How Do We Define a Currency?

theory and I got hooked. And little did I back then know that with my finished background, I would end up leading the all of the central bank, the ricks Bank, and also became one of its longest serving governors. So quite a journey. And with that as a background, what a privilege to be back as a practitioner. That's my background when I'm talking about money today and what I have sort of experienced and concluded over the years. Let me start by saying that money is a social convention.

Money is something about what we have in our heads. And this is also why we have moved over the centuries from seashells to something on a hard drive or nowadays maybe in the cloud. And then that of course begs the question in terms of changing technologies, what is next? Today money is an abstraction, but we still talk about money in terms of something that we can both see

and touch. And it's remarkable that each and every time in my bank, when a new group of PONS politicians were appointed to the General Council, they always wanted to see the gold, not talk about the money as such. It was always can we get to see the gold? And that has something to do with this issue that, on the one hand, money is an abstraction, while on the other hand, we're sort of wired in our heads in such a way that we want to touch things.

We can talk about money in many different ways, and we can talk about money at the micro level and kind of the monetary plumbing, or we can talk about money at the macro level, and at the macro level it's more sort of money tied to economic activity in one form or the other, and then it's actually economic activity in the aggregate. And you can also talk about money as something somewhere in between money as part of

the financial plumbing. And that's kind of where I decided to say a few things today, and my remarks, I mean, they're really really given my background coming out of the FIAT money world. When we talk about money, I think a helpful distinction is also to try to make a

distinction between public sectremoney versus private sectremoney. And also when it comes to monetary policy, which I'm not talking about today, Monetary policy is quite a lot about how to execute some kind of monetary control in this dual environment where

we live today. One simple way of explaining that in order to maintain monetary control in one form or the other is basically to say that that requires an exchange rate which is one to one between public sector and private sectremoney, and if that is not the case, then the whole thing collapses. And countries of today where you can watch this is, for example, Zimbabwe and Venezuela, and

you know what happened in those cases. Another way of describing this, and it's somewhat similar, and I do think it matters, but it's almost never described in this way is to talk about it in terms of front end money. That is kind of what we see and what we think that we are using, and today it's basically what you see on the screen of your computer and when you use an app, and that kind of means some

vague sense represents money to us. And the other version of it is what I call backend money and ultimately back and money is central bank money in one form or the other. It's a height to the payment system. It could be a central bank digital currency, could be a deposit or something else. And it doesn't really matter if it's one ledger, if it's this due to ledger technology, it's a token or what. It's really the principle that I'm talking about. But also when technology is change, what

happens is that all strategic issues come back. And many, many of you know what has happened over let's say a thousand years or something like that when it comes to money. And my conclusion from that is that since money is a convention, there is almost nothing new under the sun when it comes to money. But technologies do change, and that forces us to get back to all issues

that others have grappled been in the past. A gross simplification is to say the following that back in the eighteen hundreds, and that's kind of the mindset that we have inherited today when we talk about money, everything was on paper, and in the late eighteen hundreds in a very large number of countries, the central bank ended up

being the sole issue of a physical bank. In the future, we have to get used to the idea that nothing will be on paper, and that means that we have to get back to all issues and think hard about how do we reestablish the moneyness of monies in this new environment when we have to think about this, and at the same time, it's absolutely obvious that nowadays that money is also part of the state. Money is tied

to a nation in one form or the other. Not necessarily every work, particularly not if you have destroyed the value of your own money. But at the same time you just have to accept the fact that parliaments and politicians have views on money, and that raises the issue going forward whether we should have a central bank digital currency or not, despite the fact that we cannot see what it should look like. Are we talking retail, Are

we're talking wholesale? Ulish can talk at length about that because he is presently working on them, and this creates an interesting environment going forward when it's not about one currency dominating or not. But it's a fact that different nations come to different conclusions on this as of today, because look at what's going on in the US today. Basically more and more of it seems to be pushed to the private sector. In the EU they're working hard

on a central bank digital currency. In India they have been extremely successful establishing their UPI framework, which kind of ties central bank money to the payment system and ties also front end to back end using my vocabulary in a very efficient way. Same thing is going on in Brazil and China is working hard on their project. And this projects actually will not be identical, and it's basically too early you tell which will work and which won't

work and what it really does in various economies. And this means that one way you're looking at this is to call it the great game of our monetary future in a one hundred percent digital world, whatever that means going forward, and that means that in this environment we need to define or maybe redefine the role of the state in money space, and that will, of course, also in different countries, affect how we actually execute monetary policy

in different different ways. What I do think matters here when it comes to money is that one is of course the stability today it's called inflation targeting, you can call it whatever you like in the old days. And the other one is what I call transactional efficiency, because if it's impossibly difficult to use your wonderful currency. No one will use it because it's just so hard to use use it. And what this really means is that

new technologies bring old issues to the fore. And one extreme way of expressing this in a short form is to basically say that today, with a fairly high likelihood and old fashioned howallah transaction is probably executed in an it world in one form or another. It's also a fact when technology is changed. And this is really really what we see today that it people do not know a lot about money, and money people do not know a lot about it, and that creates a lot of

confusion from time to time. And then in addition to this, when you do this, then somewhere in the middle you also have to have lawyers and a legal framework. So you have it. You have a legal framework, and you have economists and jointly this is actually what is going to define how we use money in the future and

what this is all about. And then back to the holy you're writing a biography, so I do think that such a biography should also include something about where we are today and maybe speculate a bit where we are heading into the future. Thank you.

as Chris was just talking about. I think another thing to think about is that money, like any technology, when it's working well, we don't really pay attention to it. It's only if the power goes out that we suddenly realize we're in a room that has electricity, and normally it's just sort of humming along in the background. So I think with currency, we and here I mean ordinary users of money, not in fact central bankers, but the great majority of people do not think of money as

something that has a biography. It's not born, it doesn't go through adolescence, reach adulthood, then be an old age. Certainly, ordinary people don't imagine money as something that's going to die. If they are fortunate, if they are privileged, there comes a point in their lives when they start to think about what they are going to do with their money when they are dead. But implicit assumption there is that the money itself is immortal. After all, that's what makes

it a store of value. So a fully functional currency in the mind of the people who use it seems in fact to be outside of history, all right, that it's not going to have a history or a biography. And on the other hand, I will say as a historian that even using the word currency to refer to the monies used one place and not another is in

no way eternal or immortal. Locke John Locke, the famous philosopher, in his Some Considerations of the Consequences of the Lowering of Interest in Raising the Value of Money sixteen ninety two, uses the word current twenty eight times, but never the word currency. So the way we think about currency is itself the product. And this ties again to something Stephan just said of late eighteenth and nineteenth century revolutionary nationalism. So a rupture with the past. It's a revolution and

the growing naturalization of the nation state. The assumption that, well, of course there are nations and they have states. This is a historically specific development. It wasn't a concept people

had in the Middle Ages. It doesn't make sense if you think about the very long history of China before the Republic, and it may not be true in the future, but in the mid eighteen hundreds, having your own money was one of the things, along with a flag, a standardized language, an anthem, that established that some group of people got to be a nation. And as with so many features of nation thinking, a currency is part of how a bounded community is imagined and defined. Dollars on

one side of the border, pesos on the other. I mean, that's the theory. In practice, of course, it's not always the reality. I grew up in Maine and there Canadian coin circulated on par with American and you didn't even notice whether they were Canadian dimes or US dimes. They

were just all dimes. So, prior to the debates in Great Britain occasioned by the Bank of England's suspension of payments in seventeen ninety seven and then the eventual resumption decades later after the Napoleonic Wars, currency was a quality that a money object might have in some markets, and not having others currency meant that it was widely accepted

as a means of exchange. And what's crucial here is that the coins are the bills that quote unquote past current or were discounted at a predictable rate in any given place, were not necessarily expected to be units of

account or long term stories of value. Current, after all, is a reference to time as well as to the forces that move goods across the sea and actually lock in some considerations, makes lots of ponds on current in the sense of a money that passes current and current in terms of how you move things through the ocean. So think a little bit more about what it would mean for a mode of payment or a means of

exchange not to be the unit of account. In early modern France, so seventeenth eighteenth century, before the Revolution, the common large denomination coin was an AQ, and it was called that because it depicted the aquson the shield of the French monarchy on one side of it. But accounts were kept in leave pounds. There was nothing circulated that was called a leave and no denomination indicated on the AQ, so the coin was called that because of what it

looked like. Was it worth three leave four four and a half? It was up to the king to determine, and in fact, in periods of political disruption, often in periods of war, the king could revalue the circulating medium. Louis the fourteenth did it a lot in the final decades of his life. So there was a gap between what circulated and how people counted, and that's not just

a weird French anomaly. No pennies and hardly any shillings were minted in eighteenth century Britain, but people went on keeping their accounts in pound shilling pence even if they had none of those things. Another distinctive feature of the early modern period is that it was up to the private sector to determine whether to bring gold and silver to the mint to be stamped as money or not, and that gold and silver being brought to the mint might be newly mined or from the Americas, or it

could be coins stamped by some other sovereign. Economic growth in eighteenth century franch in Britain was largely made possible by private money, bills of exchange, promissory notes from one merchant to another, and all sorts of short term notes written by one government office to another, and that model of a private choice continued to inform debates during the French Revolution, as I suspect everybody knows, the National Assembly

issued paper backed by the value of nationalized church properties. These are the assigna. But it didn't mandate that the assignac circulate on par or at any particular exchange rate for the coin still in circulation, and many people argued that, well, money is a merchandise like any other, and it was up to the money changers to say, well, I'll give you three AQ for your assign of twenty five leave, or I'll give you ten. That was up to the

market to determine. So a century after this period, with the rising prominence of classical and neo classical economics, Europeans generally reacted to this sort of monetary variety and the tension between private and public issuers as a sign of backwardness and inefficiency, even though it had been the norm in Europe less than one hundred years earlier. So when they encountered it in the Qing Empire or in South Asia,

they immediately denounced it. I think in part because they realized that as long as the sort of local knowledge was relevant, they were never going to be able to outcompete local users so they impose this new European model of one country won money, what some people have called the Westphalian logic, on the rest of the world. So there are other things that I can say. I think what I want to end on is that the common sense understanding of money as something without a history, something

immortal or eternal, is of course a fantasy. But very often when histories of money get written, they nonetheless focus on those elements, the theories of economists, the intention of planners, that do themselves have some claim on immortality in that they're at least written down otherwise recorded, and can be found on the shelves of libraries or in the cartons of archives. What that history misses is the actual day to day practice of money, what ordinary people are doing

with their money, and how they're thinking about it. That is a much more difficult history to write, but it's the one that I am committed to write it.

International Settlements. I would like to start by saying something that is probably very uncontroversial, which I think money is one of the most, if not the most consequential and impactful social technology that was ever by humanity. And as a monetary economist, of course, I tend to think as

this as the most fascinating as well. And I mentioned social because I think this is something that came up in the in both Stephan and Rebecca's comments that money is a social and institution that is sustained by a share expectation that money that is accepted in payments today is going to be accepted in payments tomorrow. And this

requires trust in money. This requires trust in the stability of money, and also this requires trust in the ability of money to elastically scale to meet the needs of a growing economy. So I think two things then follow from this perspective. The first is the centrality of money. Many economies often conceive of money as a veil, that sort of mask and underlying real world of commodity production

and exchange. I don't share this. I don't share this view, and I think, like probably like many people in the room, I conceive of money as the essence of a world of interlocking promises to pay. So Stephan also mentioned tokens, and then Michael, Yes, I mentioned organization quite prominently in the dinner speech, and I think it's actually possible to

conceive of money as the primal or primore. Their original organization is the organization of the credit and that relationships that bind all of us together through the financial commitments that we make that we make to each other. So as the first element centrality of money's second element is the emphasis on payment. So money is, as far as I conceive it, first and foremost, means of payment, which

which is meant to say, a means of certainment. And I think this is important because it gets me in some way, after dancing around the concept of what is money, to start to define money a bit because it points to a key qualitative distinction between money and credit, between a means of payment or a means of settlement and

a promise to pay. So credit is a promise to pay money which effectively delays finance settlement, and money is a way to extinguish credit, to extinguish credit, sorry fulfilling that obligation when basically when settlement comes to and in this sense, money is better than credit, especially in crisis, which is something that goes along what you were mentioned

in terms of how people use it. So people might not understand it in this terms, but they understand very intuitively that money is better than credit in crisis, and as coming from an emerging market, I can tell you this is very much the case. Now, this still makes the question what is money then? And I think my answer as an economy should not surprise anyone, and it's going to be underwhelming. It depends. It depends, because I really do think it depends. It depends on who issue

the promise to pay. It depends on where that issue stands in the hierarchy of is to pay, and also who holds that claim. So I think perhaps it's better to talk about moneyiness of these various instruments, these various promises to pay, and the hierarchical arrangement of the promise is to pay, so bank reserves at the central bank and cash are the ultimate means of payment. They are money for banks, and in the case of cash, of

course there are money for all of us. Bank the posits are in terms of form of credit because we have a promise to deliver cash, to pay cash, or to confer payment finality through ultimate settlement in the central bank. Yes, as we know from our everyday experience, they are money

to us. Of course. Now I will not go through the rabbit hole of discussing lower level issues of a hierarchy of money, but I do want to highlight the centrality of the price that connects the two highest forms of money, and that is part which you discuss in the one to one relationship between front end and back end money, if you will. That's the price of the

posits in terms of reserves and cash. This in the context of central current central banking discussions is usually referred to us as the singlens of money, following the expression by relate to mass. And it's the key to sustaining the trusting money that I was that I mentioned in my opening sentences, And of course in modern economies there are various institutional and legal mechanisms and arrangements that underpin trust and the credibility of all of these promises to pay,

most notably underpin the underpinning power. But we should always bear in mind that we are always talking about promises to pay higher forms of money. And I think what this means is that as a matter, as a matter of modern modern practice, it's basically impossible to talk about money in full isolation from the government and the law. But I would also like to highlight that as a matter of both principle and past practice, this is not the case of this is also something that we should

We should barry money even in more practice. As we all know, most money is dead, which means most money is promises to pay that are issued largely by private agents. And there is this famous phrase by by Minski right that one can create money and the problem is to

get it to get it accepted. So the appeal of issuing of vision liabilities that can circulate us money that can circulate as a means of payment is we are kind of almost like a force of nature, and these issues materializes time and time again, historically mostly through private initiative. And the challenge then is after issuing this promised to pay and to borrow again from Minsky, is to obtain validation quote unquote from the for those emerging destructures that

arise from these promises to pay. And this validation always comes from higher levels in monetariy hierarchies, and in the limit they come from the top of the MOUNTI hierarchy, meaning central banks. And we have seen this, for example developments along these lines in the context of offshore dollars or euro dollars. We have seen it with money market funds. We are seeing it to some extent as well these

days with stable coins. And I think the example off shore dollars also allows me to close by answering and another of the questions that were posted by Brendan to get us started and thinking about these issues, which is the mapping between the currency usage and the boundaries of the sovereign that is responsible for that unit of account. And here what I would like to know that is more money is also global money. And here, of course

there are hierarchies as well. And just ahead of coming here, I had a quick under to look at the the BS banking statistics and as oft the end of last year, there were thirteen point five trillion of dollar liabilities booked

outside of the US. There were two point seven trillion euroe nominated the liabilities book outside of the Euro area six hundred and seventy billion or so for four pounds and yeah, and of course, yeah, this is lobal money that is arranged as well hierarchically, and it goes certainly beyond the boundaries of what the issuers expect.

hap in the market. But what this whole conversation is highlighted is the role of the state in moneyness, and so you need that mode of payment distinguished from means of exchange, so that people recognize that some payment you don't quote unquote get anything back, say when you're paying a parking fine.

And a good example that I know of when I was a kid, that happened in the case of Finland, and when you started discussing what the value of a used car was, then you always reverted back to the old way of arguing about things and adding a few zeros because that was familiar to everybody. But of course in most cases that's not how you do it. But it's not absolutely necessary to tide history together.

so that kind of logically preceeds precedes that. But in terms of store of value, I think these are kind of derivative things that follow from a minim of account or unit of account and means of settlement.

obviously people are into gold again these days. Maybe we'll get back to that, but it occurs to me, like you know, we think it's dollars convention and back by various things, but also it's back by implicitly a promise to be able to buy a basket of goods that only gets two percent more expensive every year, this basket

of goods and services. And I'm curious, like you know, in the broad history of like what people call money or what people call currency, obviously it's not always gold, and it's not always the specific basket that might be,

you know, the PCE. But how common throughout history is this presumption that there will be an issuing authority that has some redemption, either directly in the form of taking it to the central bank and then getting a coinback, or being able to take it out into the marketplace, with the expectation that there's some stable stock of goods and services that can be redeemed for it.

the other. So in a longer time perspective, there is maybe less stability than our perception of total stability in the near term.

we often have monopolies. And so it's curious to think about how that eighteenth century moral economy idea that there are certain goods that are so valuable to the functioning of society that they ought to have a constant price, and you ought to always be able to get bread for to sue a pound, that idea, which then so many economists have said no, no, Supply and demand will shape the cost of bread, and yet as consumers we still have moral economy gut reactions to changes in the

price of eggs or gasoline.

then the whole trust edifies collapses. I'd like to think I'm not that old, but I'm old enough to vividly remember my own experience with hyperinflation in Argentina, and then trust is broken and it's very hard to recover. And that's the complete underminey of the store of value function. So I think it is essential. That's why price stability is so important.

were all just fascinated by this. And I think there is something that's just different about seeing billions of dollars in cash or potentially gold versus seeing a line of zeros on a computer account or something like that, although I've never personally seen that either. Talk to us about how our relationship with money actually changes depending on the physicality of money, because I know governments have often consciously

thought about this. They think about the metal content in their coins, or they think about are we going to print on.

have semiconductors, you have chips. So we tend to think there's a fable that money used to be physical and it's become increasingly abstract, and some people think that's a story of progress, and other people think that's a story

of decline. But the reality is that there's always an interaction of the material and the symbol making that goes into deciding that this is money and this isn't, and over time, in different places societies configure that differently, but it's not a linear movement in one direction or the other.

run the system, because that's what it is. And either you sort of trust them because you say that they have done this for a long long time, and inflation seems to be pretty stable, so this probably works. Or to the contrary, in some countries they have the system many times over again, so it doesn't really matter who sits there. When it comes to the individuals, you just

don't trust them. And then what you do instead is that you buy gold or you hold physical dollar bills or euro bills in the mattress, because that's your way of buying an element of insurance. And this is very, very difficult to deal with. But let's at the same time remind ourselves that also in the old days, gold wasn't always gold, and all old emperors and kings figured that out that went out a long long time ago by diluting the amount of gold that they claimed they held.

So it's not that everything was better in the old days just because you held gold.

because they've been repeated so many times. But in a moment of dislocation, in a period of say, political revolution, then we suddenly see those for what they are. And then a bizarre thing happens, which I mean you just said people lose trust in the system and so they want an object. Like how weird is that if society is collapsing around you and you think, oh, that's okay, I'll just have some I have my shiny rock. I have my shiny rock. Like I don't know, I'd sort

of rather have functioning society and no shiny rocks. Yeah.

for money. And it's not that when they take money out of the ATM say like, oh, I am converting a claim on my bank to a claim on the central They have no clue, but but they know. I mean when when when the going gets rough they take the money out of the bank in the case two thousand and one Tina, or or they just go and buy dollars if they if the bank is collapsing.

curious about Tracy asked about the physicality of money. Basically, any form of currency around the world, the designers of the physical note or the coin usually has some like, you know, attempt to conjure up the sort of mystical and spiritual history of the country in question that's issuing it.

And I'm just sort of curious, like from a design perspective, a like how much of that is this attempt on some levels sort of like rekindle that excitement that you feel when you see gold, but also thinking forward as

money gets more and more digital. I'm curious the three of you, like, do you think design on some level something that like harkens back to the identity of the nation will always be an aspect of digital money, or always be an aspect of money, even as it gets more and more strictly digital.

bridges in any particular place. One of them was then built, I think in Mastricht actually, and actually the European Central Bank put out a wonderful flyer document of other designs that were not chosen, including a whole series of euro notes that would have had cats on them.

When I was deputy governor in Sweden went through the agony of trying to decide whether to join the euro or not to join the Europe and you know the end result of that. There was one moment when trying to create the euro banknotes, about four or five different potential versions in terms of colors, motives and things like that were passed around. And all of these were sort of passed around among in the General Council, which is in my case essentially politicians, and there was absolute silence

in the room, and it took a while. They were slowly passed around, and then while one politician broke the silence because there were no kings on these banknotes, and he said, but all of them are ugly. And then I sort of sensed that no euro in this country at least now.

he was sort of selling to other bitcoin enthusiasts. Somebody took a photo of a stack of those. I think it was the Bloomberg photo of the Year for twenty fourteen, and suddenly everybody started illustrating their articles about bitcoin with pictures of these, you know, basically hanaka gelt. And it's in the aftermath of that that people assume that, well, bitcoin must really be a thing, like what's that thing

saying that you keep seeing photos of? And so when you tell people that you know, bitcoin is a spreadsheet, bitcoin is a computer program, they don't believe you because they've seen the pictures of the shiny gold candy wrappers.

change so many times over the years. But just on this note, I want to ask one more question because I think it really encapsulates a lot of the discussion we're having, but on stable coins specifically. So at the moment, we have a bunch of stable coins from private issuers, so the tethers of the world and so on. Lots of central banks are talking about doing their own digital

currencies for various reasons. But how much competition would central digital currencies be for the private issuers and how should we think about I guess the attraction of both those two camps.

pay it should buy a sore membersus. The promise to pay it should buy by a private agent. And the problem we have plenty of promises to pay it should buy private agents. And we'll see, you know, like we'll see if they if they survive. I think it's very much an open question. Maybe they have a role to play as part of a payment ecosystem in the future.

paper money. And eventually, after a series and long and complicated for many years in my country, in parliament, it was eventually decided to say that it's only the central bank that issues physical banknotes, and the Banker's Association of that day basically claimed that the banks were going to go under if the state was that evil coming up with that kind of a system, and now it's a rerun of this thing coming back because the technology has changed.

And ultimately, at the end of the day, as I've referred to, this is the political value judgment. Either the political conclusion is that for whatever reason you want the general public to be able to hold central bank money given the technology of that day, or you say that it is enough to sort of just deal with the back end, and then the back end of the system

sort of backs up. Stable coins. Let me add to that, And I think that here's a lot of confusion because to me, I don't really see a major difference between let's say a stable coin of some sort and a

money market fund. Essentially it's one and the same, And particularly if you sort of scratch on the surface and check the legal aspect of what actually has been constructed, what probably is different is the way you transact because the legacy system banks, the old banks, all of them have legacy systems, So you sort of engineer a transfer of ownership titles in one way in an IT world

and probably a rather old fashioned IT world. And then you have these new startups and they sort of engineer those transfers of ownership titles with others and new technologies, but in terms of the legal setup it is roughly the same. But I do think that there is a major difference when you run a money market fund basically holds let's say, treasuries and deposits with the central bank,

compared to something you call a stable coin. And when you scratch on the surface, you realize that all of it is deposited in a bank located in an offshore financial center.

not to the same degree, although it's volatile too, But what is it about gold? You think that in twenty twenty five people reach for it when other monetary instruments they have questions about, right.

imagined future. The way I think about it is da Vinci's Why do people want a work of art by da Vinci or Picasso, It's because other people have valued it. If at some point there's a seismic shift and works of art by European men are no longer valued, Oops, well that's the end of that.

thirty nine. Sweden, in turn sent some of its gold to the FED in New York, and the issue is to following that if you have this sort of idea that this is more stable than other things, then at the same time gold is nobody else's dead, and then you hope that it is more useful than other things when times are very difficult, and to be blunt, back in those days, the issue was that you needed the gold to buy guns, and you aren't so sure what other types of kind of assets you can monetize to

such an extent that you can actually buy those guns.