The Ascent of Money, part 3, a closer look at the relationship between violence and wealth

This is the last post in my three part series on The Ascent of Money (you can read parts 1 and 2 here).

In this post, I want to return to the question, 'What is the relationship between violence and wealth?' One of the reasons I'm so intrigued by this question is that the relationship between the two seems obvious and yet it is never talked about openly in popular culture, and certainly never talked about in an economics classroom. Indeed it seems to me that the only time we every acknowledge the relationship between violence and wealth is in TV shows like The Sopranos or perhaps a movie featuring the character Jason Bourne. I think it is vital to study this dynamic because as we come to understand the relationship between violence and wealth we can presumably take steps to have less violence in our economy and in our society, correct?

With that in mind, as I read through Niall Ferguson's financial history of the world, I started to write the word "violence" into the margin anytime he mentioned the relationship between violence and wealth. I just want to draw your attention to some of those passages so that we can begin to move to the foreground, some of the underlying dynamics of our economy that deserve closer scrutiny:

"Behind every loan shark, there lurks an implicit threat." --The Ascent of Money, p. 40

It's obvious, but worth noting that the informal banker to most of the world's poor, relies on violence as a business model.

"Prior to the 1390s, it might legitimately be suggested, the Medici were more gangsters than bankers: a small-time clan, notable more for low violence than high finance. Between 1343 and 1360 no fewer than five Medici were sentenced to death for capital crimes." p. 42

Quite literally, modern banking began with mafia families in Italy. Interesting too that Ferguson sees capital crimes as "low violence."

"There were no debtors' prisons in the United State in the early 1800s, at a time when English debtors could end up languishing in jail for years." p. 60

I had forgotten about debtors prisons, but up until fairly recently (1869) the country that gave us the Magna Carta also loved putting poor people in jail.

But here's where things get really interesting:

"'War', declared the ancient Greek philosopher Heraclitus, 'is the father of all things.' It was certainly the father of the bond market. In Pieter van der Heyden's extraordinary engraving, The Battle about Money, piggy banks, money bags, barrels of coins, and treasure chests -- most of them heavily armed with swords, knives and lances -- attack each other in a chaotic free-for-all. The Dutch verses below the engraving say: 'It's all for money and goods, this fighting and quarreling.' But what the inscriptions could equally well have said is: 'This fighting is possible only if you can raise the money to pay for it.' The ability to finance war through a market for government debt was, like so much else in financial history, an invention of the Italian Renaissance." p. 69

"The Battle of Waterloo was the culmination of more than two decades of intermittent conflict between Britain and France. But it was more than a battle between two armies. It was also a contest between rival financial systems: one, the French, which under Napoleon had come to be based on plunder (the taxation of the conquered); the other, the British, based on debt." p. 80

"In many ways, it was true that the bond market was powerful. By the later nineteenth century, countries that defaulted on their debts risked economic sanctions, the imposition of foreign control over their finances and even, in at least five cases, military intervention. It is hard to believe that Gladstone would have ordered the invasion of Egypt in 1882 if the Egyptian government had not threatened to renege on its obligations to European bondholders, himself among them. Bringing an 'emerging market' under the aegis of the British Empire was the surest way to remove political risk from investors' concerns. Even those outside the Empire risked a visit from a gunboat if they defaulted, as Venezuela discovered in 1902, when a joint naval expedition by Britain, Germany and Italy temporarily blockaded the country's ports. The United States was especially energetic (and effective) in protecting bondholders' interests in Central America and the Caribbean." p. 98 [By the way, don't you just love how Ferguson describes international war crimes as "energetic (and effective!) ways of protecting bondholder's interests!"]

So the micro is the macro -- just as the loan shark will kneecap a debtor who is late on a payment, creditor nations will invade and overthrow governments, even democratically elected governments, in order to increase profits.

"As [Jan Pieterszoon] Coen [officer of Dutch East India Company (VOC) in the early seventeenth century] himself put it: 'We cannot make war without trade, nor trade without war. he was ruthless in his treatment of competitors, executing British East India Company officials at Amboyna and effectively wiping out the indigenous Bandanese." p. 134

Far from being an aberration, that theology of domination continues on to this day in U.S. foreign policy. It is also interesting to think about the ways in which creditor nations kneecap debtor nations to get their money back given that China is now the de facto banker to the U.S. -- holding nearly a trillion dollars of our debt.

"Besides cheaper calories, cheaper wood and cheaper wool and cotton, imperial expansion brought other unintended economic benefits, too. It encouraged the development of militarily useful technologies -- clocks, guns, lenses and navigational instruments -- that turned out to have big spin-offs for the development of industrial machinery." p. 285-286.

"The key problem with overseas investment, then as now, is that it is hard for investors in London or New York to see what a foreign government or an overseas manager is up to when they are an ocean or more away. Moreover, most non-Western countries had, until quite recently, highly unreliable legal systems and differing accounting rules. If a foreign trading partner decided to default on its debts, there was little that an investor situated on the other side of the world could do. In the first era of globalization, the solution to this problem was brutally simple but effective: to impose European rule." p. 289

You get the point. Even in a book written by a conservative Senior Fellow at the Hoover Institution (the Hoover institution -- intentionally named after the worst president in U.S. history), a guy who has a vested interest in obscuring the relationship between wealth and violence, the relationship shows up again and again. You can't talk about the history of money, or the history of finance, or economic history, without also talking about the history of violence and the ways in which violence has been used to enforce contracts and increase profits.

More on that topic in future posts.

The role of fractional reserve banking in propelling the growth of capitalism in Protestant countries

Friends who know me know that I'm a huge fan of Max Weber's The Protestant Ethic and the Spirit of Capitalism. I discuss this book so often in person that I was surprised the other day when I did a search of my blog and discovered that I've never gone into much depth about the book here on the site. So today I want to rap down the basic thesis of The Protestant Ethic & The Spirit of Capitalism and then expand upon Weber's theory using data from Niall Ferguson's The Ascent of Money. (There is an excellent Wikipedia article on The Protestant Ethic & the Spirit of Capitalism for anyone who is looking for a more complete overview of the book.)

First published as a two-part article in 1904-5, The Protestant Ethic and the Spirit of Capitalism is one of the cornerstones of the field of sociology. In the book, Weber is trying to figure out why it is that capitalism developed faster in countries that adopted Protestantism while the development of capitalism in Catholic and other non-Protestant countries lagged behind. And what he finds is this:

The central question for a Christian is whether he/she is going to heaven. In Catholicism, for hundreds of years, the path to heaven was very clear -- pay "indulgences" to the church, and your sins are forgiven and when you die, you go to heaven. Indulgences were basically a way for the Catholic Church to tax all of Europe for hundreds of years. But Martin Luther and John Calvin hated the practice of indulgences (and many feudal princes in Germany and other provinces hated them too). Luther and then Calvin argued that God is so great, no human works could possibly be enough to earn his (sic) favor. Rather, everything is predestined, determined ahead of time by God. They argued that those who go to heaven are saved through God's grace alone, not human works (read: indulgences).

Which is fine as far as that goes, but people naturally want to know if they are one of the chosen, one of the elect who will be going to heaven. Weber writes:

"The question, Am I one of the elect? must sooner or later have arisen for every believer and have forced all other interests into the background." --The Protestant Ethic & The Spirit of Capitalism, p. 110.

This was no small matter either. Luther argued that only 144,000 people were going to heaven, so there were a limited number of seats on the bus, so to speak. So people started to look around for signs that one is "chosen." And what are the signs? Well according to Luther and Calvin, the chosen are those who dedicate their lives to creating God's will on earth. So the signs are that one works without ceasing -- and here's the kicker -- and one never spends much on the sins of the flesh. Luther and Calvin hated the sensuality of Catholicism, that peasants could get drunk, dance, and have sex with each other on Saturday and then pay their indulgences on Sunday and be forgiven. The mark of Protestantism became those who so ordered their lives so that they NEVER gave in to the sins of the flesh and never spent their earnings on bodily desires. Hence the Protestant Ethic was born.

"On the one hand it is held to be an absolute duty to consider oneself chosen, and to combat all doubts as temptations of the devil, since lack of self-confidence is the result of insufficient faith, hence of imperfect grace... On the other hand, in order to attain that self-confidence intense worldly activity is recommended as the most suitable means." --The Protestant Ethic and the Spirit of Capitalism, p. 111 and 112

"The God of Calvinism demanded of his believers not single good works, but a life of good works combined into a unified system. There was no place for the very human Catholic cycle of sin, repentance, atonement, release, followed by renewed sin.... [Protestantism] had developed a systematic method of rational conduct with the purpose of overcoming the status naturae, to free man from the power of irrational impulses and his dependence on the world and on nature." p. 117 - 118

"Sebastian Franck struck the central characteristic of this type of religion when he saw the significance of the Reformation in the fact that now every Christian had to be a monk all his life.... By founding its ethic in the doctrine of predestination, Protestantism substituted for the spiritual aristocracy of monks outside of and above the world the spiritual aristocracy of the predestined saints of God within the world." p. 121

Just to be clear, the relentless work ethic of Protestants was not a means to attain salvation but rather a system of self assurance (a method of existential anxiety control if you will) that simply affirmed one had already attained salvation through grace.

But something curious happens when people work extremely hard and rarely spend money. For the first time in human history you have large accumulations of capital. And large accumulation of capital naturally lead to banks (places to store that capital), which then provides the catalyst (and the capital) for the emergence of capitalism in all of the Protestant nations.

The explanatory powers of the theory are so strong that indeed, a whole academic discipline, sociology, emerged in its wake. And the writing in The Protestant Ethic and the Spirit of Capitalism is both so direct and searing that it has endured as one of the great academic treatises of all time.

And yet, as great as The Protestant Ethic and the Spirit of Capitalism is, I wonder if there are some additional factors that also help to explain the rise of capitalism in Protestant countries.

In an earlier post, I asked whether in fact, slavery, not Protestantism, was the catalyst for the emergence of capitalism? Indeed Eric Williams makes that point in his book Capitalism & Slavery and Eduardo Galeano builds upon that idea in, Open Veins of Latin America.

But I don't think it's an either/or situation. I think it's a both/and. Protestantism led to the accumulation of capital that developed the bourgeois class that accumulated even more capital that paid for the ships that participated in and profited from the African slave trade that further fueled the growth of capitalism.

After reading The Ascent of Money, I think I may have stumbled upon another important facet of the story: fractional reserve banking. I'll explain:

The early Christian Church and Islam too forbade the lending of money and charging interest. It was called usury and was considered one of the worst possible sins.

"For Christians, lending money at interest was a sin. Usurers, people who lent money at interest, had been excommunicated by the Third Lateran Council in 1179. Even arguing that usury was not a sin had been condemned as heresy by the Council of Vienna in 1311-12. Christian usurers had to make restitution to the Church before they could be buried on hallowed ground." --The Ascent of Money, p. 35

The earliest forms of modern banking began in Italy with the emergence of the powerful Medici family serving as an intermediary between various businesses.

"Of particular importance in the Medici's early business were the bills of exchange (cambium per literas) that had developed in the course of the Middle Ages as a way of financing trade. If one merchant owned another sum that could not be paid in cash until the conclusion of a transaction some months hence, the creditor could draw a bill on the debtor and use the bill as a means of payment in its own right or obtain cash for it at a discount from a banker willing to act as broker. Whereas the charging of interest was condemned as usury by the Church, there was nothing to prevent a shrewd trader making profits on such transactions. That was the essence of the Medici business. There were no checks; instructions were given orally and written in the bank's books. There was no interest; depositors were given discrezione (in proportion to the annual profits of the firm) to compensate them for risking their money. " --The Ascent of Money, p. 43-44

But it wasn't until the Reformation that modern banking and the modern capitalist system really took off. And Martin Luther and John Calvin were key in revising church teachings on lending with interest.

"From 1515 until early 1524, Luther's works indicate that he was completely opposed to lending money at interest. In the second time period, from late 1524 until his death in 1546, while still principally against usury -- especially among Christians -- Luther's writings indicate that he allowed for the practice of lending money at interest, albeit with certain restrictions." --Reforming the Morality of Usury: A Study of the Differences that Separated the Protestant Reformers, David Jones p. 52

In 1524, just 4 years after surviving the Diet of Worms and excommunication (but not execution) by the Catholic Church, Luther displayed a notable shift in his writing on usury:

"Luther's writings reveal that he tolerated and even suggested guidelines whereby usury may be practiced in the kingdom of this world. These guidelines include a call for itemized collateral, shared risk, and governmental oversight of usurious transactions." -- Reforming the Morality of Usury: A Study of the Differences that Separated the Protestant Reformers, p. 61

So too, Calvin's views on usury also represented a break from earlier church teachings. In Calvin's letter on usury in 1545 he makes a biblical case that usury might be permitted under certain circumstances:

"Calvin knew there were two Hebrew words translated as “usury.” One, neshek, meant “to bite”; the other, tarbit, meant “to take legitimate increase.” Based on these distinctions, Calvin argued that only “biting” loans were forbidden. Thus, one could lend at interest to business people who would make a profit using the money." -- Norman Jones, Utah State University

As a result of these theological shifts, the modern banking system began to emerge in Protestant countries in Europe.

"It was in Amsterdam, London and Stockholm [all cities that broke from Catholicism during the Reformation] that the next decisive wave of financial innovation occurred, as the forerunners of modern central banks made their first appearance. The seventeenth century saw the foundation of three distinctly novel institutions that, in their different ways, were intended to serve a public as well as a private financial function. The Amsterdam Exchange Bank (Wisselbank) was set up in 1609 to resolve the practical problems created for merchants by the circulation of multiple currencies in the United Provinces, where there were no fewer than fourteen different mints and copious quantities of foreign coins. By allowing merchants to set up accounts denominated in a standardized currency, the Exchange Bank pioneered the system of checks and direct debits or transfer that we take for granted today. This allowed more and more commercial transactions to take place without the need for the sums involved to materialize in actual coins. One merchant could make a payment to another simply by arranging for his account at the bank to be debited and the counterparty's account to be credited. The limitation on this system was simply that the Exchange Bank maintained something close to a 100 percent ratio between its deposits and its reserves of precious metal and coin....

It was in Stockholm nearly half a century later, with the foundation of the Swedish Riksbank in 1656, that the barrier was broken through. Although it performed the same functions as the Dutch Wisselbank, the Riksbank was also designed to be a Lanebank, meaning that it engaged in lending as well as facilitating commercial payments. By lending amounts in excess of its metallic reserve, it may be said to have pioneered the practice of what would later be known as fractional reserve banking, exploiting the fact that money left on deposit could profitably be lent out to borrowers. Since depositors were highly unlikely to ask en masse for their money, only a fraction of their money need to be kept in the Riksbank's reserves at any given time." --The Ascent of Money, p. 48-49

Think about how important fractional reserve banking is to the history of the world. I deposit $100 in a bank that is required to hold 10% reserves. The bank then lends out $90 to a business that spends that $90 on equipment to run their business and make a profit. The seller of that equipment deposits that $90 in a bank that then lends out $81 and so on. In just 3 transactions, the original $100 has been turned into $271 of economic activity.

Basically, while the Catholic countries (Spain, Portugal, Italy) were still thinking that money was metal and building far flung empires to dig the metal ore out of the ground, the Protestant countries of Europe figured out how to make money out of nothing more than trust. And in the end, money based on credit (trust in business relationships) proved to be more resilient than money based on metal. How crazy is that!?

The important point to note here is that, it was not just the Protestant ethic that led to (capital formation which caused) the emergence of modern capitalism. It was also the theological openings by Luther and Calvin to allow usury, to allow lending with interest that sparked the emergence of capitalism in Reformed countries as well. Free from the dictates of the Vatican, the Protestant countries quickly liberalized lending rules in ways that reshaped the balance of power in the world and gave birth to our modern capitalist economy.

Final thought: it's interesting to reflect on how different church doctrines lead to different lending patterns in the economy. Basically, the Catholic ban on usury led to the rise of mafia-style families like the Medici -- informal financial intermediaries who don't charge interest but take a cut of each transaction. By contract, Protestant support for usury can be said to lead to the development of the multinational banks. They both have their problems of course, but it's fascinating to reflect on the role of theology in dictating the direction of the economy.

Update #1: A number of researchers have noted that the ban on charging interest in Islam has impeded the economic growth of the Middle East, leading in part to the millions of young men with limited financial futures (who are then a target for recruitment by radical Islamic organizations). Also I think it's interesting to note that religions that tend to de-emphasize the importance of the physical world and give priority to the spiritual or invisible world, for example Buddhism and Hinduism, both lead to economic structures that are a complete disaster -- basically leaving the society stuck with a stone age economy. Western liberal support for Tibet is always something of a mystery to me given that Tibet was a theocracy with a population left destitute by a theology that paid little attention to the need to improve living standards. The Indian economy has shown remarkable growth in recent years but I would argue that Hinduism is not driving that growth -- rather as the country has become more secular, it has devoted more resources towards economic development (investing heavily in education and infrastructure).

What is money?

[Editors note: Today I am starting what I hope will turn into a series of posts on what exactly it means to "wake up." I hear the words "awake and alive" a lot these days, particularly in Buddhist circles. When Buddhists talk about waking up they are usually referring to a state of non-dualism, everlasting consciousness, free from the ever-changing nature of our physical world. I've never really been able to discover the "awake" state that Buddhists refer to -- and I suspect most Buddhists, even those who claim enlightenment haven't experienced it either (in my experience, most people who claim to be enlightened in this world are not).

Instead, I'm talking about waking up in the political sense -- breaking through the assumptions and noise around us and seeing things as they really are. That's really the purpose of this blog in general but just in the last few weeks I feel like I've been seeing the outlines of what an awake political consciousness might really look like so I hope to begin sketching it here. I'm going to be coming at this question from a bunch of different angles so at first it will seem like my posts are all over the place. But I think over time, these various sketches will come together to paint a clearer picture of things as they are.]

As frequent readers of this blog will know, one of the questions I keep coming back to is, "What is the relationship between violence and wealth?" But I realized recently, that perhaps I have the question phrased incorrectly. Maybe the question is, "What is the relationship between violence and money?" And in order to answer that question, we need to ask, 'well, what exactly is this thing we call money?'

The answer is not as obvious as it may appear. Is money the rectangular piece of paper in my pocket printed by the government? Paper money used to be tied to gold but the U.S. went off the gold standard in 1971 and now the value of paper money is not tied to anything tangible. Furthermore, why did we ever treat hunks of metal as money in the first place? Is the demand for jewelry really that high? What about the number staring back at me on the computer screen showing my checking account balance? Are electronic ones and zeros stored in some remote server that most people never see really "money" in the same way that paper or metal is considered money?

To better understand money I read, Niall Ferguson's "The Ascent of Money: A Financial History of the World." Ferguson is a conservative (he's a Senior Fellow at the Hoover Institution) and he has a bad habit of dropping gratuitous neocon soundbites into the text that have nothing to do with his point. For example he argues that unions suck (page 116 in the hardcover edition); that the fascist military dictator Augusto Pinochet was really a great guy (pages 213-215); and that George Soros is evil (pgs 314-319). I guess that's just how conservatives roll -- they have to throw in their nonsensical applause lines every 50 pages in or so in order to keep their membership card active and get invited to the next conference.

Ferguson's knee jerk attacks on working people are all the more incongruous because he wrote this book during the middle of one of the greatest financial collapses in human history. As he narrates the economic history of the world, a picture emerges of an endless cycle of booms and busts and our era in no different. The long term data presented in The Ascent of Money serves as a pretty profound indictment of the capitalist system and the greed and avarice of bankers and businessmen (occasionally a few women too, but mostly men). But I guess that's why he had to throw in the red meat applause lines for conservatives -- he didn't want his neocon funders and friends to think he had 'gone all Naomi Klein on them' (even though the data in The Ascent of Money really supports Klein's politics more than Ferguson's.)

I would be remiss at this point if I failed to point out just how odious it is to have to read nonsense like this is a book by a major publisher:

To work the mines, the Spaniards at first relied on paying wages to the inhabitants of nearby villages. But conditions were so hard that from the late sixteenth century a system of forced labor (la mita) had to be introduced, whereby men aged between 18 and 50 from the sixteen highland provinces were conscripted for seventeen weeks a year. Mortality among the miners was horrendous, not least because of constant exposure to the mercury fumes generated by the patio process of refinement, whereby ground-up silver ore was trampled into an amalgam with mercury, washed and then heated to burn off the mercury. The air down the mine shafts was (and remains) noxious and miners had to descend seven-hundred-foot shafts on the most primitive of steps, clambering back up after long hours of digging with sacks or ore tied to their backs. (p. 21)

Did you catch that? Ferguson writes that 'The Spanish at first relied on paying wages. But the conditions were so bad (namely most of the miners died) so a system of forced labor HAD TO BE INTRODUCED.' The Spanish enslaved the population and worked them to death in the mines -- but Ferguson writes about it as an economic necessity as if the Spanish HAD NO OTHER CHOICE but to enslave and kill the local population.

Think of all the other ways that a more conscientious person might have written that passage: "But the conditions in the mines were so horrendous that the indigenous population refused to work at any price. Rather than improve conditions in the mine or simply walk away, the Spanish, driven by their lust for wealth and a theology of domination, decided to enslave the local population instead. The resulting forced labor and early death for the indigenous population were acts of genocide that enriched the Spanish crown." It's amazing to me that none of the editors at The Penguin Press bothered to cut out the sentences that make Ferguson look like a corporatist monster. But maybe they just didn't see it because they come from a similar worldview. It really shows the sorry state of conservative thinking that Ferguson is treated as a "serious academic" even though he reflexively sides with capital and against people every single time.

The numerous instances of sloppy, ideologically driven prose are really too bad because the information contained in The Ascent of Money is really quite excellent. Case in point, Ferguson's explanation of "what is money" is very insightful -- perhaps the strongest section in the book:

"What the Spaniards had failed to understand is that the value of precious metal is not absolute. Money is worth only what someone else is willing to give you for it. An increase in its supply will not make a society richer, thought it may enrich the government that monopolizes the production of money. Other things being equal, monetary expansion will merely make prices higher. There was in fact no reason other than historical happenstance that money was for so long equated in the Western mind with metal. In ancient Mesopotamia, beginning around five thousand years ago, people used clay tokens to record transaction involving agricultural produce like barley or wool, or metals such as silver. Rings, blocks or sheets made of silver certainly served as ready money (as did grain), but the clay tablets were just as important, and probably more so. A great many have survived, reminders that when human beings first began to produce written records of their activities they did so not to write history, poetry or philosophy, but to do business." (The Ascent of Money, p. 26 - 27.)

"What the conquistadors failed to understand is that money is a matter of belief, event faith: belief in the person paying us; belief in the person issuing the money he uses or the institution that honors his checks or transfers. Money is not metal. It is trust inscribed: on silver, on clay, on paper, on a liquid crystal display. Anything can serve as money, from the cowrie shells of the Maldives to the huge stone discs used on the pacific islands of Yap. And now, it seems, in this electronic age nothing can serve as money too." (p. 29 - 30.)

"It is no coincidence that in English the root of 'credit' is credo, the Latin for 'I believe.'" (p. 30)

"Cursed with an abundance of precious metal, mighty Spain failed to develop a sophisticated banking system relying instead of the merchants of Antwerp for short-term cash advances against future silver deliveries. The idea that money was really about credit, not metal, never quite caught on in Madrid. Indeed, the Spanish crown ended up defaulting on all or part of its debt no fewer than fourteen times between 1557 and 1696. With a track record like that, all the silver in Potosi could not make Spain a secure credit risk. In the modern world, power would go to the bankers, not the bankrupts." (p. 52)

In my next post I'll explore the ways in which fractional reserve banking explains The Protestant Ethic & the Spirit of Capitalism.