 BOOK REVIEW

SUBMITTED BY SABEEN
SUBMITTED TO MISS UMBRIN IMRAN
SMESTER M.S 2ND
ROLL NO 22102051-003
DEPARTMENT ECONOMICS
SUBJECT ISSUES IN ECONOMIC DEVELOPMENT

University of Sialkot

TITLE:
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THE END OF ALCHEMY Money, Banking, and the Future of the Global Economy
THE GOOD, THE BAD AND THE UGLY (chapter #2)

AUTHOR:
MERVYN KING

PLACE OF PUBLICATION:
New York • London

PUBLISHER, DATE OF PUBLICATION:

W. W. Norton & Company Independent Publishers Since 1923

NUMBER OF PAGES:
1-25

REVIEWED BY (SABEEN RASHEED)

ABOUT AUTHOR:
Former governor of the bank of England.

REVIEW:
In the annals of history, the lessons of the past have always been a guiding light for future
generations. As we delve into the economic journey of the 20th century, we encounter the trials
and triumphs that have shaped the world we live in today. The 1930s, marked by the devastating
Great Depression, taught us the consequences of outdated economic ideas and paved the way for
a new era of modern economics. The 1960s brought forth a spirit of change and possibility,
where mathematicians, engineers, and physicists applied their expertise to reshape the landscape
of economics. However, amidst the successes of the subsequent fifty years, we still grappled with
economic challenges, exemplified by the financial crisis of 2007-2009. Today, we find ourselves
seeking to understand the origins of economic growth, with capitalism emerging as a successful
path to prosperity. Join us as we embark on a journey through history, exploring the delicate
balance between freedom and restraint, and uncovering the transformative power of economic
growth. This chapter covers various periods, starting with the 1930s and the Great Depression,
where outdated economic ideas led to severe consequences. It then moves on to the 1960s, a time
of change and optimism, with a focus on how modern economics emerged through the
contributions of mathematicians, engineers, and physicists.

The subsequent fifty years are mentioned, highlighting the mixed experience of significant
economic growth and development, but also facing challenges like runaway inflation and the
20072009 financial crisis. The passage then introduces the idea of examining the origins of
economic growth and how capitalism has proven to be a successful system in lifting people out
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of poverty and fostering prosperity. This chapter presents a historical exploration of economic
growth and the challenges faced over the years, with a focus on the 1930s, the 1960s, and
subsequent periods. The main argument centers on the importance of learning from history to
navigate economic complexities successfully and promote prosperity.

 The evidence provided includes:

 The Great Depression of the 1930s is cited as an example of the consequences of

adhering to outdated economic ideas. This period showcased the need for modern
economic thinking and policy implementation to avoid similar catastrophic events in the
future.

 The 1960s are characterized as a transformative era, where the influx of mathematicians,
engineers, and physicists into economics brought about a more scientific approach. This
shift promised a better understanding of the economy and improved economic
performance.

 The subsequent fifty years were marked by significant growth in national income in
advanced nations and the upliftment of millions from extreme poverty in the developing
world. This demonstrates the positive impacts of capitalism as an economic system in
supporting prosperity.

 However, challenges were also encountered, such as runaway inflation in the 1970s and
the severe financial crisis of 2007-2009. These events serve as evidence of the need to
better manage the relationship between finance, money, banking, and the capitalist
system.

 The passage argues that the failures experienced do not indicate the inevitable instability
or doom of a capitalist economy. Instead, it emphasizes the importance of understanding
the underlying causes of economic challenges to make the system work more effectively.

Overall, the evidence presented in the chapter supports the idea that learning from history and
understanding the complexities of finance and economics can lead to better economic
management, foster prosperity, and mitigate the risks of financial crises and economic instability.
The argument presented in the chapter revolves around three bold economic experiments that
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were conducted in the Western world from the late 1970s onwards. These experiments aimed to
improve the management of money, exchange rates, and the banking system. The first
experiment involved giving central banks greater independence to achieve national price stability
through inflation targeting. The second experiment allowed capital to move freely between
countries and promoted fixed exchange rates, both within Europe (culminating in the creation of
a monetary union) and in rapidly growing economies like China. The third experiment focused
on removing banking and financial regulations to promote competition and stability in the
banking system. The evidence provided in the chapter consists of the consequences of these three
experiments, which are described as the Good, the Bad, and the Ugly. The Good consequence
was a period of unprecedented stability in output and inflation, referred to as the Great Stability,
observed between 1990 and 2007. During this period, inflation targeting and central bank
independence spread to numerous countries, and inflation became lower, less variable, and less
persistent on average. The Bad consequence highlighted the rise in debt levels due to the
elimination of exchange rate flexibility in Europe and emerging markets. As countries saved or
borrowed to finance their external deficits, long-term interest rates in the integrated world capital
market began to fall. This led to an increase in asset prices, especially in housing, as low-interest
rates encouraged borrowing. As a result, household debt significantly increased in countries like
the United States and the United Kingdom.
In conclusion, the world economy has faced significant challenges since the collapse of the
banking system in 2008. Despite efforts by central banks to prevent a complete meltdown and
stimulate growth through unprecedented monetary measures, the recovery has been slow and
lackluster. The period following the crisis saw a stagnant growth rate in advanced economies,
even when it was expected that they would rebound strongly. The concept of "secular stagnation"
has been introduced by economists to describe the persistent weakness in global demand and
exceptionally low real interest rates. However, there is still a lack of a comprehensive theory or
narrative to fully explain the root causes of this phenomenon. Merely restating the problem in
different terms does not offer a satisfactory solution. The world economy is facing unique and
complex challenges that require a deeper understanding and more innovative approaches.
Policymakers and economists need to continue exploring the underlying factors contributing to
weak global demand and low interest rates to develop effective strategies for sustainable growth.
Moreover, addressing the issues of disequilibrium in the world economy necessitates
international cooperation and coordination. Different countries and regions face varying
economic conditions and policy challenges, and it is crucial to find common ground and work
together to ensure a more robust and balanced global economic recovery.

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