China’s central bank revealed a few weeks ago that transactions using its new digital currency, the e-CNY, had reached 7 trillion yuan ($1 trillion). It’s not just China that has succumbed to the allure of cryptocurrencies. More than 130 countries have or are planning digital currencies, according to the Atlantic Council.
Cryptocurrency advocates believe the combination of smartphone dominance, innovative cryptography and massive computing power means it is possible to remake the financial system, the economist notes.
The future of money, in other words, is attracting attention. What about its past? In a new article in the British journal, Adam Brzezinski of the London School of Economics, Nuno Palma of the University of Manchester and François Velde of the Federal Reserve’s Chicago office urge readers to pay close attention to money’s long history. It holds “pleasant surprises,” they point out. It also contains some parallels with today’s innovations.
Money manipulation
Central bank digital currencies, for example, could give the general public an account at a central bank. That sounds novel. 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 hatmaker on Regent Street opened an account at the bank’s swanky new branch in Mayfair. And by 1900, the Bank of Spain held more than half of the country’s current accounts.
Studying history can also be frustrating for cryptocurrency enthusiasts who want to free money from government control. Monetary policy—the manipulation of money by governments—is almost as old as money itself. Even when coins were made of gold or silver, governments were concerned about 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 the literal sense, as Brzezinski and his colleagues point out. This allowed for the separation of two functions of money that are now perfectly linked. Coins served as a medium of exchange. They were what people exchanged for the things they bought. But they did not serve as a unit of account, that is, the thing in which everything else was priced. Often, the unit of account was an old coin that had already disappeared from circulation, or “ghost 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 one might call an inflation-reducing law—the king’s council decided, without warning, that coins would be worth less than before. From 1723 to 1724, it reduced their value by 45 percent.
It was a big mistake. “Everyone was so used to selling at high prices that the decision came as a shock. France suffered an industrial depression.
However, history does have its “natural” experiments. In an earlier paper, Brzezinski and Palma examined one source of variation in the money supply of modern Spain: disasters at sea.
Ships carrying treasure from the Americas to Spain sometimes encountered hurricanes, pirates, or the British navy. In 42 incidents between 1531 and 1810, they lost some or all of the precious metals that Spanish merchants had hoped to receive.
The losses averaged 4 percent of Spain’s money supply. Drawing on a variety of sources, including tax records, the authors show the damage these losses have caused to the Spanish economy.
New ways, old mistakes
To modern eyes, it seems strange that the money supply could be so dependent on chance. Why should it shrink when ships sink? Why should it expand when new 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 money resulted in disastrous inflation. In the future, money may need to change form again. Banknotes may be considered obsolete. Bank deposits may be replaced by a claim against the monetary authority itself.
While the forms money takes may be new, its effects are rarely neutral, the economist notes. And it is cheaper to learn from past mistakes than to make teaching mistakes in the present.
