2024-09-21 15:44:34
China’s central bank revealed a few weeks ago that transactions with its new digital currency, e-CNY, have reached 7 trillion. yuan ($1 trillion). It is not only China that has succumbed to the allure of cryptos. More than 130 countries have or are planning digital currencies according to the Atlantic Council.
Cryptocurrency advocates believe that the combination of the dominance of smartphones, innovative cryptography and massive computing power means that it is possible to remake the financial system, notes the Economist.
The future of money, in other words, is getting attention. What about his past? In a new paper presented by the British magazine, Adam Brzezinski of the London School of Economics, Nuno Palma of the University of Manchester and François Velde of the Federal Reserve’s Chicago branch urge readers to pay close attention to the long history of money. . It hides “pleasant surprises”, they point out. It also contains some parallels with today’s innovations.
The manipulation of money
Central bank digital currencies, for example, could give the general public an account at a central bank. That sounds new. But as several economists have noted, it is also a return to the past. The Bank of England took deposits from the public: in 1855 a Regent Street hatter opened an account at the bank’s handsome new branch in Mayfair. And in 1900 the Bank of Spain held over half of the country’s current accounts.
Studying the history can also frustrate cryptocurrency enthusiasts who wish to free money from government control. Monetary policy – ​​the government’s manipulation of money – is almost as old as money itself. Even when coins were made of gold or silver, governments were concerned with their weight and purity. The value of coins often deviates from the preciousness of their materials.
Until the 19th century, the value of coins was rarely written on their face. They had no “face value” in that literal sense, as Mr. Brzezinski and his colleagues point out. This allowed the separation between two functions of money which are now seamlessly linked. Coins served as a medium of exchange. It was the thing that people exchanged for the things they bought. However, they did not serve as a unit of account, that is, the thing in which everything else is priced. Often the unit of account was an old currency that had since disappeared from circulation, i.e. “phantom money”, in the words of historian Carlo Cipolla.
This separation allowed France to conduct a major experiment in monetary policy in the 1720s. In an effort to lower prices – what you might call a law to reduce inflation – the king’s council decided, without warning, that the coins will be worth less than before. From 1723 to 1724, he reduced their value by 45%.
It was a big mistake. “Everyone was so used to selling at high prices that the decision was a shock. France suffered an industrial depression.
However, history does “natural” experiments. In an earlier paper, Brzezinski and Palma examined one source of variation in the money supply of early modern Spain: disasters at sea.
Ships carrying treasure to Spain from the Americas would sometimes encounter hurricanes, pirates, or the British navy. In 42 incidents from 1531 to 1810, they lost some or all of the precious metals that Spanish traders expected to receive.
Losses averaged 4% of Spain’s money supply. Drawing on various sources, including tax records the authors showed the damage these losses caused to the Spanish economy.
New forms, old mistakes
To the modern eye it seems strange that the money supply should be allowed to be so hostage to chance. Why should it shrink when ships sink? Why should it be expanded when fresh silver deposits are discovered?
Even in the 18th century, some visionaries believed that money should break its association with metals. The most notable example is John Law, a Scottish banker and chancellor who somehow convinced France to overturn its monetary regulations in 1716.
Law was ahead of his time – his experiment with paper currency resulted in disastrous inflation. In the future, money may need to change form again. Banknotes may be considered obsolete. The bank deposit can be replaced by a claim against the monetary authority itself.
Although the forms the money takes may be new, its effects will rarely be neutral, notes the Economist. And it is cheaper to learn from the mistakes of the past than to make teaching mistakes in the present.