The future of money and the payment system: what role for central banks? Lecture by Agustín Carstens

The economics of money is back in the limelight. Even five years ago, I cannot imagine that a lecture on money and the payment system could have been a subject for an event like today’s. Theoretically speaking, money is a social convention. People accept money in the expectation that everyone else will do the same. According to this bare-bones definition, anything could serve as money provided that everyone, as it were, buys in. In economic parlance, this equilibrium analysis gives rise to a theoretical notion of a currency area consisting of users in a community, as shown in a recent paper by our host Markus Brunnermeier and his co-authors. In giving further texture to the analysis of money as a convention, economists and central bankers have learned over the years that the institutional details matter when it comes to how durable and how efficient any economic arrangement can be. To define money as a self-sustaining convention is not the same as nailing down the nitty-gritty details of the monetary system’s architecture.

"...money is a social convention. People accept money in the expectation that everyone else will do the same." Right. As David Graeber showed in Debt: The First 5000 Years, the concept of "money" arose from prehistoric tribal societies that operated on the  "gift economy," when gifts were considered social obligations to be reciprocated. Adherence to such customs generated social trust, not only for "money" as a social construct but also for the rule of law (justice) over the rule of men (power) as a matter of reciprocity and fairness, in addition to utility.

Money and other constructs (arrangements) that underlie institutions later evolved into institutionalized debt and record-keeping using a unit of account, as Michael Hudson showed. "Credit money" as a social construction was developed prior to the advent of state monies that were tax-driven to generate demand. See the work of A. Mitchell Innes.

It was the temple and not the palace that seems to have given rise to institutional monies. Interestingly, the Federal Reserve is referred to as "the temple." It is the palace (state) that backs the temple. I am thinking specifically of William Greider's Secrets of the Temple: How the Federal Reserve Runs the Country.

Subsequently, the palace (state) took over from the temple. Georg Friedrich Knapp described "chartal money" in The State Theory of Money (1905). Institutionalists, Post Keynesians and MMT economists later elaborated on this, as well as legal scholars.

The highlight of the lecture is central bank money as a public good.

The monetary system is founded on trust in the currency. This is something that only the central bank can provide. Like the legal system and other public goods, the trust underpinned by the central bank has the attributes of a public good.3 To coin a phrase, I would like to refer to “central bank public goods”.

This is a huge step in the right direction. The state's power to create currency is delegated to the central bank as the government's fiscal agent. This power derives from the constitution of the state. Thus, the currency issued on this fashion is a public good rather than a private good.

The function of the central bank is also involved in the creation of the public-private institution of commercial banking, where banks are given access to the central bank's payments system and the central bank as lender of last resort. In turn, banks agree to state regulation.

Bank for International Settlement (PDF)
The future of money and the payment system: what role forcentral banks?
Lecture by Agustín Carstens General Manager, Bank for International Settlements
Princeton University, New Jersey, 5 December 2019