Paper Promises

Why does money rule everything yet feel so fragile? In Philip Coggan’s sweeping history of money and finance, he argues that money is far more than a technical medium—it’s a social contract showing who holds power and who bears risk. Across centuries, the book traces how different monetary forms, banking structures and financial ideas express the perennial conflict between creditors and debtors, discipline and discretion, metal and paper. You soon see that monetary history is really a story about trust and distribution.

The three functions that create tension

Money does three jobs: it’s a medium of exchange, a unit of account, and a store of value. These roles coexist uneasily. When societies prioritize trade and flexibility, the medium‑of‑exchange function dominates (paper or digital money). When they prize stability and creditor rights, the store‑of‑value function prevails (metal or fixed exchange systems). That tension—between dynamism and stability—appears over and over, shaping everything from ancient gold coins to modern quantitative easing.

From metal discipline to paper discretion

When money is tied to scarce metal, governments cannot easily inflate or spend beyond means. Under paper regimes, they can issue promises—and those promises rest on confidence. The Chinese invented paper notes when copper ran short; John Law in eighteenth‑century France extended that idea into a complete paper‑money scheme, discovering that confidence can be created and destroyed with breathtaking speed. The same dynamic repeats in subprime mortgages or quantitative easing centuries later.

The institutions that make money breathe

Banks create most modern money through lending. Fractional‑reserve banking multiplies deposits across the system. But since banks lend out what they owe depositors, the structure is fragile; runs occur whenever confidence breaks. Central banks emerged as lenders of last resort—Walter Bagehot’s advice to lend freely to solvent but illiquid banks remains the cornerstone of crisis management. Yet every rescue generates moral hazard: if bankers expect rescue, they gamble more next time.

The creditor–debtor moral divide

Economic battles often echo moral ones. Hammurabi’s laws on interest, Aristotle’s disdain for usury, and William Jennings Bryan’s plea in 1896 not to be crucified on a “cross of gold” all express the same complaint—that monetary rules favor one class over another. Inflation helps debtors; deflation helps creditors. Whenever societies face heavy debts, policy decisions about austerity, inflation or default become moral judgments about who should pay.

Crisis, learning and reinvention

The book’s arc moves through gold standards, the Great Depression, Bretton Woods, and the floating‑rate world. Each era tries to reconcile discipline with flexibility, failing in some way and prompting transformation. The gold standard provided predictability but crushed employment during downturns. Paper systems allow stimulus but tempt excess. The lesson you carry: monetary regimes never achieve perfection—they rotate through cycles of confidence and collapse shaped by human behavior and political power.

The contemporary inheritance

Today’s dollar standard, asset bubbles, and sovereign debts represent the latest stage of this ancient story. Global liquidity now flows through paper promises and derivatives instead of metal. Central banks control not just money but risk perception itself. The final question Coggan poses—who pays the bill when paper promises outgrow reality—frames a future struggle that connects Wall Street to Beijing, retirees to taxpayers. Money remains what it always was: a measure of trust, power, and collective memory.

Modern money is largely bank credit—a set of promises multiplied through balance sheets. When you deposit funds or take a mortgage, your bank creates money with a keystroke. Coggan traces how this system evolved from metallic coins to paper notes to electronic claims, making trade faster but also more vulnerable to panic. The story of fractional‑reserve banking explains why crises recur.

Fractional reserve and the multiplier

Banks keep only a fraction of deposits in reserve, lending out the rest. These loans become deposits elsewhere, expanding the total money supply. This process fuels growth yet depends entirely on depositor faith. When many depositors demand cash—their original claim—the structure collapses. That dynamic appeared in Northern Rock’s 2007 run, echoing nineteenth‑century panics.

Central banks and moral hazard

Bagehot’s principle, revived during the 2008 crisis, says central banks must lend generously to illiquid but solvent institutions—at penalty rates to deter reckless use. But bailouts blur lines between liquidity support and solvency rescue. Once markets expect intervention, risk‑taking expands. The “Greenspan put” after 1987 showed how cheap liquidity creates moral hazard: investors come to believe that losses will be socialized but gains privatized.

Important lesson

Confidence, not reserves, sustains the banking system. Policymaking that protects confidence at any cost inevitably seeds the next round of excess and fragility.

QE and the age of discretion

Quantitative easing reflects this shift from automatic discipline to discretion: central banks create money to buy government debt or support assets. Coggan connects this modern printing to earlier seigniorage practices—different in technique but similar in temptation. The more money depends on trust and expectation, the more political its management becomes.

Debt lies at the core of monetary struggle. Coggan shows that from Babylon to the euro zone, societies wrestle with how to balance obligation and mercy. Every monetary regime forces a choice between honoring debts strictly and easing them through inflation, default or forgiveness.

Interest and morality

Debates over interest are moral as well as economic. Ancient codes limited it, medieval Christianity called it usury, and modern markets turned it into normal rent for capital. Yet high interest rates can drain productive energy, while artificially low ones reward borrowers and punish savers. Coggan’s point: each society defines fairness through its approach to interest and credit.

Productive vs. consumptive borrowing

Loans used for productive investment expand future income; those used for consumption do not. This distinction drives debates about regulation and fiscal policy. Credit bubbles often arise from mislabeling consumption as investment. Once the assets bought on leverage fail to generate returns, defaults cascade.

The political divide

Monetary choices—gold versus paper, austerity versus stimulus—map onto the social divide between creditor and debtor groups. This makes every era’s monetary reform deeply political.

Debt as destiny

Large modern budgets and welfare promises turn future obligations into implicit debts. Whether through austerity, inflation, or restructuring, these debts will be paid by someone. Understanding who pays—savers, taxpayers, pensioners—is the lens through which to interpret every financial upheaval.

Under metallic systems, discipline came from scarcity. Coggan explores how the gold standard, Bretton Woods and later floating regimes trace humanity’s search for monetary predictability without policy paralysis. The trade‑off—fixed rules versus flexibility—defines economic life even today.

The gold standard and its costs

Gold linked national currencies to tangible reserves, enforcing honesty but demanding painful adjustment. Deficit countries saw gold outflows and had to deflate, cutting wages and jobs. Keynes criticized this rigidity; Coggan shows how Britain’s adherence to gold through the 1920s deepened unemployment. Creditors generally favored it because it preserved value, while workers and debtors bore the cost.

The trilemma of international finance

You cannot have all three: fixed exchange rates, free capital mobility, and independent monetary policy. Bretton Woods compromised with partial capital controls. Floating exchange rates after 1971 restored autonomy but introduced volatility. This trilemma explains much of contemporary conflict—from China’s managed peg to the euro‑zone’s tension between national needs and shared currency.

Key insight

Every exchange‑rate regime hides distributional effects: fixed systems favor creditors and traders; flexible ones favor policymakers eager to manage domestic jobs and growth.

From Bretton Woods to floating paper

When Nixon ended dollar‑gold convertibility, the world gained discretion and inflation risk. Monetarists like Friedman reframed policy around controlling money supply and expectations. The shift taught that monetary systems evolve as political choices—not eternal truths—responding to who bears the pain of adjustment.

Every long boom eventually overreaches. Coggan uses Hyman Minsky’s theories to explain how stability breeds instability. When confidence is high, lending standards fall, leverage rises, and speculative positions dominate. Once prices stop rising, the structure implodes.

Minsky’s borrower taxonomy

Borrowers shift from “hedge” (can pay interest and principal) to “speculative” (can pay interest only) to “Ponzi” (depend on rising asset prices). Each stage reinforces the bubble. John Law’s Mississippi venture, Japan’s 1980s boom, and the 2000s housing bubble share this pattern.

Debt, leverage and feedback

Rising asset prices raise collateral values and encourage further lending—a positive feedback loop. Bubbles thus redistribute wealth upward, rewarding early holders and lenders but punishing late entrants. When reversal begins, debt transforms modest corrections into systemic crises.

Minsky’s warning

The period of calm is precisely when risk builds; apparent stability is the prelude to upheaval.

Practical vigilance

You can track bubble risk through leverage ratios, credit growth and asset valuations. History shows that financial crises result not from ignorance of risk but from collective overconfidence—the illusion that this time, rescue mechanisms will make it different.

Coggan explains how modern finance cloaked risk in mathematics and complexity. Derivatives and securitization promised risk dispersion but delivered contagion. Models gave false precision, encouraging leverage just when uncertainty was greatest.

Securitization illusions

Mortgage pools, sliced into tranches, convinced investors that correlation risk was trivial. Rating agencies granted AAA to structures built on subprime loans. When house prices fell, those models collapsed and liquidity vanished because nobody knew where the exposures lay.

Flawed models and tail events

Value‑at‑Risk models rely on normal distributions, underestimating rare, extreme outcomes. The 2007–08 crisis showed models’ failure under stress; Goldman Sachs executives facing “25‑standard‑deviation” events learned statistical comfort offers little real protection.

LTCM and leverage excess

Long‑Term Capital Management’s collapse in 1998 exemplified how even brilliant strategies fail with excessive leverage and crowding. Its rescue previewed moral hazard dangerously similar to future bank bailouts.

Lesson

Sophisticated packaging does not remove risk; it hides it. When everyone uses the same model, diversification disappears and systemic fragility increases.

Coggan concludes that transparency and humility matter more than precision. You should doubt any financial engineering that promises high returns with low risk—it usually transfers risk elsewhere, often to taxpayers or pension funds.

After 1971, the dollar replaced gold as the world’s anchor, creating new asymmetries. Coggan calls this arrangement the dollar standard—where dollars, not metal, form global reserves. This system unleashed liquidity and shifted inflation from goods to assets.

How the dollar standard works

Surplus countries such as China accumulate dollar reserves by selling exports. They reinvest those dollars in US bonds, keeping global interest rates low and fueling asset inflation. Reserve growth exploded—non‑gold reserves rose twentyfold from 1969 to 2000—helping cheap credit spread worldwide.

Asset inflation and demographics

Consumer inflation subsided, but asset prices soared. Equities and housing gained far faster than GDP. Baby‑boomers driven by pension saving poured funds into markets, driving valuations even higher. As McKinsey and Shiller’s data show, cheap money and demographic demand pushed P/E ratios beyond 1929 levels.

The whack‑a‑mole effect

When policymakers suppress consumer inflation, pressures surface in asset markets. Central banks hesitate to pop bubbles, preferring to clean up afterward—thus perpetuating the cycle.

Global imbalances and power politics

These flows create geopolitical tension: American debtors rely on Asian creditors, while Europe’s euro project struggles without fiscal transfer mechanisms. The dollar standard delivers cheap liquidity but embeds inequality: debtors live better today, creditors hold paper promises tomorrow.

In the last chapters Coggan reveals how finance grew from servant to master of the economy. From the 1980s onward, deregulation, technological change, and political favoritism let banks’ profits outpace real growth. Finance’s share of GDP doubled, its risks multiplied, and its collapse in 2007–08 socialized losses.

Growth and concentration

The largest banks consolidated power. UK bank assets reached 500% of GDP; US financial firms earned a quarter of corporate profits. The expectation of government support amounted to a taxpayer subsidy worth tens of billions annually. Regulators, entangled with industry veterans, allowed excessive leverage and opaque products.

Social costs

Inequality rose as financial-sector pay exploded. Crises triggered austerity that fell on ordinary citizens rather than institutions. Coggan describes an implicit insurance: taxpayers guarantee banks but receive none of their profits. The moral imbalance mirrors the creditor‑debtor conflict that opened the book.

The ageing and sovereign‑debt trap

After the crisis, governments absorbed private liabilities, leaving swollen public debts alongside pension promises. Ageing populations and unfunded healthcare obligations render those debts unsustainable. Policymakers face a trilemma: inflate, stagnate, or default. Each choice shifts burdens differently across generations.

Final reflection

The global financial order must eventually adjust to pay its accumulated bill—likely through inflation, slower growth, or restructuring. The deciding factor will be political power, not economic equations.

For you, this means watching how governments, central banks and voters share the pain: through taxes, inflation or reduced benefits. The end of Coggan’s journey brings the reader full circle to money’s essence—a promise whose ultimate settlement is always political.