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wallow in the state archive of Florence; it's a treasury of neatly
written documents chronicling the ups and downs of medieval financial
giants. Occasionally they found themselves bancarotta - the words mean
"broken bank". Hence our word bankrupt - another Italian contribution to
the language of money.

Here are the records from three centuries of the Medici, cloth merchants
and bankers who became popes and grand dukes of Tuscany. Where else, I
thought, would you find the 1457 tax return of Cosimo de' Medici, one of
the greatest of the clan? He paid one-half of one percent. Property tax,
that is.

Back in Siena, outside the Renaissance palace of the Monte dei Paschi di
Siena bank - it traces its beginnings to 1472 and is still going strong
- I run into more Italian ingenuity: a foreign-exchange machine,
operating around the clock for the convenience of tourists. Put in bank
notes in any of a dozen European currencies, or Japanese yen, or dollars
Canadian, Australian, or US. In no more than fifteen seconds a
compartment opens - there's the equivalent in Italian lire, down to the
last small coin. An electronic display shows the exchange rates,
fluctuating daily.

For many years after World War Two, foreign-exchange rates were pretty
much fixed. I recall a Washington, DC, exhibit of bank notes from nearly
every country in the world, each with a notation of its value in terms
of the US dollar; under the dollar bill it said "equal to one
thirty-fifth of a troy ounce of gold". Foreign governments were allowed
to redeem dollars for gold at the US Treasury. But eventually the demand
increased so much that the "gold-exchange standard" was suspended in
1971 and formally abandoned in 1978.

Not that the world's governments have discarded their gold bars. They
keep lots of them as part of their reserves, with some sixty countries
storing about 10,000 tons - or a hundred billion dollars' worth, if
valued at $350 a troy ounce - in the world's largest gold depository,
the subterranean vaults of the Federal Reserve Bank of New York. The US
Treasury holds some 9,000 tons, mainly in the legendary vaults of Fort
Knox, Kentucky, at West Point, New York, and in Denver, Colorado. Back
in 1960 the US had 19,000 tons.

Ever since that direct link of gold to currencies was cut, currencies
have been "floating" against one another, at prices reflecting demand
and supply. Governments strive to keep such prices within certain
limits, but, as recent events have shown, market forces can bring about
more drastic fluctuations. In any case, today's worldwide
foreign-exchange market is the biggest trading system ever, with an
estimated daily turnover of one trillion dollars. In the trading room of
an international bank in downtown New York City, I get a whiff of the
world of the big-time foreign-currency traders.

"They've got to be young, aggressive, and hungry", says the supervisor.
Next to each, four video screens bring economic news, rumors, and price
quotations punched up with a tap on a keyboard - Chicago, London,
Frankfurt. Half a dozen loudspeakers offer quotes too. Eighty buttons
control phone lines to trading partners.

The name of the game is speculation - betting one currency will go up
and another will go down. And arbitrage, taking advantage of differences
in the price of the same currency in different places - location
irrelevant - differences as small as 1/100 of a cent.

You've got to do it fast - a quote more than a few seconds old is
history. So, spot a good one. Grab it. But don't get stuck, get out and
cut your losses and get in again. Stress, yes, but what a thrill!

I ask a young woman doing British pounds how one can make money on such
tiny margins. It's called scalping the market, she says, a matter of
volume. She shows me her profit and loss statement for yesterday: On 120
trades - 164 million pounds bought, 160 million sold, a total of 324
million traded - she made $12,000. For the bank, that is. It may not
seem like all that much, but that's how thin the margins are.


TRADERS THRIVE on ups and downs; governments seek stability. That's a
principal goal of the US central bank, the Fed. Charged by Congress to
do what it can to promote price stability domestically, along with
steady economic growth, it faces an endless dilemma.

It can influence the money supply, as we've seen, and thereby affect
interest rates via "tight money" or "easy money". It can also vary the
so-called discount rate - the rate at which commercial banks, savings
and loans, and credit unions may borrow from the Fed; when that rises or
drops, the loan rates that they charge their customers usually follow
suit. But here, as the Fed sees it, is the quintessential problem:

If the Fed provides too little money, interest rates tend to be high,
the borrowing of money expensive - business activity may slow,
unemployment go up, and there is danger of recession.

If there is too much money, interest rates decline and borrowing can
lead to excessive demand - pushing up prices, fueling inflation.

Just what are the right money-supply rates, the right interest rates  -
the ones most conducive to stability and orderly growth in an ever
changing economy?

In an ornate hall in Washington, DC, under the American eagle above the
fireplace, meet the seven members of the Board of Governors of the
Federal Reserve System. At the head of the great board table sits
Chairman Alan Greenspan. Having studied reports of economic conditions
across the country, they'll now discuss and vote on what actions the Fed
should take.

And what has the Fed done lately? It lowered the discount rate - step by
step, from seven to three percent, in order to encourage recovery from
the severe recession that began in 1990. At the same time, the increase
in the money supply has been kept modest: between 2.5 and 6.S percent
annually, in the hope that inflation can be brought down below two
percent a year.


AS ARAB OIL WEALTH was the money phenomenon of the 1970s, so in the
1980s was the Japanese money machine. I learned about it in Tokyo.

True, the Japanese had been selling lots of cars and electronic stuff
around the world and saved lots of yen and put them into the banks - but
that wasn't the half of it. As is the Japanese way, manufacturing
companies and financial institutions paid only minuscule dividends and
kept the bulk of their profits as reserves.

With those profits as collateral they borrowed cheaply to buy real
estate, which rose to ever higher paper values. With real estate as
collateral, they borrowed to buy shares on the Tokyo Stock Exchange,
which rose impressively as well, providing collateral for still more
borrowing. And then came zaiteku.

"Zai" - the Japanese word for the Chinese character for wealth - was
combined with "teku", a word borrowed from English that represents
technology. Zaiteku means financial engineering - "new ways of making
money with money", I was told by Haruhiko Kuroda, a senior official in
the Ministry of Finance. And who was the biggest practitioner of
zaiteku? Toyota. They were earning 2.9 billion dollars from cars and 1.2
billion from financial operations in 1989.

How? "Rapid currency trading", said Mr Kuroda, "and issuing securities,
say five percent bonds, that will be bought by Belgian dentists ..." I
must have looked puzzled. Mr Kuroda smiled - he'd meant to say affluent
people who are financially unsophisticated, looking for investments that
seem safe and yield good returns. "You paid out five percent on those
bonds, and the money you got for them you put into American corporate
bonds that then paid twelve percent". Risky, perhaps, but the Japanese
were willing to take that risk for the seven percent profit involved.

Something else also helped a lot. Back in September 1985 the finance
ministers of Britain, France, West Germany, and Japan agreed with James
A Baker III, then the US secretary of the treasury, to push down the
value of the US dollar, then worth 241 yen. Baker's purpose was to
increase the export of American goods by making them cheaper abroad.
Eventually, with the dollar dropping to as low as 120 yen, the Japanese
could buy twice as much in the US as before. And they did. Columbia
Pictures. Eighty percent of Rockefeller Center. A lot of downtown Los
Angeles. Tokyo banks, awash in money based on inflated real estate and
stocks, became the world's biggest - and the world's major supplier of
capital.

In Tokyo I heard some remarkable figures. A housewife said the cost of
an apartment had more than doubled in a year. I passed a downtown office
building with rents six times what they were in Manhattan. The grounds
of the Imperial Palace in the middle of town were said to be worth all
the land in California. A typist said she'd been flying to Hawaii on
weekends to play golf - that was cheaper than playing here. Could this
go on much longer?

When I visited the Tokyo Stock Exchange on December 5 1989, its Nikkei
index was at 37,494.17 yen. I didn't know then, nor did anyone else,
that at the end of the month it would reach a historic high - 38,915.87
yen. As of this writing, the Nikkei has dropped more than fifty percent.
Land prices are falling too. Zaiteku has faded; the baburu keizai, the
bubble economy, has burst. The big Tokyo banks are pulling back on
overseas loans.


TOWARD THE END of my money travels, I found myself in the Republic of
Nauru, an island on the Equator in the western Pacific. Only four miles
long and three miles wide, it has 1,000 to 2,000 foreign corporations
and banks. "They come and they go", said Leo D Keke, then Nauru's acting
secretary for justice; but that's only in a manner of speaking - they
have no offices here, no personnel. Mr Keke had to approve the foreign
applications. What Nauru gets out of this, he said, is fees. What do the
foreigners get? Secrecy and reduced taxes. "It's arranged through
lawyers and accountants in Hong Kong ..."

In Hong Kong a partner in the international accounting firm of Ernst &
Young told me that these Nauru banks and corporations exist as computer
entries elsewhere, maybe in a bank in New York City. Money can go via
electronic transfer directly to New York - say to Citibank for account
of Bank XYZ, Nauru. It can then be invested in anything, anywhere.

Nauru, he said, is an extreme example of the worldwide phenomenon of tax
havens; others like it are the Cook Islands and Vanuatu in the Pacific
and the Turks and Caicos in the Caribbean. Considered more solid are
Bermuda, the Bahamas, and the Cayman Islands, and especially Luxembourg,
Switzerland, and Liechtenstein. They may all be used not only for
commercial transactions but also to keep one's money safe. A trust fund
for the children. Or to protect your money against wild inflation or
political upheaval.

Much tax-haven activity is completely aboveboard - but some is not.
Dirty money cries out to be laundered, and I caught a glimpse of how
that's done from the Centre for International Documentation of Organised
and Economic Crime in Cambridge, England. This is a real-life example:

A US organized crime group with a lot of hot cash forms a cozy
relationship with the central bank of a British Commonwealth country.
Diplomats of that country carry the cash out of the US. If it's $10,000
or more, they are supposed to report that to US Customs, but they don't;
they "externalize" the cash. It goes into the central bank and then into
various dummy companies in different countries in return for shares in
those companies. The money is thus "agitated", so it'll be just about
impossible for investigators to follow. Then, to "repatriate" the money,
dummy companies in the US sell their worthless shares to investors in
Britain - who are in fact in on the scam - and behold, the money is back
in the US, clean! Now it buys legitimate businesses, banks, political power.

An operation like this, involving highly placed officials and
businessmen, will cost quite a bit, maybe 35 percent, but once the
system is in place, people will want to use it - not only drug
profiteers but also arms dealers, terrorist organizations, intelligence
agencies ...

A prime haven for such shady customers was BCCI, the Bank of Credit and
Commerce International, headquartered in Luxembourg and the Cayman
Islands with branches in 72 countries. It is said to have secretly
controlled the First American Bank of Washington, DC. After BCCI
collapsed in 1991, having defrauded depositors of several billion
dollars, it became known as the Bank of Crooks and Criminals International.


BACK HOME I RUN ACROSS a little formula that bankers and financial
analysts know, that everybody should know - the rule of 72. No one is
certain who first developed the rule, but the principle is quite simple:
Divide any number into 72 and the answer tells how long it will take for
a sum to double in financial terms.

Are you charged eighteen percent interest on the unpaid balance of your
credit-card account? Eighteen goes into 72 four times - so the debt
would double in four years. Say your annual raise is six percent; that
number goes into 72 twelve times, so in twelve years your salary will
double. The same will be true of any investment. And what if inflation
runs at six percent a year? Then after a dozen years your money will be
worth half as much - so in a sense you'll be back where you started.

But look what can happen when inflation runs wild, when governments
simply issue more and more currency to cover increasing obligations as
prices rise.

In 1986 Peru's currency - the sol, which is Spanish for sun - fell to
14,000 to the US dollar, so the government lopped off three zeroes and
called it the inti, which means sun in Quechua, a language spoken by
more than half the Peruvians. By mid-1991 a cup of coffee cost 500,000
intis. The government lopped off six zeroes and called it the sol again.
Over five years the inflation rate was 2,200,000 percent!

The most drastic inflation ever? Hungary 1946, after World War Two, when
Germany had taken away the national bank's gold reserves. By June the
Hungarian pengo appeared in notes of a million million billion, which
would look like this: 1,000,000,000,000,000,000,000. Then the gold came
back, confidence returned, and in August Hungary had a stable new
currency, the forint.


FROM THE EARLY 1950s ON, a new means for payment in place of currency
began to spread from the US to much of the world - the use of what's
been called plastic money, meaning charge cards and credit cards.
Currently some 250 million MasterCard and Visa cards have been issued in
the US alone. Occasionally these cards go to unlikely recipients, such
as Tommy Mullaney of Crownsville, Maryland. He was eleven years old when
he got a gold MasterCard from a bank in Wilmington, Delaware, with a
$5,000 credit limit, even though on his application he had stated his
income - his allowance, that is - as five dollars a week. The bank
called it an error.

ATM cards, for use in automated teller machines, are also proliferating.
More than 150 million are now used in the US, not only to draw cash from
banks but also to make payments. At gas stations, for instance. And
increasingly in supermarkets - with your ATM card and a "point of sale
terminal" at the checkout lane, your grocery bill will be deducted from
your bank balance.

Are we, as all this might suggest, headed for a cashless society? The
answer is yes, but slowly. ATM gadgetry is expensive. Nevertheless, new
uses for it are being tried, such as letting ATM cards pay for fast
food. And one day you may need neither cash nor a card for highway
tolls; your car may get electronic tags, and as it passes a tollgate, it
will be automatically identified without your having to slow down. The
toll will later appear on your bank statement. But for the foreseeable
future you'll still have to have currency to pay for a newspaper or a
candy bar.

As for me, I'm still amazed that I can go to Paris, stick a plastic card
into a machine, and sixteen seconds later pull out enough money for a
pleasant evening. Not that this electronic marvel has reached
perfection, mind you. A newspaper in England reported that when a man
punched in his request for GBP 30, the ATM did its beeping and blinking,
and then disgorged GBP 2,670.

To an average fallible human, that's comforting.


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