indeed, Galbraith is an old-school Keynesian, responsible in some fashion for price controls during World War II. Some of the most interesting parts of "Money", to me, were Galbraith's defenses of this centralization. It all worked quite well, says Galbraith, and people seemed generally satisfied with it. When the price controls were lifted, inflation did not go through the roof; there was no pent-up demand waiting to explode, but for the evil central planners. This, and much of the rest of the book, is a more or less direct response to Milton Friedman, maybe especially Friedman and Stigler's "Roofs or Ceilings?"
Part of "Money" is in fact a direct attack on Friedman's monetarism. The standard Keynesian attack seems to go like this: there comes a point in an economic crisis when the interest rate just cannot be productively lowered any more -- we are at the "zero lower bound". Banks are afraid to lend out any more money, so they hoard it. Lower interest rates near the ZLB just lead to more hoarding. The distinctive Keynesian response is to emphasize fiscal policy here over monetary policy: the government should actively spend money to put it in consumers' pockets to get people spending, get them borrowing (clear out those hoards), etc. When read today, Keynes sounds somewhat naïve about the prospects for apolitical control of the economy by a technocratic élite; so does Galbraith.
Some of Galbraith's naïveté comes from a belief that the world is moving to greater centralization: fewer corporations controlling production, and unions representing workers in bulk. It sounds like commerce really was more concentrated during World War II, and consequently that the central planner had a much easier task than he would now. Galbraith doesn't seem to have updated this picture of the world since 1945.
Still, "Money" is a terrific read. A lot of what Galbraith says makes perfect sense, and I have a much better picture of how monetary policy works. He's maybe less reliable on Keynesian demand management; just read the final 50 pages or so with the same skepticism that you brought to the rest of the book, and you'll be fine.
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7 of 8 people found the following review helpful:
4.0 out of 5 stars
A generally correct exposition flawed by his ignorance about Keynes, June 20, 2008
Galbraith presents a generally correct overview of the connection that exists between the private commercial banks' optimizing behavior, loans from the banks to speculators,speculation by the banks themselves,the creation of bubbles leading to manias,panics,crashes and economic collapse ,resulting in recession /depression.The business cycle is thus due to two major sources that create uncertainty about the future,one monetary and one real but both endogenous to the economic system-technological advance ,innovation,and "creative destruction" ,and financial innovation as the banks constantly try to create new assets to avoid the regulatory constraints previously imposed upon them in an effort to rein in and minimize their speculative behavior. Thus, Galbraith gets the following right:"In financing the sale of bad securities and in nourishing the stock market speculation,a leading part was played in these years(author's note-Galbraith is talking about 1925-1929;however,it also applies to the years 1980-2008) by the new monetary system"(Galbraith,p.173).
Unfortunately,Galbraith was tutored,as was Paul Samuelson, on " What Keynes meant " by Joan Robinson,Austin Robinson,and Richard Kahn.This explains the following assessment made by Galbraith about Keynes and the General Theory:" The theoretical justification came in the book Keynes mentioned to Shaw(note-George Bernard Shaw),The General Theory....Keynes had long been suspect among his colleagues for the clarity of his writing and thought,the two often going together.In The General Theory he redeemed his academic reputation.It is a work of profound obsurity,badly written and prematurely published.All economists claim to have read it.Only a few have.The rest feel a secret guilt that they never will.Some of its influence derived from its being extensively incomprehensible.Other scholars were needed to construe its meaning,restate its propositions in intelligible form.Those who initially preformed the task-Joan Robinson in England,Alvin Hansen and Seymour Harris at Harvard-then became highly effective evangilists for the ideas".(Galbraith,pp.217-218).Galbraith,unfortunately,never covered the theoretical core of the GT in chapter 19,the appendix to chapter 19,chapter 20,where Keynes works everything out in great detail,and in chapter 21,where Keynes presents his final results demonstrating that it is speculation that causes involuntary unemployment.Keynes generalizes the Quantity of Exchange formula in chapter 21 so that,for instance,neoclassical theory and Milton Friedman's monetarism are seen as special cases holding only under certainty and linear (normal distribution)risk.These theories break down under non linear risk,uncertainty(ambiguity-D Ellsberg),and ignorance.It's all there on pp.304-306 of the GT.
Galbraith's assessment of Keynes could not be further from the truth.Galbraith's assessment has been a major factor in explaining why economists still have no idea about what Keynes did in 1936.Galbraith is the founder of the American Post Keynesian School(Journal of Post Keynesian Economics),a major influence in the American Institutionalist School (Journal of Economic Issues),and a major influence in the Cambridge Keynesian school(Cambridge Journal of Economics).Galbraith's assessment forms the foundation for all work published on Keynes in these journals and many others as well.
The book is worth buying as long as the reader realizes that Galbraith has no specific knowledge of the GT and probably did not read it himself.
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