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The Print
6 days ago
- Business
- The Print
75 years of Planning Commission—what India's first experiment can teach us in the age of PLIs
To understand why India embraced planning, we must understand the ideas that shaped the independence movement. In 1950, planning was not a foregone conclusion—it was a deliberate choice. Across the political spectrum, from the Socialists to the Communists to the Hindu Right, and even businesses, planning was viewed as critical in shaping India's economic destiny. Amid the tumult of WW1, the Great Depression, the Russian Revolution, and WW2, state-led intervention appeared to provide much-needed social or economic stability. This was seen as crucial for avoiding further wars and revolutions. In the Indian context, it was a way to hold a fragmented, impoverished country together following the trauma of colonialism and Partition. However, when it was dismantled in 2014, critics saw the move as a belated course correction—one that, in their view, should have occurred in 1991. Or better yet, they held, the Planning Commission (PC) should have never been created at all. On 15 March 1950, the Union Cabinet passed a resolution declaring that 'the need for comprehensive planning based on… an objective analysis of all the relevant economic factors has become imperative.' The result was the creation of the Planning Commission. It was not just an administrative body, but the culmination of an intellectual and political movement that started in the early 1930s, gained momentum in the 1940s, and helped steer India's political economy for the next five decades. Today, with the world economy becoming increasingly fragmented and the emergence of great power rivalries, states are taking a more proactive role in economic affairs. So it is imperative to ask why India embraced a planned economy in 1950, and how that continues to shape its future. Global consensus in the 1930s By the late 1930s, the Great Depression had shattered faith in free markets. British economist John Maynard Keynes showed that governments could—and perhaps would be forced to—intervene in order to pull economies out of collapse. Across the world, various forms of planning became a tool of reconstruction, from Roosevelt's New Deal in the US to the Beveridge Report in England and the larger postwar development plans in Europe. There was a broad consensus that unregulated markets produced disorder, not stability. This sentiment was later echoed by Indian business leaders in 1944 and 1947, when India was on the cusp of Independence. The USSR's centralised planned economy offered a more radical yet appealing model. Jawaharlal Nehru's 1927 visit to the USSR left a deep impression on him. He wrote admiringly that its Five-Year Plans had ushered 'a new sense of economic security among the people [of the USSR],' and that Russia, 'a feudal country…has suddenly become an advanced industrial country.' (Glimpses of World History, 1934, p 995) To him, this approach helped overcome class barriers. He observed that the Moscow opera 'was full with people in their work-a-day attire.' The trip left Nehru with the impression that state intervention and planning could actually result in transformative outcomes. Also read: Trump is treating diplomacy like a failed casino deal Economic ideas in the Congress party The British Raj left India fractured, impoverished, and institutionally underdeveloped. It had few large-scale industrialists, no unified market, and vast disparities across caste, class, and region. In such a context, planning served both economic and nation-building purposes. It allowed the Indian state to articulate developmental priorities, direct investment, and unify a fragmented country under a common vision. For a country with weak private capital and sharp social cleavages, the state became the default engine of growth and coordination. The 1931 Karachi Congress resolution called for state control of 'key industries and services, mineral resources, railways, shipping, and other means of public transport.' In his 1936 presidential address at Faizpur, Nehru argued that 'only a great planned system for the whole land and dealing with all these various national activities [land reforms, industrial growth, cottage industries]' could offer a solution to India's economic challenges. In 1938, the Congress, under Nehru and Subhas Chandra Bose, established the National Planning Committee (NPC). Though its proposals were only adopted in a few provinces like Bihar and UP, and the committee was disbanded in 1939 after Congress ministries resigned, the NPC laid crucial intellectual groundwork for post-independence planning. Notably, it included prominent intellectuals like Professor KT Shah, Gulzarilal Nanda, and business leaders such as Purshottamdas Thakurdas. And Thakurdas, along with other doyens of Indian industry like JRD Tata, GD Birla, and Ardeshir Shroff, continued to support planning as a stabilising framework for industrial growth through the Bombay Plan. Also read: L&T exit aside, Bengaluru's suburban rail dream faces another big hurdle—shinier big-ticket projects Economic ideas in modern India Planning was embraced across the Indian political spectrum due to a desire for independence. This was also coupled with the desire to mobilise India's limited resources effectively, to ensure economic growth for the entire nation, and to check worsening inequality. One article introduced in the Constituent Assembly proposed eliminating the profit motive in production. Another sought to give workers control over the state's administrative machinery. While both were rejected, it is clear that disagreements were not about whether the state should direct the economy, but about the degree and form of that intervention. The compromise that came about finally was a semi-planned economy aimed at alleviating poverty and making India self-sufficient as well as bereft of foreign influence. The PC's setup was unique: it was a semi-independent institution housed, contrary to most expectations, outside the finance ministry, but nonetheless was not a Union ministry either. Nehru, Nanda, and PC Mahalanobis were among the many crucial figures who shaped the initial activities of the PC. Nanda, who had a background in labour economics and cooperatives through the freedom struggle, became the first Deputy Commissioner of the PC. He helped build the institution itself—hiring its early staff, drafting operating procedures, and promoting coordination with state governments. He saw planning not just as technocratic governance, but as a means to mobilise national unity through administration. Nehru provided the PC with patronage and cover to operate. As Chairperson, he helped cement its importance in the state apparatus. Even then, as Nikhil Menon notes in Planning Democracy (2022), it was not an all-powerful body as commonly believed. It merely helped translate an intellectual moment into some form of reality. The first Five-Year Plan (FYP) focused on stabilising India's food security and establishing technical institutions needed to grow India's economy. The second FYP marked a leftward shift in India's economic discourse with Mahalanobis' views. A renowned statistician, he brought Soviet-style modelling to Indian economic planning and believed that industrialisation could not be left to market forces, especially in a capital-scarce economy like India's. In Mahalanobis' framework, the state had to direct investment toward sectors that would yield the greatest long-term returns—chief among them, heavy industry and capital goods. This called for massive public investment in steel, machine tools, and infrastructure. While the plan was heavily criticised later for underestimating consumer demand, agricultural constraints, and capital restrictions, the Mahalanobis model embodied the core developmental belief of the era: that self-reliance was an essential path to economic freedom. Regardless of the outcomes of the planned economy, it served as an integral framework that shaped India in the initial years of independence. In 1991, India's economy was flailing under this regime, forcing it to be opened up to the rest of the world. Since then, it has grown rapidly and expanded opportunities for many. However, recent production-linked incentives (PLI), infrastructure pushes, and public capital formation suggest that the state has begun reasserting its powers in the economy. This is further compounded by the rerouting of supply chains away from China toward India and other emerging economies. As industrial policy, public investment, and state-led development return to the global stage, India's early experiments with planning offer perspectives on the role of the state in the economy, and offer ways to manage such radical transformations and global turmoil. The future may not lie in replicating the model, but we cannot understand the present without reckoning with its intellectual legacy. Vibhav Mariwala writes about political economy, history, and the institutions that shape our world. He works on public policy and global macro between London and Mumbai and tweets @VibhavMariwala. Views are personal. (Edited by Prasanna Bachchhav)
Express Tribune
04-08-2025
- Business
- Express Tribune
IMF's Washington Consensus versus Beijing Consensus
Listen to article "Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back," said John Maynard Keynes, the founder of Keynesian thought in economics, in the final chapter of his pathbreaking book — The General Theory of Employment, Interest and Money in 1936. Today, Keynes's words may well apply to the economic policies that govern Pakistan. In our case, the defunct economist was a certain John Williamson, who returned to his Lord some four years ago. Dr Williamson, who held a PhD in Economics from Princeton and taught there and at other prestigious universities such as MIT, served as the chief economist for South Asia at the World Bank from 1996 to 1999. He is best known for coining the term "Washington Consensus" — this was a set of 10 economic policy prescriptions, emphasising fiscal discipline, trade liberalisation, and privatisation. In its original form, Williamson had intended the Washington Consensus to be a rough set of guidelines, to be applied with common sense and flexibility in accordance with the specific needs of the country. Unfortunately, Williamson's carefully laid out treatise fell into the hands of the minions of the World Bank and the International Monetary Fund (IMF). These are institutions known for hiring some of the smartest people and then doing their utmost to squeeze all creativity and independence of thought from their new recruits, rendering them automatons committed to the unquestioning enforcement of what they preach. And so it was that Williamson's loose set of guidelines became gospel, immune to doubt, flexibility, or change — to be applied ruthlessly to "saving" sinking developing economies around the world. It is this prescription — the Washington Consensus – that the IMF has foisted on Pakistan. The ten principles of the consensus are: fiscal discipline, cutting subsidies, tax reform, market-based interest rates, competitive exchange rates to encourage exports, trade liberalisation such as reducing duties on imports, encouraging foreign direct investment, privatisation, deregulation, and finally, respect for property rights. All these principles, for some time now, have been pushed down the throat of Pakistan's government. The question is: has the Washington Consensus worked for Pakistan? A simple comparison with China, which followed sufficiently distinct policies to merit the name "Beijing Consensus," may provide an answer. The numbers tell the story. In 1962, China's GDP per capita was $70, while Pakistan's was $90. By 1973, there was a brief reversal: China had $155 and Pakistan still $90. By 1980, China's figure was $308 and Pakistan's $479. This gap continued until 1993, when China decisively began pulling ahead. Today, China's GDP per capita is more than eight times that of Pakistan. To understand why, let's contrast the Washington Consensus as applied to Pakistan with the Beijing Consensus followed by China. Pakistan adopted many Washington Consensus-style reforms, especially under IMF programmes and structural adjustment policies. Here's how they played out: 1) Fiscal discipline: Pakistan struggled with high fiscal deficits. Reforms aimed to reduce government borrowing, but persistent debt and inefficient spending remained challenges. 2) Tax reform: Efforts to broaden the tax base were made, but Pakistan's large informal economy and tax evasion limited success. 3) Privatisation & deregulation: State-owned enterprises were privatised, but outcomes were mixed, some sectors saw efficiency gains, others faced backlash due to job losses and poor regulation. 4) Trade liberalisation: Tariffs were reduced and markets opened, but domestic industries often couldn't compete, leading to trade imbalances. 5) Foreign direct investment (FDI): Policies encouraged FDI, but political instability and weak infrastructure deterred sustained inflows. Despite these reforms, Pakistan's average growth rate hovered around 3% - far below the 7% needed to reduce debt and create jobs. Now, contrast this with the Beijing Consensus: China's model emphasises state-led development, gradual reform, and pragmatic experimentation. Key features include: 1) Strong government role: The state controls key sectors like energy and finance, guiding long-term planning. 2) Incremental reform: Instead of shock therapy, China implemented changes step-by-step, allowing adaptation and stability. 3) Focus on welfare: Development isn't just about GDP – it includes poverty reduction, infrastructure, and quality of life. 4) Export-led growth: China used manufacturing and trade to drive growth, supported by strategic investments and incentives. 5) Merit-based bureaucracy: Officials are rewarded for economic performance, creating incentives for innovation and efficiency. The Beijing Consensus has turbocharged China's growth, transforming it from a neglected backwater into a global economic powerhouse. Since 2000, about 400 million people have been lifted out of extreme poverty in China. The poverty rate has declined from about 40% in 2000 to about 10% today. Contrast this with Pakistan: under the Washington Consensus, poverty has increased from about 35% in 2000 to 45% in 2025. So, what is the lesson here? Any set of policy prescriptions for economic development must not be based on blind dogma, as is the case with the IMF's implementation of the Washington Consensus. Policies must be tailored to the specific circumstances and needs of the country to which they are applied. In this sense, the IMF has rendered a great disservice to Pakistan by compelling us to adopt policies that do more harm than good. THE WRITER IS CHAIRMAN OF MUSTAQBIL PAKISTAN AND HOLDS AN MBA FROM HARVARD BUSINESS SCHOOL
Forbes
31-07-2025
- Business
- Forbes
Bearish Pressure On Oil Prices Remains Elusive
These are confusing times for the oil market, with forecasts continually calling for a growing surplus, yet prices remain strong with some analysts suggesting a new spike is possible. OPEC+ has been criticized for unwinding the voluntary cutbacks more quickly than initially proposed, while fears of demand weakness due to uncertainty about U.S. tariffs suggests they might be overly optimistic about the market balance. In my opinion, one of the best observations explaining market behavior came from John Maynard Keynes, who was an active trader and at one point had massive losses in his portfolio. He opined that economics don't explain market behavior so much as traders' perception of the market economics. That still holds true today, and in no place more so than oil trading. 'Crisis fatigue' is a known phenomenon where traders, facing lengthy geopolitical threats, ultimately grow weary and begin to discount the potential for, or impact of, supply side disruptions. Israel's war in Gaza is one example, as violence involving that country and its various neighbors initially raised fears that the violence will spread to oil producing regions. Eventually, the perceived probability of a disruption receded and the security premium with it. The equivalent now appears to be 'recession fatigue.' Fears of economic dislocation have put downward pressure on the price of oil since Trump's inaugural, with government layoffs suggesting rising unemployment, deportations of workers raising fears of inflation especially for groceries, and tariffs appearing likely to boost inflation and depress spending. Yet unemployment remains low, inflation has only marginally risen, and the economy was strong in the second quarter. But I recently came across a quote from M.I.T.'s Rudiger Dornbusch (in Ken Rogoff's Our Dollar, Your Problem), who observed, "In economics, things take longer to happen than you think they will, and then they happen faster than you thought they would." In other words, just because it hasn't happened, doesn't mean it's not going to. The impact of tariffs is hard to estimate because, first, they have changed repeatedly, including pauses of announced levels, and second, consumer spending might not reflect longer term activity but instead people and businesses front-loading their purchases to beat the tariff implementation. The impact of government layoffs and worker deportations are also hard to estimate, but to date, the anecdotal reports appear to be much worse than the government data. Partly this is because some government layoffs have been paused by the courts, but also, the multiplier effect of the layoffs will take time to accumulate as unemployed workers cut back spending, weakening the local economies. The recent decline in the number of hours worked might be a foretelling of later weakness, but to date, employment levels are not seriously affected. Interestingly, the data on oil demand are mixed: gasoline demand to date is down 0.6% compared to last year, suggesting consumer confidence is poor and people are not taking long driving vacations. On the other hand, distillate demand is 3.7% above last year's, and distillate primarily reflects business activity, such as shipping goods. Possibly, demand surged with orders from consumers trying to beat the tariff imposition, but the evidence is too muddied to provide anything close to a definitive answer. Jet fuel, interestingly, shows continued growth, up 5.4% over last year, which contradicts the impression that consumers are less confident and not spending on long-distant vacations. Typically, jet fuel is the first to be affected by a slowing economy as businesses rein in travel spending. On the supply side, many have been flummoxed by the failure of OPEC+'s production increases to dampen price expectations. Since March, when they decided on April production quotas, OPEC+ has repeatedly called for a rapid unwinding of the voluntary quota reductions of 2.2 mb/d. After each announcement, prices dipped but only briefly before recovering, partly in recognition of the fact that the expected surplus has not materialized as of yet. This reflects the fact that the headline increase in OPEC+ quotas is well above the actual, since many members are already at full production. The voluntary cutbacks of 2.2 mb/d will, in theory, be gone as of August, but the increase in the first three months of the unwinding, expected to be 1.23 mb/d, was only 0.81 mb/d, according to IEA estimates. Supply in July and August is also likely to be less than the quota increase, as only Iraq, the Saudis and Emiratis have much spare capacity: the IEA estimates that they have 3.8 out of the 4.4 mb/d total spare capacity in OPEC+. In theory, Iraq and the Emiratis will not increase further, as they are supposed to be compensating for earlier over-production, but to date their compliance with quotas as been deficient. The inventory picture vaguely supports the mixed indicators, with inventories growing some but less than expected. The IEA estimates that global oil inventories built over 1 mb/d in the first quarter, when they typically decline, and should have increased another 1.6 mb/d in the second quarter. Data and transportation lags mean that the build would not necessarily have shown up as of yet; OECD inventories grew by only 38 million barrels from end-December 2024 to end of May. Assuming the growth in global inventories is twice the OECD levels, that still means that less than half the expected inventory increase has shown up. The broader dataset of what the IEA defines as observed stocks are thought to have grown by 1.74 mb/d in the second quarter, which is more in line with their projected market balance. However, the second quarter typically sees inventory builds as refineries undergo seasonal maintenance. Furthermore, a significant fraction of the stock build was in China and U.S. natural gas liquids, whose exports have been disrupted by the trade conflict with China. So, the increase in OPEC+ quotas looks more prescient than misguided, reflecting actual inventory and price levels, as opposed to the IEA forecast of future stock builds. Weaker shale production in the U.S. could support this outlook, as could stronger sanctions on Iran and Russia. However, those sanctioned countries have a record of maintaining sales over the longer run, and shale producers have had a habit of outperforming expectations. I would argue that neither the bear price case nor the bull price case is certain at this point. If supply holds up better than expectations, and inflation picks up in the U.S. as many, but not all, economists predict, oil demand and the market will definitely weaken and the possibility of an oil price spike will recede. Whether the price collapses will depend more on Saudi reaction to overproduction by Iraq, Kazakhstan and the U.A.E. If inventories do not grow much this summer, the Saudis will probably be in a conciliatory mood, but if the IEA project proves close to the mark, new reductions in the quotas can be expected. In that case, the Saudis would bring greater pressure to be on their recalcitrant partners. Should economic growth in China and the U.S. prove robust, and sanctions reduce supply on the market, the bullish price case will prevail. Shale oil production is almost certain to underperform, given moderate prices at present and rising costs of equipment, especially due to steel tariffs. But quite possibly, any strength in oil prices will encourage the Saudis to push for higher quotas in an effort to cash in, rather than refuse to increase output in solidarity with Russia. Ultimately, both bulls and bears have support for their expectations, but unless U.S. tariffs remain at modest levels and inflation isn't ignited, oil demand growth is more likely to be anemic and only better sanction enforcement will support current price levels.
Hindustan Times
25-07-2025
- Business
- Hindustan Times
The future of money: Kashyap Kompella on what's next for this pivotal invention
What is money? Economists begin with function. When code replaces coin, we are no longer redesigning currency. We are redesigning control, compliance and consequence. (HT Illustration: Puneet Kumar via Midjourney) Money, they say, does three things: it lets us exchange goods and services, acts as a standard measure of value, and it lets us store value. A kind of economic Swiss Army knife, remarkably adaptable and endlessly circulated. John Maynard Keynes saw money as a bridge between present and future. Milton Friedman warned that it could be a weapon in the wrong hands; that too much of it, too fast, would corrode a system. Hyman Minsky went deeper still: all money is a promise, he said, but not all promises are equal. Some come wrapped in the authority of the state, others in the credibility of a bank, still others in the brute fact of power. Today, a hundred-rupee note doesn't in fact represent a hundred rupees. It asks to be believed as such. What we call currency is a fiction wrapped in design: Microtext and hologram, watermark and thread, security and ceremony. We dress our illusions well. Where coins offered a kind of weight and direct value, and the early notes were backed by metal (often gold), stored somewhere, safe and tangible, most currency is now backed by the heft of its respective state. By inertia as well, in a sense. But really, in a world where money is mostly numbers drifting across invisible networks, what holds it up is our collective agreement. Consensus as collateral. Money is the most powerful fiction humans ever agreed to believe. (Scroll to the bottom for more on how this works, and how we got here.) The death of cash Is it accident that most money now doesn't even exist as paper? What does it mean that so much of the ritual and choreography around this asset is fading? There was a time when one went to the bank to update a passbook, and to an ATM to withdraw the notes. Money still had a place, a shape, a texture. More and more, today, it doesn't. Cash, we are told, is the past. It is eulogised in policy memos and start-up decks. Replaced by cleaner, smarter tools; contactless, compliant, optimistically frictionless. It persists, in temple donation boxes, in wedding envelopes, in the shadowy portions of real-estate payments. It lives in private safes, in the seams of sari blouses and under mattresses. It survives in the folds between trust and traceability. It neither asks its user's name nor logs their location. It holds no record of where it has been. But for how long? Secret gardens In the mythology of Silicon Valley, every system is just a feature waiting to be rebuilt: as faster, more frictionless, more easily monetisable. Money is no different. Here, the goal has become focused on erecting walled gardens to enclose wealth and spending. Capture the interface, own the flow. Build platforms that draw money in, and then design ways to keep it there. It's the Starbucks Rewards scheme, on a global scale. Already, expanding ecosystems of this kind have been built by Google, Apple, Amazon and others. For the user, the promise is a smooth, unified experience (and small benefits for staying with the walled garden). For the tech company, the potential is massive. If a salary is eventually disbursed onto a platform and spent within that platform, in tokens or credits or points, does it matter (to the owner of the platform) whose name is on each token as it changes hands? The real revolution, however, will be driven by those who have been carefully watching. Early experiments in these walled gardens have shown governments — ie, the powers that create, regulate and oversee the money actually driving it all — what is possible and what will be embraced. Which brings us to… Money with a mind Imagine a coin that knows what it's for. A welfare payment that refuses to be spent on alcohol. A currency that reports to headquarters, quietly, after every transaction. This isn't science-fiction. These are the traits or potential traits of central bank digital currencies. These are being rolled out as test cases around the world, in countries ranging from China and Nigeria to Jamaica and India. This is programmable money; essentially, money with a mind. If it becomes widespread, for the first time in history, standardised promissory notes will no longer be silent, disinterested participants in a transaction. Governments could target subsidies more precisely and monitor corruption in real time. They could also automate compliance. Economic policy could be deployed like code: live, granular, conditional. The implications, of course, are enormous. This kind of currency could serve as a direct tool of control. The lines between incentive and instruction, governance and surveillance, public and private, could blur. Programmable money would turn spending into a performance that is constantly logged and evaluated. Unlike cash, this money could also be remotely controlled. In one possible scenario, a dissident isn't placed under house arrest; their credits are simply erased. And compliance becomes a hushed imperative. Parallel tracks In a strange twist, cryptocurrency — born of rebellion against the absurdities of hyper-capitalist definitions of money, and the excessive control wielded by governments through it — laid the groundwork for money with a mind. Bitcoin, the world's first such currency, was born in 2008, in the wake of the global financial crisis. If so much of the world's money was fiction to begin with, and could simply evaporate because it had no true inherent value, then why could a new kind of currency not improve on this with ideas of its own (such as limited supply and far greater transparency), it argued. Bitcoin began to be 'mined' in 2009, generated as a fee or reward for using powerful computers to solve complex math problems. But hyper-capitalism claimed this revolution too. As it gained in value, it lost its claim to rebellion. Hype made it speculative and volatility made it impractical. What had been pitched as the people's money became one more asset class. As more cryptocurrencies emerged, creating, securing, and transferring value without state intervention or control, the empire took note. Governments began planning centralised digital currencies. (In a final signal that this particular revolution has been co-opted, American government agencies are now considering using Bitcoin-backed instruments to shore up and diversify pension-fund portfolios.) The future of us For years, the future of money has been framed as a contest of forms. Would cash survive? Would the dollar be dethroned? Would we eventually pay via thumbprints, retinal scans, barcodes embedded in skin? These are interesting questions, but not the most important ones. Because the deeper shift isn't about form. It is about access. In a world where money is programmable, traceable, and conditional, the critical questions will be: Who decides how it is used? And: Who will be watching, each time you swipe? Now, the old order had problems. It leaked, it excluded, it corroded and enabled hoarding, laundering and loopholes. The new order seeks to fix some of this. But what it fixes, it also redefines. We began by asking what money is. We end with something harder: How will it change us this time? Because money is never just money. It is infrastructure for belief. It is how a society encodes obligation. How it decides what counts, who counts, and on what terms value can be held, moved, withheld and erased. When code replaces the coin, when your account becomes your identity, we are no longer redesigning currency. We are redesigning control, compliance and consequence. Yes, cash may survive in the cracks. The dollar may hold its seat a while longer. Cryptocurrencies may mature. But these are surface questions. The deeper shift is this: money is fusing with code, and code is never a silent participant. What we are building is not just a new financial system. It is a new moral architecture. One where every choice — by government, by company and by user — carries the weight of a rule once debated in public. The future of money is not a question of coins vs notes vs ledgers. It is the future of trust. The future of access. The future of power. Which is to say: the future of us. (Kashyap Kompella is an industry analyst and author of two books on AI) . A TIMELINE: How our money came to be Coins have a long history that overlaps with ideas of barter, soft power and annexation. So, the story of money for money's sake really dates to the earliest forms of non-metal currency: standardised promissory notes. * 118 BCE: The Chinese empire takes its first steps towards lighter, more representative money by issuing tokens or promissory notes on leather. * 1000 CE: In Sichuan, as trade booms, strings of coins are becoming too bulky to haul around, so black-and-red mulberry-paper receipts begin to be used instead. Sixteen merchants are awarded the right to issue these, and the government ultimately takes over, issuing the world's first fixed-denomination banknotes. They are essentially backed by bullion; a trader needed to hand over strings of coins and take an equivalent note in return. These notes could then circulate until someone returned to the merchant-banker to claim the corresponding coins. Of course, soon enough the notes are doing the rounds without the coins themselves being moved at all — and money was born. A banknote dated 1287, with its printing wood plate, from Yuan dynasty China. (Wikimedia) * 1200s: Central and western Asia took to the concept readily. Fast-forward 200 years and the Mongol emperor Kublai Khan has helped spread paper money all the way to Persia. But the concept baffles Europe. Those reading about paper money in Marco Polo's travels think it so preposterous, they wonder if he's making it up. * 1294: The Persian city of Tabriz experiments with paper money of its own but issues too much of it, sending the trading port of Basra into financial ruin. * 1455: The Chinese goof up too. Their over-production of paper notes devalues their money. Paper money is eliminated at this point, and will not return for centuries. Currency reverts to metal. A treasure note from the Qing dynasty (1644-1912), China. (Wikimedia) * 1661: Dutch entrepreneur Johan Palmstruch, who founded the Stockholms Banco in collaboration with the Swedish government, introduces kreditivsedlar or credit notes. They come in set denominations, are watermarked, bear a date of issue, bank seal and eight banker signatures. They are a hit. But they issue too many too and the bank is liquidated. A 1666 banknote for 100 Swedish daler, issued by Stockholms Banco, signed by founder Johan Palmstruch. (Wikimedia) * 1694: England learns from Sweden and sets up the Bank of England to issue Pound Sterling notes to help fund a war with France. * 1700s: Banks are appearing across the colonies. Currency notes are circulated within banking regions. For the public, it is a convenient and safe way to move money around. For the banks, it creates wealth from thin air – banks are permitted to print as much as 1/3rd more notes than they have coins in reserve. * 1792: Following the end of the American War of Independence in 1783, the US dollar is declared the country's official currency. * 1700s to 1900s: Given how much of the world Great Britain controls, it is no surprise that the Pound Sterling is the default global currency. * 1944: World War 2 is devastating Britain. Its empire is shrinking at the same time. The US, meanwhile, is now the world's most stable economy. Amid acknowledgement that the Pound Sterling will need to be replaced as the world's reserve currency, 44 allied countries come together to sign the Bretton Woods agreement. It fixes a rate of exchange for all foreign currencies against the US dollar, with the US promising, in theory, to back every dollar transaction using its vast reserves of gold. (Interestingly, it has shored up much of this gold as a result of trade surpluses during the two world wars.) The gold-backed dollar remains relatively stable, allowing other countries to back their currencies with dollars rather than gold. In order to back a currency with dollars, of course, one must have dollars. This creates an entirely separate revenue stream for the United States, turning US treasury bonds into one of the most powerful debt instruments in the world. Governments buy the bonds on the promise that the US can swap them for dollars at any time. They then use the bonds (plus actual dollar reserves) to keep their economies stable. * 1971: US President Richard Nixon delinks the US dollar's representative value from the country's gold reserves. This is essentially a tacit admission that the economy has grown so large that there isn't enough gold in the world to back it with. Money as a social construct has entered a new phase. What does back the dollar now? Trust and goodwill, partly. As well as the understanding that US economy can generate enough revenue (through the direct sale of goods and services, and through taxes and debt) to keep the still-growing system from imploding. But perhaps the most powerful thing keeping currencies today from crumbling is the quiet social contract by which we all agree not to look directly at the numbers, so as not to see them for the mirage that they, sort of, are. Instead, our system is backed by the idea that as long as the wheel keeps turning, the wheel will keep turning. . WHEELS WITHIN WHEELS: How much of our money is 'real'? What does it really mean that most currency is no longer backed by gold? That isn't even really the question. The real question is: How much of our money is 'real'? And the answer is: It is impossible to say. For instance, let's say that you put ₹1 lakh in the bank. The bank uses it to issue a loan to a customer. That money is now in two places at once. The customer who took the loan uses it to buy things; the person he pays uses it again. The money is now in multiple places at once. And that's not even accounting for how much of the original ₹1 lakh was 'yours' to begin with. Anti-capitalists view this system as absurd, and it was partly as a mark of protest against this absurdity that Bitcoin was born. It was marketed as a fresh slate; anyone could get rich; there was no legacy wealth. Could it become the money of the future? It turned out, of course, to be simply another social construct, entangled with those that came before it: money, legislation, security, adoption, legitimacy. The idea of cryptocurrency has since become woven into the idea of centralised money. There has been periodic talk of post-money economies replacing the tangles of today. It is wholly unclear what they would look like, or what kind of world we would need to build in order for them to work. For the moment, then, money remains the most stable means of exchange, if not the most just or logical. Just as elections remain the most stable means of governing large populations. Could a change be coming? It almost certainly is. The story of money, of societies, of people, after all, is just an endless unfolding of old to new.
Gulf Today
07-07-2025
- Business
- Gulf Today
America's broken politics affecting economy
The political realignment has come for economics. At least since the days of Friedrich Hayek and John Maynard Keynes in the last century, the divide in economic thinking roughly corresponded to the political split. In the mainstream, everyone was a capitalist and saw some role for government. The right/left divide was mostly over exactly how big that role should be. Now, in economics as in politics, it is no longer left versus right; it is moderates versus populists. The question isn't so much the optimal size of government in a global market-based economy, it is whether the economy is positive or zero-sum and how it entrenches power, according to Tribune News Service. The result is unlikely allies and enemies. The horseshoe theory of politics holds that extreme left and right partisans agree more with each other than they do with the centrists in their party. That theory now also applies to economics. A decade and a half ago, economists and policy wonks were divided on things that in retrospect seem quite small — the structure of the Affordable Care Act, for example. More and more lately, I struggle to find disagreement with center-left economics pundits who used to make me shake my head. It could be that we are all moderating with age. But I don't think so. It's that the conversation has changed. The debate is increasingly about questions we moderates have long seen as resolved, such as whether price controls work (no), globalization is a good thing (yes), or growth should be the primary objective (of course). These questions are being revisited because populists have become a much bigger and more influential force in US politics and policy — and as they do, centrists find that we have more in common with each other than the more extreme wings of our respective camps. It's not just me. Ezra Klein recently described a divide in the Democratic Party over the so-called abundance agenda, which argues that getting many regulations and special-interest groups out of the way can unlock more growth. So-called 'abundance liberals' argue that, with the right policies, the government can increase economic growth and make everyone better off. The more populist wing of the Democratic Party rejects this approach, because it sees the real problem as power. It has a more zero-sum view of the economy, in which the powerful (usually corporations and the rich) take most of the limited resources everyone should be entitled to. I am closer to abundance liberals (let's make a bigger economic pie) than I am to populist liberals (let's make sure the pie slices are exactly even). I also support getting rid of wasteful regulations and favors to special-interest groups. The difference is that I think these barriers need to be removed to empower the private sector, not the government, to drive growth. This is not a trivial difference, and someday it will probably tear our fragile alliance apart. But for now, compared to the alternative, it feels semantic. Conservatives are facing a divide similar to the one Klein describes among liberals. The populist strain of the right also sees the world as zero-sum and condemns the concentration of power — not of the rich, but among foreigners and institutions: universities, technology firms, government bureaucracies, international agencies, and so on. President Donald Trump's administration reflects this division. Its economic team includes representatives from the more traditional pro-growth wing of the Republican Party, with trained economists and people who worked in finance, as well as people from the more populist zero-sum wing, dominated by Yale Law graduates and their fellow travelers. This realignment will shape America's economic discourse and policies for the foreseeable future. Rather than a right/left divide on the role of government, the main debate going forward will be between centrists and populists.
