How Do We Define a Currency?
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Terms apply. For J.D. Power 2024 award information, visit JDPower.com slash awards. Hello, Odd Lots listeners. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, we're doing another live show and it's right here in New York City. Yeah, this one should be our biggest yet. And we're going to have a bunch of Odd Lots favorites and do something maybe a little different to some of our previous live podcast recordings.

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Hello and welcome to a special episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, this is special. I think this is the first time we've done this. We're not used to like, you know, we like to talk to academics, certainly, but we've rarely ever done anything like in the proper academic context.

setting in the types of seminars where, you know, academics are on their home turf. That's right. So we were invited by the Princeton Economic History Workshop to an event called How to Write the Biography of a Currency. I love that topic and that name. And we were invited to moderate a panel specifically on how to define a currency. How do we define what actually is money and what it does and all that good stuff?

And we had an amazing panel. That's right. So we had three guests. We talked to Iñaki Aldesoro, an economist at the Bank for International Settlements, Rebecca Spang, a professor at the University of Indiana Bloomington, and Stefan Ingves, the former head of the Sveriges Riksbank, the central bank of Sweden, from 2006 to 2022. So take a listen to the three of them. So I'm Iñaki Aldesoro, and I'm a principal economist at the Bank for International Settlements.

Rebecca Spang, professor of history at Indiana University. Stefan Ingves, former governor of the Swedish central bank, the Riksbank. Should we go down the line? Should we start with Stefan? How to write a biography of a currency, or actually maybe how to define a currency. And let me start by saying that it's a privilege to be here and discuss money, or actually I think in the course of the day, money is used in the plural form.

It just so happens that 47 years ago, when I was a visiting graduate student here in Princeton, I took a course in monetary theory and I got hooked. And little did I back then know that with my Finnish background, I would end up leading the oldest central bank, the Riksbank, 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 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 sector money versus private sector money. 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 sector money. And if that is not the case, then the whole thing collapses and collapses.

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 when you use an app.

And that kind of in some vague sense represents money to us. And the other version of it is what I call back-end money. And ultimately back-end money is central bank money in one form or the other. It's tied 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 much.

If it's one ledger, if it's distributed ledger technology, if it's a token or what, it's really the principle that I'm talking about. But also when technologies 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 monies.

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 old issues that others have grappled with in the past. A gross simplification is to say the following, that back in the 1800s, 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 1800s, in a very large number of countries, the central bank ended up being the sole issuer of physical banknotes. 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 old 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 world, 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 talking wholesale? Ulrich can talk at length about that because he is presently working on them.

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 these projects actually will not be identical. And it's basically too early to tell which will work and which won't work and what it really does in various economies. And this means that

One way of looking at this is to call it the great game of our monetary future in a 100% 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 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 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, an old-fashioned Hawala transaction is probably executed in an IT world in one form or another.

It's also a fact when technology has 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 in 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 monies in the future and what this is all about. And then back to the whole issue of 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.

So Stefan just said that money is a convention and so there's really nothing new. Technologies just present the same questions in different guises. I would say that conventions are socially determined and societies change.

And so the convention for issuing money, say, in the ancient Mediterranean is going to be different than the convention in the Middle Ages and is going to be different, again, from the conventions under capitalism, 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're going to do with their money when they are dead. But the 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

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, 1692, uses the word current 28 times, but never the word currency.

So the way we think about currency is itself the product, and this ties again to something Stefan just said, of late 18th and 19th 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-1800s, 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 their Canadian coin circulated on par with American, and you didn't even notice whether they were Canadian dimes or U.S. 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 1797, 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 have in others. Currency meant that it was widely accepted as a means of exchange. And what's crucial here is that the coins or the bills that quote unquote passed current or were discounted at a predictable rate in any given place were not necessarily expected to be units of account or long-term stores 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 puns 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 17th, 18th century before the revolution, the common large denomination coin was an aque. And it was called that because it depicted the aqueuson, the shield, of the French monarchy on one side of it. But a count...

were kept in livres, pounds. There was nothing circulated that was called a livre and no denomination indicated on the IQ. So the coin was called that because of what it looked like. Was it worth three livres? 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 XIV did it a lot in the final decades of his life. So there was a

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 18th 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 ore from the Americas or

it could be coins stamped by some other sovereign. Economic growth in 18th century France and 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 assignats.

But it didn't mandate that the asinia 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 asinia of 25 livres, or I'll give you 10. That was up to the market to determine.

So a century after this period, with the rising prominence of classical and neoclassical 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 100 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 out-compete local users. So they impose this new European model of one country, one money, what some people have called the Westphalian logic, on the rest of the world.

So there are other things that I could 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 are 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 writing. Thank you.

Okay, so let me first start by thanking Harold and Brendan for inviting me, for giving me the chance to present here this fantastic event. To me, it's a real honor to share the panel with Rebecca, Stefan, a towering figure, of course, in the central banking community. And if I may steal your own phrase, with the perfect moderators. So before I begin, let me start by reminding you that these are my views and not those of the Bank for 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 invented by humanity. And as a monetary economist, of course, I tend to think of this as the most fascinating as well.

And I mention social because I think this is something that came up in both Stefan and Rebecca's comments, that money is a social institution that is sustained by a shared 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 economists often conceive of money as a veil that sort of masks and underlines a real world of commodity production and exchange. I don't share this view. And I think probably like many people in the room, I conceive of money as the essence of a world of interlocking promises to pay.

Stefan also mentioned tokens. And then Michael yesterday mentioned tokenization quite prominently in the dinner speech. And I think it's actually possible to conceive of money as the primal or primordial original tokenization. It's a tokenization of the credit and debt relationships that bind all of us together through the financial commitments that we make to each other.

So that's the first element, the central idea of money. The second element is the emphasis on payment. So money is, as far as I can see, first and foremost a means of payment, which is meant to say a means of settlement. And I think this is important because it gets me 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, fulfilling a debt obligation when basically when settlement comes due.

And in this sense, money is better than credit, especially in crisis, which is something that goes along with what you were mentioning in terms of how people use it. So people might not understand it in these 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 begs the question, what is money then? And I think my answer as an economist 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 issued the promise to pay. It depends on where that issuer stands in the hierarchy of promises to pay, and also who holds that claim. So I think perhaps it's better to talk about moneyness of these various instruments, and

these various promises to pay and the hierarchical arrangement of the promises 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, they are money for all of us. Bank deposits are in turn a form of credit because they are a promise to deliver cash, to pay cash, or to confer payment finality through ultimate settlement in the central bank balance sheet. 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 the 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 par, which you discuss in the one-to-one relationship between front end and back end money, if you will. That's the price of deposits in terms of reserves and cash.

This, in the context of current central banking discussions, is usually referred to as the singleness of money, following the expression by the late Tommaso Padua Schioppa.

And it's the key to sustaining the trust in money that I mentioned in my opening sentences. Now, 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 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 of 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. So this is also something that we should bear in mind. Even in modern 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 Minsky, right, that anyone can create money and the problem is to get it accepted. So the appeal of issuing liabilities that can circulate as money, that can circulate as a means of payment, is, I would argue, kind of almost like a force of nature. And this issuance materializes time and time again, historically, mostly through private initiative.

And the challenge then is after issuing this promise to pay and to borrow again from Minsky is to obtain validation, quote unquote, for those emerging destructors that arise from these promises to pay. And this validation always comes from higher levels in monetary hierarchies. And in the limit, they come from the top of the monetary 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 stablecoins. And I think the example of offshore dollars also allows me to close by answering another of the questions that were posed by Brendan to get us started in 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 that modern money is also global money. And here, of course, there are hierarchies as well.

And just ahead of coming here, I had a quick and dirty look at the BS banking statistics. And as of the end of last year, there were 13.5 trillion of dollar liabilities booked outside of the US. There were 2.7 trillion euro-denominated liabilities booked outside of the euro area.

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Here's more from our conversation on how we define a currency recorded at Princeton University. All right. So I hesitate to say this in front of a group of academics, but I asked ChatGPT what the traditional definition of money actually is, according to economists. And it said the three functions that we've basically been talking about today, unit of account, transaction method, store of value. To

Does everyone here agree with that broad definition? Or if you had the option to tweak it and change it, what would you do? We're going to keep the silence in. Or maybe we're already done. This is the episode. We've defined it. I think it's

I think it's important to keep the means of exchange mode of payment differentiated, not to just collapse them together into transaction. Because I think that ordinary people, when they imagine a transaction, the default setting is still the fable of barter. And so they assume that any transaction is happening in the market.

But what this whole conversation has 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.

I do think that there are instances when you actually can separate them, despite the fact that this is sort of how we usually represent money. And apparently in an AI world, that's also the way it is. And let me give you one example, particularly in cases where you have had a lot of inflation. And then for various reasons, you decide to reissue your money by taking out X number of zeros.

In those instances, it takes years and years actually before you stop using the old nominal values. And a good example that I know of when I was a kid was that 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 tie these three together. I would share with you, I think that probably became clear to me, means of payment or means of settlement is central. To me, this is the driving logic of everything. That said, to be able to have an arrangement of what are we going to settle on, you need to have a unit of account, right? So that kind of logically precedes that.

But in terms of store of value, I think these are kind of derivative things that follow from a medium of account or unit of account and...

enemies of settlement. Joe, I'm sure some people might be worried that store value seems to be the least important aspect to money. Actually, this sort of fits in with where I was going next. And Stefan, obviously, you talked about the politicians wanting to see the pile of gold, which is funny in a way, but also still probably revealing. And 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 of dollars, convention and backed by

various things. But also it's backed by implicitly a promise to be able to buy a basket of goods that only gets 2% 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 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 coin back 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?

I think that when Rebecca sort of said that we think about money, money forever, and we combine that with Inaki's reflection, the singleness of money. And that's sort of how we think about money in kind of our daily lives. But the fact of the matter is that history tells us that despite that assumption, when we buy things on a daily basis,

Once every 30, 40 years or something like that, things happen. And then we sort of try to recreate new money in one form or the other. So in a longer time perspective, there is maybe less stability than our perception of total stability in the near term.

The idea that there's some stable stock of goods that you can buy with your money sounds to me much more like an assumption of the moral economy than of the market economy. In a market economy, producers are going to compete.

And some things may get cheaper, some things may get more expensive. Since we don't have perfect markets, we often have monopolies. And so it's curious to think about how that 18th 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 two sous 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. I would add that store of value is kind of fundamental. It's just the way I would understand how money works. It starts from the premise that it's a means of payment, but at the same time, because

As I was saying, this is basically a web of promises to pay. Those promises to pay are sustained with trust.

And if you don't have trust in the ability of that currency to basically maintain its purchasing power all the time, then the whole trust edifies, collapses. I 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 a complete undermining of the store of value function. So I think it is essential. That's why price stability is so important.

Rebecca, I wanted to ask you this specifically, but since Joe brought up gold, both of us have been lucky enough to take some field trips recently. And we went to the Chicago Fed and we saw their cash operations. So billions and billions of dollars stacked up in their vaults. We went to a jewelry store in New York recently where we got to hold gold.

some not very tasteful pieces of jewelry, big necklaces and things like that. And we 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 silk or basic paper. So clearly this is in people's minds. Right. This is in people's minds. And yes.

It seems to me really important to remember that even in a world of, if it ever existed, a world of completely digital money, there would nonetheless be a material substrate that made that possible. So it is impossible to have cryptocurrency or central bank digital currencies or anything else

unless you have a way to generate electricity, you have a way to plug in your computer, you have semiconductors, you have chips. So we tend to think there's a fable that money used to be

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. Stefan, since you've seen the gold, do you want to take that question as well? Yeah. I mean, one way to think about it is, as we all have sort of alluded to, is that

We are wired to think about things in a physical sense. And that's why it sort of feels good to try to lift a gold ingot and touch it. While it's harder, actually, when we think about and we talk about fiat money, because fiat money is an abstraction. You can't necessarily touch it. It can be electronic, strictly electronic. And that's basically about trust in those who 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 destroyed 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 said,

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. I've been thinking about the metaphor of wiring and plumbing, which are frequently used in talking about money. And I just want to point out again that both wiring and plumbing are things made by humans. They are not naturally existing phenomena.

So if we say we are wired to do this or the monetary plumbing works in a particular way, what we're talking about is the sedimentation of social norms and cultural assumptions that we no longer recognize as such because they've been repeated so many times. But in a moment of dislocation, in a period of, say, political revolution, then we're

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.

I don't know. I'd sort of rather have functioning society and no shiny rocks. Yeah, but the problem is that quite often this for individual users is not a choice. You react. And I like your mattress example because that's, you know, I can relate to that. And I think this becomes very clear, right? When you have the crisis, it goes back to what I mentioned, that money is better than credit. And going to your book, Rebecca, right?

People have an intuitive understanding of this because in crisis they run away from credit and go for money. And it's not that when they take money out of the ATM and say like, oh, I am converting a claim on my bank to a claim on the central bank. They have no clue about it. But they know. I mean, when the going gets rough, they take the money out of the bank. In the case, I don't know, 2001, Argentina, or they just go and buy dollars if the bank is collapsing. ♪

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We are back and continuing our conversation on how to define a currency recorded live at Princeton University. I've seen the gold at the New York Fed's bank vault. And Tracy, as you mentioned, went to the jewelry store in the Diamond District. And obviously, gold has this sort of effect on people still today. But something I'm curious about, you know, Tracy asked about the physicality of money. Basically, any form of currency around the world today.

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 to on some level sort of like rekindle that excitement that you feel when you see gold, but also thinking forward as money gets more and more digital, right?

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? I think a really interesting example to think about in terms of design is the euro.

which specifically had to be non-national, but nonetheless wanted, its designers wanted it to look more or less like money had looked, but it couldn't have the symbols of any particular nation. So the make-believe bridges on the bills, which are not bridges in any particular place, but one of them was then built.

I think in Maastricht, actually. And actually, the European Central Bank put out a wonderful flyer, a document of other designs that were not chosen, including a whole series of Euronotes that would have had cats on them. So, you know...

They should have used those. Yeah, they really should have. They're incredibly cute. So I think the thing here is that, again, this is a social convention and much like, oh, we're a new nation. We need a flag. How about we have three stripes? Do you think they should be vertical or horizontal? Like that's the extent of your choice. Similarly, I think when designers think, oh, we're going to design some bills. Let's put somebody's face maybe.

And so I think there is that artistic convention that we tend to keep using. Let me add to that that today if you log on and you want to check on stable coin, this and that, and maybe they should be called unstable coin, time will tell. All of them have their own logos. Yeah. And if you look at them, they have sort of copied logos.

Old logos. So that in one way or the other, they're trying to remind you of something that has existed in the past. And more at the anecdotal level, when I was deputy governor and Sweden went through the agony of trying to decide whether to join the euro or not to join the euro, 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, motifs, 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 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, uh-uh, no euro in this country, at least not for now.

If I may add also on the anecdotal dimension and the need for this physicality. So when the currency board in Argentina was in its death throes, 2000, 2001, a lot of the provinces were really cash trapped and they started issuing these quasi monies, which were legally, they couldn't be money. So they legally had to be effectively, they were a bond.

But they look exactly like a bill. Exactly like a bill. So to facilitate, you know, the familiarity with the users. And in terms of going forward, I mean, I think this aspect of identification and design and so on, I think most likely is going to be like a logo, like Stefan was mentioning, and it could be a logo for a central bank that you check on an app. I think this is most likely where we're going.

Can I make one more point? That the first journalistic articles about Bitcoin that started to appear in like 2010, 2011 are illustrated with diagrams and with sort of pictures of circuit boards. Yeah.

And it's only in, I think, 2013 that somebody who had invested in Bitcoin, which at that point had no value whatsoever, started to manufacture gold-colored trading tokens with a B with a slash through it.

Then he had a pile of those, which 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 2014. And suddenly everybody started illustrating their articles about Bitcoin with pictures of these, you know, basically Hanukkah 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 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.

I actually remember this because I wrote a Bitcoin article in 2011, back when I was at the FT. And I used a picture of the Fed because the headline was, I think, digital money from real central bank distrust. Because that was the narrative at that time. It was, we don't trust the Fed after the financial crisis, we're going to create this. And then we saw that narrative 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

But on stablecoins specifically, so at the moment we have a bunch of stablecoins 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 bank digital currencies be for the private issuers? And how should we think about, I guess, the attraction of both those two camps?

Well, I mean, I think if you hear people from the stablecoin space talk about, say, retail, central bank digital currencies, not so much wholesale, but retail, they would be very much opposed to this. And to me, this is an indication that they see it as a challenge, right? Because they are very vocal about speaking against this.

So I think in a way that there will be competing payment instruments. But of course, they are very different because they are a promise to pay issued by a sovereign versus a promise to pay issued by a private agent. And we have plenty of promises to pay issued by private agents. And we'll see 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.

This is kind of a rerun of a conversation that took place in many countries in the late 1800s. Because back then, in a paper-based world...

Private banks issued their own paper money and the central bank issued its paper money. And eventually after a serious 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 bank notes. And the bankers 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 a 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 there is 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, but 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.

And there is even more intertwining of that, right? Because some stable coins have their reserve managed by money market funds. Right. Circle, for example. But going back to gold. So obviously it has this magnetic effect on people, but also people value it and people value it higher during certain times of uncertainty or perception of inflation, et cetera. And it's

Done extraordinarily well this year amid many headlines. What is it about gold that to this day people change what they're willing to pay for it in a sort of specific way that doesn't really, you know, even silver not to the same degree, although it's volatile too. But what is it about gold you think that in 2025 people reach for it when other monetary instruments they have questions about? Right. I mean, I think it's, again, a fairly...

simplified version of history that will say gold has always had value.

And one of the first things I tell my students is that two words that are meaningless when writing about history are always and never. But nonetheless, people like, they find comfort in being able to say this has always had value. And so they assume that what they think they know about the past will hold true in the 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. Let me mention two examples going back to 1939.

And it's sort of a bit relevant to what happens in Ukraine presently. Finland was attacked by the Soviet Union and the gold was transported to Sweden. Back in 1939, Sweden in turn sent some of its gold to the Fed in New York. And the issue is the 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 debt.

And then you hope that it is more useful than other things when times are 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. It's not a promise to pay that somehow establish itself as valuable over time through social convention, right?

It's pretty crazy. And it's amazing that the idea that in a way, the gold held at the New York Fed is this obligation of the United States to return it on demand at some point. And the incredible trust implied in that, that all these countries around the world are willing to have their gold or at least some of their gold in a locker in the basement of another country seems like an extraordinary social achievement in its own right. But they still want to go check that it's there every once in a while. All right. Thank you.

Thank you.

That was our special episode recorded live at Princeton University. Tracy, a lot of fun. We should try the academic setting again sometime. Oh, yeah. And I got to say, Princeton was beautiful. Just the architecture was amazing. And we can talk, you know, everyone just heard enough. But it is very funny to me that there's one thing we take for granted, like the currency is actually subject to so much debate and no one gets really that close to like a definitive answer. And that was sort of a fascinating example of it then.

Always define your terms, Joe. That's right. All right. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Traci Allaway. You can follow me at Traci Allaway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at Carmen Arman, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks.

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