How to Spend What Is Owed

"Money & Promises

By Paolo Zannoni

Columbia Business School, 320 pages, $29.95

For millennia, money was a physical object, from Chinese cowrie shells to Roman coins. It ably served its societies, but only to a point. Over time, a new possibility emerged: the concept that the promise to pay a debt can become money itself, something to be recorded, traded, credited and debited across an infinite number of parties.

Paolo Zannoni's "Money & Promises" is an ode to this transformation. He advances no grand theory or polemical critique but rather takes us on a flaneur's amble through history, digging through archives to present richly illustrated vignettes from Renaissance Italy to revolutionary-era Russia. He is most interested in the roles of banks and governments: The endless exchange of debts between them, he says, has presented great opportunities, though they are "fraught with dangers."

The action picks up in Pisa, Italy, in the late 14th century, where the port city was thriving but strained by the limited supply of gold florins to meet the needs of its artisans and traders. Eagerly prowling Italian archives, Mr. Zannoni reviews the dealings of a small bank whose records have survived to the present. 

They show how "bank money" -- his term for the transformation of debt to money -- was replacing coinage as a means of trade. In one case, a wool merchant who was owed 36 florins used that debt, in turn, to pay off 36 florins of his own debts, with the bank keeping detailed ledgers to ensure that the offsets were accurate and fair. A trivial matter? Mr. Zannoni views it as revolutionary.

One key to such a system was trust in the institutions that traded in debt. Mr. Zannoni recounts the nuances of finance in Venice, where banks were swamped by foreign merchants of dubious creditworthiness and routinely found themselves with too little hard currency to back their own balance sheets. In 1496, Mr. Zannoni says, Venice was home to about 10 banks. Within 50 years, they had all gone bust. The wise men of Venice reacted as their 21st-century counterparts did: They regulated the banks, enforcing more hard-currency requirements and less speculative forms of "bank money."

The state moves more fully into the picture with the creation of the Bank of England in 1694. Back then, Mr. Zannoni tells us, England's banks used tally sticks to keep track of debts, typically for taxes owed to the government. These sticks -- literally willow-tree limbs notched in patterns to record financial information -- were a kind of ersatz database.

The Bank of England, though privately chartered and capitalized, was launched on the government's behalf to take a more efficient approach. Effectively the debts notched on tally sticks became bank money and government tax payments became public debt that could be traded. "The debts of the Bank of England became a true national currency," Mr. Zannoni writes. A problem that had vexed England, a scarcity of money, was "finally solved and the country prospered."

A century later, during America's Founding era, money was the source of a clash between Jeffersonian and Hamiltonian ideals. The Hamiltonian approach was one of centralization, in which the federal government would create a physical national currency and a means of creating and exchanging debts -- public and private -- through a national bank. Jefferson's party, by contrast, was skeptical of large banks and national standards, favoring the provision of state-issued currency and no federal apparatus. In part because of this ideological conflict, the U.S. didn't mint its first coins until 1793, a few years after the Constitution went into effect. Lacking direction, the economy grew largely through bank money swapped via state-chartered banks, an arrangement that, according to Mr. Zannoni, retarded the creation of a national currency that would be composed of the "debts of one national bank."

The most unexpected chapter in "Money and Promises" examines the early Soviet banking system: It began with revolutionary zeal, Mr. Zannoni observes, but ultimately succumbed to capitalist principles. Lenin and his comrades envisioned a society that would abolish money; in the early days of the revolution the Soviets tried a system of direct exchange, in which grain would be traded for manufactured goods, with exchange rates set by a committee. This system failed terribly, and soon the Soviets retreated to creating a powerful state bank, called Gosbank, modeled on the Bank of England. It didn't take long for the government to realize that the bank could issue debt as money -- to the benefit of the state. Which is exactly what the bank did, though in grim Soviet fashion the state did eventually execute the bank's key founders.

In the course of sketching his historical vignettes, Mr. Zannoni shares stories of his own career as a businessman (he was a longtime Goldman Sachs banker) and a wayward academic (he did graduate work in the U.S. and Europe). His business career included two years in Moscow in the waning days of the U.S.S.R., for a doomed nationalization of AvtoVAZ, the manufacturer of the famous -- or infamous -- Lada brand. "No one knew what was happening," he writes, "or how to make it happen." Now an executive at the fashion house Prada, the author gives the impression of a man in a pressed linen suit occasionally doffing his coat at the back of a musty archive.

Except for a few references to modern events, "Money & Promises" makes scant mention of the 2008-09 financial crisis or the rise of bitcoin, which uses wildly different means (a cryptography-enhanced public ledger) to achieve the same ends of trust and transparency that the Venetians and Pisans aimed for. Mr. Zannoni seems resigned to the idea that debts will be chronically mismanaged and that periodic bank failures -- and bailouts -- are an almost necessary feature of our modern system. One wishes he had made this argument more directly.

Still, "Money & Promises" is an amiable mix of scholarship and jaunty financial history. This summer it should appeal to those who like to read on the beach but who prefer to avoid the mindlessness of the classic beach read." [1]

1. How to Spend What Is Owed. Berman, Dennis K.  Wall Street Journal, Eastern edition; New York, N.Y.. 31 July 2024: A.15.