Why you should care
Because understanding the crazy world of finance could come in handy during the next crisis.
This weekend, more than a few of us will wonder why the world economy must lurch from one crisis to another nonstop, and how it is that seemingly far-away events like China’s economic slowdown — hey, it’s still growing by over 6 percent a year! — spell gloom for us poor folks who trusted our savings to Wall Street. Well, I’ve got good news for you. Some great books answer these questions without killing your brain. I came across these three gems for the first time in 1997, while living in Asia and trying to figure out why Asia’s once standout economies were going up in flames; two have been updated to include recent events. While not Tom Clancy novels, they are well-written, often amusing and offer precious insight into the incurably crazy world of money and international finance.
Why should we be able to walk away with a TV or order a pizza just by handing over a wad of paper?
Money Mischief, by Milton Friedman, the famed University of Chicago monetarist, looks at the strange phenomenon of money: how it repeatedly trips us up and why we keep going back to it — much like millennialists who keep the faith even though Christ fails to return as predicted. The priceless first chapter compares the monetary system on the island of Yap, consisting of large stones that retain value even when irretrievably sunk in the ocean, to the relabeling of stacks of gold in the Federal Reserve in New York as ownership passes from one country to the next. Money is an object of faith. Think about it: Why should we be able to walk away with a TV or order a pizza just by handing over a wad of paper?
Barry Eichengreen’s Globalizing Capital looks at the history of the international monetary system, from gold to today’s so-called fiat currency — paper money backed by nothing. Did you ever wonder about those nuts who keep calling for a return of the gold standard? Read the work of this University of California, Berkeley economist and you’ll understand why it will never work. The culprit: democracy, since voters these days won’t put up with the harsh measures needed to keep the standard. This book, updated in 2008, makes clear why small and medium-size countries are so helpless as international capital washes freely about the globe. It walks the reader though all those strange historical moments, from the collapse of the gold standard during the Great Depression, to the post-World War II Bretton Woods world and its eventual collapse when President Nixon deep-sixed the gold standard in 1971. We live in a brave new world.
Perhaps the best is Charles Kindleberger’s Manias, Panics, and Crashes, a narrative history of speculative manias and their inevitable collapse. The book (updated posthumously in 2011 by economist Robert Aliber) details and explains the anatomy of crises, and provides an easy-to-comprehend explanation for why the frequency of financial panic is increasing: Recent crises are linked in surprising ways that suggest an ominous future. It’s the engrossing detail of this book that makes it a winner, from the South Sea and Mississippi bubbles to the Madoff affair. Kindleberger explains, but he’s less of a theorist than a storyteller.
No solutions in these books, unfortunately. Financial turmoil looks here to stay, but with some understanding, perhaps there’s a way to seek shelter from the storms.