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Welcome to math and economics. Before your eyelids droop and you flip to the political sex scandal Cheat Sheet, let us recall that this subject is a necessary evil. Indeed, it is quite possibly the backbone to any useful knowledge gained from this tome.

  As Groucho Marx put it, “Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy.”

  So don’t get too grouchy here. I’ve tried to keep this subject as entertaining as possible for all you Oscar the Grouch Muppets out there. If you’re going to blame anyone, blame the Scottish for inventing banking. Well, branch banking anyway.

  Our first Cheat Sheet on this subject concerns the history of money, and the fact that if one considers the concept of cash too carefully, we’re basically in an “emperor’s new clothes” situation. This is followed up with a grid of the major economists throughout civilization and their thoughts—thoughts that have dubious links to reality, as we will see in the seventh Cheat Sheet, which covers the economic crisis of 2008, including Eurogeddon.

  In an attempt to end the section on a hopeful note and actually get some concrete tips on money matters, in our eighth Cheat Sheet we look at three case studies, of the good, the bad, and the aha! Namely Warren Buffett, Bernie Madoff, and Oprah Winfrey.

  The good news is that it turns out we shouldn’t be watching CNBC in the morning if we want to get ahead—we should be glued to reruns of Tom Cruise types bouncing on The Oprah Winfrey Show’s sofa.

  CHEAT SHEET 5—HISTORY OF MONEY

  BACKGROUND BRIEFING

  “Money makes the world go round.” “It’s a rich man’s world.” Clichés are clichés for a reason. “Money” is defined as anything that is generally accepted as payment for goods and services and repayment of debts.

  Initially, it all made perfect sense. The use of barter dates back tens of thousands of years. Many cultures around the world eventually developed the use of commodity money, such as gold coins. This eventually evolved into a system of representative money known as fiat money. Fiat money has nothing to do with the car. Instead, in itself, it is without intrinsic use or value—i.e., it’s just a bit of paper. It gets its value by being declared by a government to be legal tender.

  * * *

  NOTEWORTHY NUGGET

  The Chinese, trailblazers that they are, came up with paper money during the Song Dynasty (although the notes were used alongside commodity money).

  * * *

  Starting in the seventeenth century, European traders got bored of lugging gold around. So commodity money—gold coins—was eventually replaced by representative money—paper notes—linked to the gold standard. This still makes perfect sense. The supply of gold can only grow slowly, so the gold standard would restrain governments’ spending and keep inflation in check. By the beginning of the twentieth century almost all countries had adopted the gold standard.

  And then the world decided to shoot itself in the foot. Life is a cabaret, old chum.

  There was World War I, followed by the Wall Street crash and Great Depression. To help bring the United States out of the Depression (and most economists agree that it did), President Franklin D. Roosevelt cut most of the dollar’s ties with gold, allowing the American government to pump money into the economy and lower interest rates. But the United States did continue to allow foreign governments to exchange dollars for gold.

  However, the world continued self-sabotaging itself, this time in the form of World War II. The winner takes it all and all that jazz (sorry, I’ve been senior editor at Broadway.com too long; I’ll leave it with the musical theater references). And in this case, the real winner was America. Europe lay in ruins and the United States became the preeminent global economic power.

  So in 1944, off the world (well, at least “experts” representing all forty-four Allied nations, who battled the Axis powers of Hitler and co.) trotted to America, specifically to Bretton Woods in New Hampshire, to begin to resolve the mess. At Bretton Woods, most countries adopted fiat currencies that were fixed to the US dollar, which still maintained at least a link to gold.

  Currencies basically swam along until 1971, when the Nixon administration suspended the convertibility of the US dollar to gold, at which point many countries depegged their currencies from the US dollar and most of the world’s currencies weren’t backed by anything except governments’ fiat of legal tender.

  WHY IT MATTERS TODAY

  Now pause for a moment. Take a deep breath. Try not to panic too much. Yes, you are correct in thinking that our financial system has evolved to something akin to the emperor’s new clothes. Everyone is telling everyone else we’ve got money (clothes on), but we don’t really. Thanks to what went on in 1971—and I’m not talking about the recreational drug use, which actually didn’t play a part in America’s decision; it was because foreigners flush with dollars were depleting US gold reserves—our money is not linked to gold or anything real anymore. It’s just a bit of paper that some bloke somewhere says is worth something.

  The only thing that’s stopping out-and-out chaos is inflation—print too much money and the economy will go haywire. So that’s all right then.

  * * *

  KEY TERMS: INFLATION AND DEFLATION

  Inflation

  • Inflation is the persistent, substantial rise in the general level of prices. If prices don’t rise, it’s deflation.

  • In the United States, this is measured by the Consumer Price Index, which is based on a shopping “basket” of goods and services on which we typically spend our money.

  • To combat inflation, the Federal Reserve, aka the Fed, will increase short-term interest rates so it costs more for businesses and consumers to borrow money.

  Deflation

  • The Fed fears this more than inflation—it’s when the general level of prices goes down.

  • Best analogy, think of a car. Say thanks to deflation in 2017 a new car costs $30,000; in 2018 it’s $10,000, and by 2019 it’s $5,000. What sane consumer would buy a car in 2017? As a result, spending dries up on cars and the industry collapses. This would be mirrored across the board. You are in the deflation “death spiral.”

  * * *

  And then again, maybe not. There’s also a young pretender to the whole monetary system called the bitcoin. Stuff of nightmares? Quite possibly.

  * * *

  KEY TERM: BITCOIN

  • Bitcoin has massive potential and challenges the banking system as we know it. A bitcoin is a form of digital currency, sometimes called a cryptocurrency or a virtual currency, that was started in 2009 by an unknown person called Satoshi Nakamoto. Bitcoins basically exist only online and you hold them in an online “wallet.”

  • You can trade bitcoins for goods or services with vendors who’ll accept them for payment, but it is not legal tender anywhere. It is not backed by any government.

  • The payment system is supposed to be designed so only a certain number of bitcoins can exist, preventing inflation.

  • The “real” monetary value of bitcoins fluctuates, like equities.

  • Governments are freaking out. People can anonymously trade, sometimes even naughty things, and avoid taxes!

  • You’ll keep hearing about it as everyone tries to figure out what to do and how to regulate the system.

  • It could really work; just think of the currency thing for normal people. If my mum in London wants to buy me a birthday present in New York, the banks will screw her on the exchange rate. If she could use bitcoin, that wouldn’t be an issue.

  • At time of going to press, the world’s largest bitcoin wallet is owned by the US government (of course it is). The largest bitcoin holder is Nakamoto, who holds many wallets.

  • Interesting sidenote: Just 8 percent of the world’s currency exists as physical cash; the remainder is electronic.

  * * *

  TALKING POINTS

  • If you’re going to date a bankster type, you won’t see them much (mi
ght be a good thing), what with globalization and all, but you’ll possibly get more face time with someone who is primarily in equities—stocks and shares—rather than Forex. Forex, or FX, is what businessmen—not a breed best known for their spelling ability, but who do like to confuse us with jargon in the hope we will believe that they are masters of the universe—call the foreign exchange rate between two currencies. Forex is unique because it trades twenty-four hours a day except weekends. The New York Stock Exchange trades weekdays from 9:30 AM to 4:00 PM EST and has public holidays off.

  • Taxation has been used by states throughout history to carry out many functions, from war to welfare. Historically, the nobility were supported by taxes on the poor. This has now flipped, and modern social security systems are intended to support the poor, the disabled, or the retired by taxes on those who are still working. Some might say that certain conservative types have embraced this “grudgingly.”

   The first known system of taxation was in ancient Egypt, and our ancestors have flirted with all sorts ever since. Some obsolete forms of taxation include taxes being clamped on beards in tsarist Russia (we should probably have one on mustaches now—for men and women—to encourage the end of this fashion faux pas). The window tax lasted in the UK from 1696 to 1851, so if you were showing off, you’d build a house with lots of windows, and if you were broke, you’d fill them in.

   It may be a statement of the obvious, but a nation’s tax system tends to be a reflection of its communal values or the values of those in power. Hence the Germans are still forking out for a solidarity surcharge, which was introduced back in 1991 to help pay for reunification. Can you see (insert the name of whichever selfish country or political party you dislike) agreeing to do that?

   America, being so big and all, has state as well as federal taxes. Some states do not levy an individual income tax, including Texas and Florida. Places where the Bush family have tended to hang out. Hmm.

  * * *

  NOTEWORTHY NUGGET

  Today, Germany has one of the most complicated systems of taxation in the world. It’s even been suggested that three-quarters of the world’s literature about taxation refers to the German system.

  * * *

  RED FLAGS

  • Don’t confuse Bretton Woods with the Marshall Plan. Bretton Woods didn’t solve the postwar imbalanced international economic situation: Europe was still broken and debt-ridden.

   General George Marshall, after sorting out the Allied victory over Hitler, became the US Secretary of State (1947–1949) and recognized this problem.

   Thus the United States set up the European Recovery Program—aka the Marshall Plan—to provide monetary support for rebuilding Europe largely through grants rather than loans, for four years starting in April 1948.

   It wasn’t an entirely selfless act on America’s part; it was partly to prevent the spread of communism.

   It worked: By 1952, for all Marshall Plan recipients, output in 1951 was at least 35 percent higher than in 1938. Over the next two decades, Western Europe enjoyed unprecedented growth and prosperity. Some suggested that the only way to sort the recent Eurogeddon crisis was to have a new “Marshall Plan” to allow Europeans to get out of the debt hole they’re currently in.

  • It is dangerous to ignore history on taxation or you will be bound to repeat it.

   Poll taxes, which every adult has to pay without their income or overall wealth being taken into account, have almost always been unpopular in England. From Richard II in the late fourteenth century on, their implementation contributed to revolts and such like. So what did Margaret Thatcher do? A decade after becoming prime minister, she decided to implement one. Cue riots in March 1990 and her resignation that November. The poll tax undoubtedly contributed to her downfall.

   America got it right twice, with the two world wars. In 1918, the top rate of US federal income tax was increased to 77 percent (on income over $1,000,000) to finance World War I. During World War II, Franklin D. Roosevelt even tried to impose a 100 percent tax on all incomes over $25,000 to help with the war effort. Unfortunately President Bush II ignored his history books, cut the top marginal tax rate down to 35 percent in 2001, proceeded to wage two wars, and didn’t pay for them. Throw in Medicare Part D and cue debt drama.

  * * *

  WISE WORDS

  When I was young I thought that money was the most important thing in life; now that I am old I know that it is.

  —Oscar Wilde

  * * *

  SOCIAL SURVIVAL STRATEGY

  Argument: “Politicians who remain in power too long end up out of touch—look at Margaret Thatcher.”

  This is hard to disagree with and can be applied to almost everyone in office. Margaret Thatcher, the grocer’s daughter, rose to power precisely because she wasn’t a member of the traditional elite, liked debate (here), and was in touch with the electorate. Ten years later, while she was surrounded by yes-men, the poll tax occurred, and within months she’d resigned.

  Crisp Fact: “The world’s largest bitcoin wallet holder is the US government.”

  The US government has its tentacles everywhere …

  Pivot: “The winner always takes it all. That was a great ABBA song! Have you seen Mamma Mia!, or is the idea of a jukebox musical too horrific for you?”

  It’s hard not to have an opinion on jukebox musicals; unlike Wagnerian operas, everyone can understand the concept. Useful way to turn the chat to something all and sundry can contribute to and not come to blows about. Unless you’re talking about Jersey Boys. There are some very serious Jersey Boys fans.

  CHEAT SHEET 6—ECONOMISTS

  The wisest words that an economist has ever uttered were those of the Canadian-American John Kenneth Galbraith (1908–2006). You should use them if anyone ever asks you about the economy.

  The only function of economic forecasting is to make astrology look respectable.

  As we now know, all the money and learning in the world didn’t make most economists (with a few notable exceptions such as Dr. Doom, Nouriel Roubini) any good at predicting financial Armageddon in 2008, did it?

  Like astrology, the earliest discussions of economics date back to ancient times. Back then, and until the Industrial Revolution, economics was not a separate discipline but a part of philosophy. One might suggest it would have been better off remaining there, debated as an abstract notion rather than depended on for small stuff such as the security of nations.

  For those who want to drop in a few historical names in conversation, we now take a quick tour though times past via one of our trusty reference grids.

  ERA

  PHILOSOPHER/TERM

  PHILOSOPHY

  Ancient Greece

  Aristotle and Company

  Examined ideas about the “art” of wealth acquisition and questioned whether property is best left in private or public hands. Posited a natural and an unnatural kind of wealth getting, which we can all relate to. The natural referred to what it took to keep a household going—securing food and a roof over one’s head (Main Streeters). Unnatural was the making of money for its own sake (Wall Streeters).

  Medieval

  Thomas Aquinas and other scholars

  Argued that it was a moral obligation of businesses to sell goods at a just price.

  Western Europe, sixteenth to late eighteenth centuries

  Mercantilism (term was invented later by its critics)

  A political and economic movement. It suggested governments should play a protectionist role in the economy by implementing masses of regulation. So began an argument that will probably be with us for the rest of time.

  Eighteenth century

  Capitalism (term coined later by its critics, primarily Karl Marx)

  Spearheaded by the Scottish philosopher Adam Smith, often cited as the father of modern economics for his treatise The Wealth of Nations (1776). His vision of a free market economy, the opposite of mercantilism, was seriously
helped by timing (as with everyone who is a success). Wealth of Nations coincided with:

  • The American Revolution.

  • The French Revolution (inspired by the American, and which caused Europe-wide upheavals).

  • The Industrial Revolution (the start of), which allowed more wealth to be created on a bigger scale than ever before.

  NB: It was a Frenchman, Vincent de Gournay (1712–1759), who is reputed to have asked why it was so hard to laissez faire et laissez passer (free enterprise, free trade).

  Nineteenth century

  Marxism

  Karl Marx was, and in many ways still remains, the preeminent socialist economist; his ideas are credited as the foundation of modern communism. He led the backlash against the Smith school’s “laissez-faire” attitudes, believing that capitalism contained the seeds of its own destruction. Marx thought that as wealth became more concentrated in the hands of a few capitalists, the ranks of an increasingly dissatisfied proletariat would swell, leading to bloody revolution and eventually a classless society.

  Post–World War II

  John Maynard Keynes

  Advocated interventionist fiscal policy to stimulate economic demand and growth. What Democrats like doing now.

  Twentieth century

  Chicago School

  What Republicans like doing now. Keynes was challenged by what came to be known as the Chicago school of economics at the University of Chicago. They advocated “liberty” and “freedom,” harking back to nineteenth-century-style noninterventionist governments. More University of Chicago academics have been awarded the Nobel Prize in Economics than those from any other university. But since Obama received one in 2009 for peace and Europe one in 2012 when it was trying to bankrupt the world, perhaps we shouldn’t set too much store by this.