Every now and then it is good to devote our reading to the very long view. So today I share some recent economic writing that goes back in history and carries lessons for policy thinking today.
So-called cryptocurrencies are all the rage at the moment, but they are of course hardly the first ever monetary innovation of importance. Isabel Schnabel and Hyun Song Shin, both eminent economists, have taken a historical deep dive into the spread of government-backed (but privately organised) deposit banking during the 30 years’ war — that is to say, the first half of the 17th century, and well before the creation of the first central banks, the Swedish Riksbank and the Bank of England.
The prime examples, the Banks of Amsterdam and Hamburg, were set up to address the inflation and lack of commonly accepted payment methods caused by war-induced debasement of metallic currencies. They did this by accepting only coins that were verified upon being deposited not to be debased, and then allowing transactions in notional “bank money” by transfers between accounts. The authors write: “The source of the success of public deposit banks was their role in instilling common knowledge in monetary transactions by establishing a platform for standardised settlement of transactions, both for goods and for financial instruments.” This helped promote the locations of the public deposit banks as major trading centres.
They make a strong case for tracing the origins of central banks to this function of providing common knowledge of the value of means of payments — rather than the alternative explanation that they came about primarily through the needs of sovereigns to borrow. (Indeed, they point out that public deposit banks that did lend to governments were less successful at monetary stabilisation.) A lesson for central banks today is the importance of central banks in providing certainty about a currency’s value across the economic trading area. In the eurozone, this is the function of the mistakenly maligned Target2 settlement system of the European Central Bank.
The parallel with cryptocurrencies should be clear. The role of the cryptographically protected public ledger that is blockchain (and this applies beyond its application to payment tokens) is also to provide common knowledge about the content of the token. Put simply, one bitcoin is one bitcoin, and always will be. Of course normally well-run government monetary systems achieve this as well, and there is no guarantee that the value of a cryptocurrency in terms of goods and services will ever be at all certain. But for those who cannot use government money, blockchain-based payment tokens could have a purpose.
This history is about innovation to address the instability of the value of money. But another perspective on instability is to look at breakdowns in the structure of prices. For an example of this reverse perspective, you may enjoy David Pichaske’s loving description of how street markets blossomed when price controls were abolished in transition Poland in 1990 and decentralised price-setting was let loose to establish an equilibrium between supply and demand.
We finish with a completely different topic in economic history: the origins of the welfare state. In the London Review of Books, Susan Pedersen intriguingly traces the older and surprisingly conservative assumptions about social norms going into the postwar creation of the cradle-to-grave UK welfare system. The view of the family as well as the eulogy of paid employment embodied in the contributory system has implications that can both be anti-egalitarian and struggle with women’s equality. It rather makes one think there may be better ways of doing it.
- Tim Harford writes down on a postcard what you need to know to distinguish statistics from lies and damned lies.
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