On Money: Let's agree to disagree
Elon Musk’s tweets on cyrptocurrencies reach an immediate audience of 44.8 million followers and invariably trigger violent price swings in the likes of Bitcoin and Dogecoin. The Bank for International Settlements’ virtual conference on CBDC and finance in the digital age attracted a somewhat smaller crowd and triggered no such price gyrations. But if you had to bet on which of the two tell us more about the future of money – Elon’s tweets or the central bankers’ deliberations – which would you take a punt on?
The pace of innovation in payments today is unprecedented. Matched by the soaring valuations of some of the newer providers, excitement is rife. But excitement and innovation aren’t unique to payments. The future of money itself is in play, not least thanks to those that are promising revolutions that would upend many of the traditional notions of money and raise the question of what money really is. Given the crucial role money plays in modern society the topic is relevant, whether or not you care about payments. Money is one of three abstractions that enable societies to function at a scale of hundreds of millions, rather than the hundred or so of a hunter-gather tribe (the other two being religion and writing). And when money goes wrong, it tends to go wrong spectacularly, as it did during the Weimar republic and in the global financial crisis. Money is not something you want to mess with.
But you can disagree about money – and disagree about money the world certainly seems to do today. While some bullish folk are busy ensuring Bitcoin heads straight for the stratosphere (or Mars, courtesy of Musk), most of us are continuing to exchange our pounds and pesos, euros and dollars and to measure our wealth and debt in them, not in BTC.
We also, even if we don’t argue about it much, disagree about the origin of money. Conventional economic theory holds that currency, the means of payment, evolved over time from the concrete to the abstract – from seashells and silver to coins, banknotes and eventually the commercial bank deposits that form most of modern money. As the anthropological crew see it, debt preceded money. In their world view most money was tradable debt right from the get-go. Life was always indebted, as well as nasty, brutish and short.
Arguably these different views on money reflect fundamentally different views on society. Money as a convenient commodity to facilitate barter fits with the view of man as a rational agent. He engages in economic activities that maximise his utility, and money is the measure of his success and well-being. The world is meritocratic, and differences in wealth and income are justified as long as they are based on fair competition, reward entrepreneurism and reflect the economic value of individuals’ skills. This is the modern liberal economic religion; Adam Smith and Friedrich Hayek its prophets.
Money as debt meanwhile fits with the view of man as a political animal. Wealth and inequality are driven by politics, social class and/or caste. Man engages with others to satisfy his basic needs and advance his position in society. The key prophets here are Marx and arguably Plato himself. Economics is politics and even money itself is political.
True to these worldviews, there are both political and economic elements to the current innovations in money. Bitcoin and other cryptocurrencies are espoused by libertarians, wary of any government interference, especially in money. Private sector stablecoins are championed by blue-chip behemoths like Facebook and JPMorgan. So what of the CBDCs of which there is so much discussion at the BIS? At least some of the interest in CBDC is driven by central banks reclaiming their political and economic territory against this onslaught; indeed, to quote a BIS paper, an arrangement of multiple exchangeable CBDCs could “foster a diversity of convertible national currencies and strengthen monetary sovereignty in the digital age”. (Maybe, but those looking for nirvana in CBDCs have much to grapple with. Amongst others, CBDC could themselves give rise to further political and economic issues, such as the risk of smaller/weaker economies being Dollarised or Yuanised by CBDCs issued by their stronger and larger peers.)
As we mere mortals wrestle with the relative merits of all these (apparent) forms of money, we can at least take comfort in the fact that the nature of money has long bedevilled economists. Keynes famously said: “I know of only three people who really understand money. A professor at another university. One of my students. And a rather junior clerk at the Bank of England.” If Keynes was around today reading about global stablecoin promises and watching the ‘Keynesian beauty contest’ now underway in cryptocurrencies, would his comment differ all that much?