Paper Money
Summary
George Goodman, writing again as Adam Smith, examines the international monetary and economic disorder of the 1970s: the end of Bretton Woods, the oil shocks, the recycling of petrodollars into loans to developing countries, inflation, and the resulting instability.
The substantive argument concerns the recycling of oil surpluses. Goodman describes how OPEC's revenues were deposited in Western banks and lent to Latin American and other developing country governments, and he identifies the risk clearly: that these were sovereign loans made by commercial banks on the assumption that countries cannot go bankrupt, that the lending was driven by the need to place deposits rather than by analysis of the borrowers, and that a rise in interest rates or a fall in commodity prices would make the loans unpayable. The Latin American debt crisis began the year after publication.
He also covers the loss of the dollar's gold anchor and what replaced it, the political economy of inflation, energy dependence and the American response to it, and the general condition of a monetary system operating without a rule.
Goodman writes as a reporter and essayist rather than an economist, and the book is anecdotal, discursive and organised loosely. It is a period document and readers should not expect analysis of the depth that later accounts of the same events provide. Its value is as a contemporaneous statement by an informed observer who identified the sovereign lending problem before it broke, and as a portrait of what the end of a monetary regime looked like from inside it.
Key takeaways 7
- Commercial banks lent OPEC surpluses to developing country governments because they needed to place deposits, not because they had analysed the borrowers.
- Sovereign lending proceeded on the assumption that countries cannot go bankrupt, which is true legally and irrelevant economically.
- A rise in interest rates or a fall in commodity prices would make the petrodollar loans unpayable, which is what happened the year after publication.
- The end of gold convertibility removed the anchor of the monetary system and nothing was put in its place, which is the source of the decade's instability.
- Inflation is a political phenomenon before it is a monetary one, because it results from decisions no government wants to be seen making.
- Energy dependence transferred wealth and strategic position to producers in a way that Western policy had no framework for addressing.
- Financial systems accumulate risk fastest when institutions face a supply of funds they must deploy rather than a demand they must satisfy.
Who should read it
Investors interested in a contemporaneous account of the 1970s monetary breakdown and the sovereign lending build-up that preceded the Latin American debt crisis.
About Adam Smith
Scottish moral philosopher at the University of Glasgow who founded modern economics with The Wealth of Nations in 1776.
The Wealth of Nations set out how division of labour, self-interest and competitive prices coordinate production without central direction, and it supplies the vocabulary economics still argues in: specialisation, capital accumulation, natural and market price. The Theory of Moral Sentiments supplies the other half, placing exchange inside a system of sympathy and judgement.
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