Money in Crisis

Contents

Preface

1 .Hopes and Reality of Digital Money

2 .Money and Technology in Ancient Times

3 .Money and Technology in the Modern Age

4 .What Money Is and Does for Us

5 .The Paradox of Cash

6 .Banks as Creators and Stores of Money

7 .Cards and Apps from Above and Below

8 .Promises and Failures of Crypto

9 .Stablecoins or Troublecoins?

10 .Central Bank Digital Currencies

11 .Money and Freedom

12 .Money in the Global Power Game

13 .The Return of Instability

14 .Money in Crisis and the Possible Future

Index

Preface

Those who followed economic and political affairs in the 1990s can hardly escape the feeling that the new century marked a break from earlier trends and beliefs. As soon as the December 31, 1999, page was stripped from the calendar, the worldview built on free markets, globalization, and liberal democracy stumbled into multiple crises: all unexpected, all different yet somehow connected, all near-existential. The old times may one day be regarded as a Golden Age. What is clear already is that they were a step in history, not the end of it.

The sequence of those crises is worth reminding. The terrorist attacks of 2001. The financial meltdown of 2008 and the economic recession that followed. The COVID pandemic in 2020-21. Environmental disasters, epitomized by wildfires in North America and elsewhere. The return of commodity shortages and global inflation. Lastly – as we write, at least – Russia's attack on Ukraine, the Middle Eastern crisis and the freeze of East–West relations, reminiscent of the Cold War. In Western societies, the seemingly unstoppable divergence in living standards between the rich and the poor. Superficially, these things have little in common. At their core, all of these elements have brought with them cracks or utter failures in the assumptions underlying democratic liberalism, based on a shared trust in legitimate leadership, institutions and political representation.

As the political pendulum swings back toward centralism and control, the responsibility of politicians is to promote balance, mitigating the tendency toward the extremes of public opinions increasingly divided into opposite camps. Our times may well require a stronger presence of the government in the economy, more attention to national and even certain vested interests, a narrower scope of private markets, and more governance of globalization processes. But this tendency must be controlled. The perimeter of private, open, and competitive markets should not be restricted to the point at which they lose their creative force. Their contribution to collective welfare has been demonstrated and should not be lost. 

From ancient Greece to modern times, philosophers and historians have seen history as evolving in cycles, from birth to development to maturity and decline, possibly followed by rebirth and a new cycle. That vision has been reproposed in the so-called theory of turnings, according to which ages go from high to awakening, then to unravelling and to crisis. Supposedly, each phase lasts about a quarter century and we are now in the last, the crisis one. This theory may not have much scientific value in the commonly intended sense, but its descriptions resonate with much of what we see happening as we move deeper into the twenty-first century.

In this book we reflect on these developments through the prism of one of the most ancient and fundamental societal institutions: money. Both of us have put, in different ways, money at the center of our lifetime professional interests. But there are other reasons as well. Money is a mirror of society - the litmus paper that reveals the deepest drivers, contradictions, strengths, weaknesses, and failures of the societal order at large. Money not only reflects society's development and destiny but also shapes them. That is why monetary institutions are so important and worth upholding and protecting.

To our mind, the expression "money in crisis" combines different ideas. The etymology suggests a state of disease and also a situation in which transformation takes place and decisions need to be made. But we are also interested in understanding what happens to money when societal tenets and values enter into a crisis and politics and policies take new directions.

Like history more broadly, monetary history has gone through phases recently. The foundations of contemporary monetary institutions reside in the postwar arrangement agreed in 1944 at Bretton Woods. The initial phase lasted a quarter century, until the early 1970s when that system broke down. The following stage, one of development and progress, lasted through the 1990s. It was dominated by the opening of global finance, the buoyant expansion of international capital flows, and the triumph of free markets. Then cracks began to appear. We are now into the next phase, in which traditional money is undercut by monetary and financial instability and challenged by new forms of money engineered by the private sector, some more cryptic than others, all threatening the status quo. One manifestation is a lack of trust in the ability of central banks to foresee and govern economic outcomes. Again, this mirrors society: If society is divided, it is more difficult for money and its institutions to be strong and stable. In our advanced democracies, monetary and financial governance is largely entrusted to independent institutions with mandates spanning longer than the political cycle: central banks, capital market regulators, competition authorities, banking supervisors, and the like. Those institutions, unelected but essential to the democratic architecture, share with politicians the responsibility to exercise a restraining influence in our increasingly divided societies. In particular, they should resist the opposite temptations of unduly relaxing prudential standards or overregulating the economy by replacing private markets. We suggest that this applies to two areas: financial regulation, where it is increasingly apparent that the lessons of past crises have been insufficiently heeded or prematurely forgotten, and the payment industry, where the tumultuous innovations of the last decades are tempting central banks to start offering their own payment means.

What lies ahead? Like history in general, the history of money is open; inexorable yet not inevitable, it cannot be stopped but can be changed. In our attempt to provide some answers, we build on two convictions. Donb The first is the heuristic value of history. A careful review of history goes a long way toward telling us what money is, what purpose should it serve, and how should it accordingly be designed and governed.

The second conviction is that the fundamental purpose and requirements of money do not change through time or space. What changes are the manifestations of money, its forms. Technology helps money serve those purposes and requirements better. It was true in the past and continues to be true today that most technology is digital. Like digital gadgets often make children lose concentration and disrupt their thoughts, digital money risks distracting us from what money is and should always remain: a stable, simple, friendly, and recognizable tool to measure the value of things we need, use, produce, possess, and exchange. 

We hope that the story we tell and the reflections we make are of interest to some. We will have achieved our purpose if they stimulate and help the reflections of others.