Abstract
This chapter discusses how digital technology can unfold specific effects on money and monetary systems. It focuses on the money functions and on aspects of currency competition. It endeavours to differentiate the specific effects of digitalisation that may lead to inflation. It briefly outlines the emergence of the phenomenon known as “digital currencies” and deals with the extent to which these pose a threat to the stability of central bank money. It discusses central bank digital currencies and their potential impact on monetary systems.
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Notes
- 1.
This is, nota bene, what he is said to have said. I owe Dietmar Meyer the hint of another reference, J.M. Keynes: “Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. (…) Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose”. from: The Economic Consequences of the Peace, Chap. 6, “Europe after the Treaty”.
- 2.
Different schools of economic thought have different answers to economic crises, just as they look at fundamental questions from different angles. We do not want to give the impression that Eucken and the Freiburg School offer the only or the best answer. Nor, of course, is the Freiburg School by any means the only one to have dealt with the problem of stable money. In the present considerations, it is much more a matter of demonstrating, as also stated in the introduction, that digitalisation is not a superficial phenomenon, but a form of technical change that—far more than all other technological revolutions before it—really also affects the fundamental principles of the market economy. Therefore, the question chosen here because of the perspective—to what extent does digitalisation affect the stability and functionality of money?—is important, and it is not the intention to weigh the perspective of the Freiburg School in detail against the perspective of other schools, be they classical, (post-) Keynesian, monetarist, liquidity theory or whatever.
- 3.
The current inflationary developments have considerably fuelled the debate on problems of the monetary system and monetary policy. Of course, this cannot be addressed here. Likewise, the attempt to only halfway depict the debate on the claims of Modern Monetary Theory and the corresponding opposition would go far beyond the objective of this contribution. Rather, the aim is to illustrate the extent to which fundamental relationships have been placed under new conditions by digitalisation. Where appropriate, reference is of course made to the corresponding discussion.
- 4.
For the purposes of this study, it is not expedient to present the complex history of the theory of what money actually is. This is an exhaustively discussed topic in economics and philosophy alone. However, due to the remark in the text that the—moneyless—barter economy sets limits to the possibilities of the economy, it should be pointed out that intermediate forms do exist and in this respect the question of what can serve as money in which form also forms a subject of investigation for cultural anthropology, among others. The relevant discourse on forms of money that do not correspond to the modern concept of money relevant to these considerations can be summarised under the collective term “primitive money”. Einzig (1966) has presented an extremely broad and instructive study on the topic. It is remarkable that his definition of “primitive money”, which must satisfy a sufficient degree of generality, does not seem to deviate that far from a modern concept of money: “It may be defined as a unit or an object conforming to a reasonable degree to some standard of uniformity, which is employed for reckoning or for making a large proportion of the payments customary in the community concerned, and which is accepted in payment largely with the intention of employing it for making payments” (Einzig 1966, 317).
- 5.
- 6.
For the sake of completeness, it should be noted that this formulation is also problematic depending on one’s point of view, because depending on the situation one is in at the time, “intrinsic values” are of course quite different. If in doubt, remember, you can’t eat gold. Gold, however, has the functional advantages of being scarce and also of having no debtor.
- 7.
This applies under the condition that it is not central bank money that has been completely devalued for the time being. Müller and Kerényi (2022, 125) seemingly try to stress the importance of the central banks, stating that they “(…) have been providing societies and economies with reliable, valuestoring money, for hundreds of years”. One would like to exchange Reichsmark with them or make bets on the Hungarian Forint. The assertion in the text above does not apply, of course, if the money referred to here has disappeared and been forgotten; however, even found money is only due to the lucky finder if the origin of this money precludes the claims of others; heir investigators are not accidentally a profitable business.
- 8.
The complementarity of money functions means that the disruption of even one function can trigger a self-reinforcing process, which is partly due to the fact that the use of a currency is based on network effects. Thus, fleeing a currency because one assumes the disruption of even just one function becomes a good reason to flee that very currency.
- 9.
This is not the place to discuss the borderline between economics and sociology. Some anthropologists would then have a different view of the same object area. Let us—without lapsing into economic imperialism!—simply assume here, with good reason, that the economy is also a part of the social, which we can certainly differentiate from other parts of the social on the basis of the above-mentioned code.
- 10.
Accordingly, we cannot engage in a detailed discussion of monetary theory here either, but we will start with the fundamentals in order to be able to show where the change that goes hand in hand with digitalisation starts in this context. Instead of a detailed discussion that would not be very useful, we will refer to the telling disclaimer by Crespo (2021, 459): “The topic of the nature or essence of money has produced an abundant literature without reaching a uniform conclusion. It has drawn the attention of famous philosophers, sociologists, and economists such as Aristotle, Nicholas Oresme, David Hume, Adam Smith, Ferdinando Galiani, Georg Simmel, Max Weber, Carl Menger, Georg F. Knapp, John Maynard Keynes, Karl Polanyi, Ludwig von Mises, Friedrich von Hayek, and Joseph Schumpeter, among others”.
- 11.
This is a fundamental assumption that also underlies the approach of Jevons and Menger. See, for example, Hull and Sattath (2021), 6; 17. Things that are not scarce cannot have any stable value at all in a system of relative values. Walras (2014) already points to this: “only scarce things and all scarce things are (…) appropriable, (…) valuable and exchangeable” (ibid., 20); “(…) a thing is scarce, in economics, the moment that it is useful and limited in quantity “(ibid., 21); “(…) things that are useful but that exist in unlimited quantities are also not appropriable”. As noted above, this cannot be the place of a comprehensive discussion of money theory. In any case, the central idea in Walras’s theory of money, namely “(…) to stabilize price variations by regulating the supply of money” (Walras, cited by Cirillo 1986, 215), refers to the function of the numéraire, according to which money is not “(…) purely a ‘veil’ in the sense that an exchange system could work without” (ibid.), but rather “(…) a third commodity of invariable value” (ibid.). Walras’ theory has not spoken the last word either (accordingly, we cannot go into questions of neutrality of money and the “classical dichotomy” here) but here we accept the scarcity of money as its fundamental prerequisite for it to function (as a numéraire) at all. That scarcity itself is the central basis for the functionality of money in the first place is also elucidated by Halaburda et al. (2022, 21): “Scarcity matters for both medium of exchange and store of value”.
- 12.
Similar to the above reference to the broad discussion on monetary theory, it should be noted here that there is of course also a discussion of proposals for monetary constitutions, and this was particularly the case at the time of Eucken. See, for example, the still instructive contribution by Bernholz (1986).
- 13.
Of course, the situation is more complex. For example, if a precious metal is an intrinsic value of the medium used as money, this does not mean that the officially given form of this money is allowed to be destroyed at all, nor that this, to stay with the example of coins, would even be a technologically simple undertaking for the average user of money. For our purposes, it must suffice to make clear the differences between the general-typical systems.
- 14.
This context is the starting point of both a much extended academic discourse and, increasingly, the public debate, in that since the Federal Reserve’s temporary abandonment of the gold standard in 1971, an exponentially growing set of claims has been matched by ever more—questionable—promises.
- 15.
Without being able to give an adequate account of the discussion in this regard, it should be noted that, strictly speaking, it is of course a matter of greater flexibility for politics, which in a fiat money system is able to cushion short-term problems of the economy with monetary means. We will not discuss here in which case this makes sense or not over which time horizon. What is indisputable, however, is the fact that this possibility alone creates an “inflationary bias” among those in power, which, ever since fiat currencies have existed, has always led to inflation, i.e. in the long run to destabilisation and thus to the destruction of the money functions. See Bernholz (2015), 18f.
- 16.
It is possibly one of the most pressing problems the global economy faces today. There is no doubt that the political measures taken in the wake of the Corona pandemic have damaged the highly differentiated value chains, and the current conflict over the Ukraine and the uncertainties that accompany it have certainly played a role. But one should not underestimate that the current inflationary developments are an obstacle of their own kind to the recovery of the international division of labour.
- 17.
- 18.
See—as one possible example among many—the statement of the European Central Bank: “Our job is to maintain price stability. (…) We keep prices stable by making sure that inflation—the rate at which the overall prices for goods and services change over time—remains low, stable and predictable” (European Central Bank 2023a).
- 19.
These explanations are, of course, extremely condensed and with regard to the institutional conditions of money creation too short. It should therefore at least be mentioned that the creation of money is a task that certain groups have usurped and secured for themselves through state power, today in the form of central banks. But whether this serves the cause is an entirely different question. The fact that those responsible have never acted sustainably in this regard is as obvious as it is extensively documented. This is why Friedrich August Hayek wanted to wrest the creation of money from the public purse. Since an appropriate discussion of a monetary constitution would be a volume in itself, we must focus here on the concrete effects of digitalisation. In this respect, these considerations can contribute an element to a discussion on an appropriate monetary constitution in the digital age. Hayek again: “I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop” (Hayek 1984). If digitalisation holds new ways to do so?
- 20.
An instructive, tabular overview of these approaches is provided by Csonto et al. (2019), 15.
- 21.
This is again an extremely controversial connection, which will be discussed in more detail in the chapter on labour and income.
- 22.
Nota bene: this chapter focuses on the problem of monetary stability. Now, as already noted elsewhere, it is not always easy to distinguish whether the value of money is decreasing or whether certain goods are simply getting more expensive. Of course, they may become more expensive, i.e. scarcer, because they become better from the customer’s point of view, more technically complex, etc. (so-called hedonistic regression). They may also become more expensive because there is a change of constellations on the market, e.g. processes of monopolisation. However, it seems helpful to keep in mind that “(…) money constitutes a category of its own as it is neither an object of consumption (it does not directly satisfy human need) nor a means of production (the usefulness of money to allow for increasingly complex production process does not depend on its quantity)” (Fiedler et al. 2019). Accordingly, this chapter focuses on the “category of its own” and other chapters illuminate this topic from other perspectives, namely the extent to which digitalisation can lead to different behaviour in markets—and in this respect, of course, also influences prices. These are two sides of the same coin.
- 23.
Admittedly, there is also a debate about what inflation actually is. Gaffard (2018, 2), who then traces the positions of Friedman, Wicksell and Keynes, etc., in his contribution, summarises the topic provocatively and succinctly: “The question remains whether we are dealing with a monetary phenomenon in the sense that it is attributable to mistakes in discretionary monetary (and fiscal) policy, or whether it is a phenomenon anchored in disequilibrium adjustments on gods and labour markets”. Against this background, it is easy to formulate the view put forward in this contribution: namely that inflation is of course and always a “monetary phenomenon”, which has different, primarily monetary and/or fiscal policy causes, but to whose different manifestations the “disequilibrium adjustments” mentioned above can either contribute causally—and secondarily—or are consequences of the process caused primarily by monetary policy. In short: do one thing without omitting something else. A structural separation is simply not realistic.
- 24.
This discussion cannot be reproduced here in its breadth. This chapter focuses on the extent to which this new phenomenon poses new challenges to the stability of money.
- 25.
This is, of course, a simplification. Currency areas do not have to be identical with national economies. The dollar area, for example, is of course much larger than the USA, a fact that has its advantages for some participants and is sometimes defended fiercely. This can have different reasons, which cannot be discussed here. Nor can the aspect of money markets, including currency speculation, be dealt with here. However, we will see that operations with “cryptocurrencies” must be assigned to another market.
- 26.
The differentiated use of currencies depending on their function naturally also has a corresponding influence on the value depending on the volume of demand, a phenomenon known as “Gresham’s Law”. This will be discussed in more detail in the next sub-chapter.
- 27.
The technical side of the cryptographic process in the narrower sense cannot be dealt with further here. Most crypto-assets are based on the blockchain, but not all (such as IOTA). The technology itself, the distributed ledger technology, is almost irrelevant in the context considered here, since in principle all media that meet certain functional requirements can be declared money. We only consider the special possibilities that arise on the basis of the new technology.
- 28.
It is important to bear in mind that this number has grown with astonishing dynamism so far. Söderberg (2018) still mentioned about 1500.
- 29.
Luther and Smith (2020) also refer very clearly to the title of the “popular” book by Ammous (2018): The Decentralised Alternative to Central Banking. Luther and Smith’s (2020) contribution is noteworthy in that they further differentiate the commonly used pair of opposites of centralised vs. decentralised and distinguish between a “centralised payment mechanism process”, a “decentralised payment mechanism process” and “distributed payment mechanisms”. Accordingly, they also classify bitcoin as neither “centralised” nor “decentralised payment mechanism”, but as a “distributed payment mechanism”. For our purpose, namely to make clear the influence on monetary stability and the contrast to the principle of the conventional architecture of the banking system, we can stick to the commonly used pair of opposites. Ultimately, following the logic, “decentralised” and “distributed” have one thing in common: they are not central.
- 30.
Unlimited quantity is a technical possibility of fiat money systems that is actually subject to only two restrictions: One is some form of agreement or confession, economic policy commitments, self-binding of governments and all other forms of treaties and promises which are altogether, in all experience, not worth the ink. The other restriction is a corresponding successive devaluation of the value of money when the money supply grows faster than economic output, i.e. the argument of the quantity theory: If the money tap is left open, at a certain point the currency collapses on its own.
- 31.
This is a potential, but it does not have to be the case. Such communities can also be regionally limited. See, for example, the interesting study by Pédussel Wu et al. (2023).
- 32.
Admittedly, the connection addressed here is even more complex, as it is ultimately the platforms that are both the product and the medium of the transformational effect of digitalisation; the connection will be taken up again in later chapters.
- 33.
This is an assumption that is all the more obvious the more crisis-ridden the situation is for traditional currencies, or rather, how crisis-ridden it is assessed to be. This can already be empirically verified, see, for example, Conlon et al. (2021). However, the situation is not clear-cut; that bitcoin plays a role as an inflation hedge remains to be seen; in any case, Choi and Shin (2021) show that its price development against the backdrop of crises is different from that of gold, and bitcoin is therefore “not a safe haven”. In their empirical study, Kikuchi et al. (2021) attest at least bitcoin, Ethereum and Ripple a strikingly good stability. However, the development can also be interpreted in such a way that cryptocurrencies are not being bought as inflation hedges, but simply because central bank money has been available very cheaply for a long time and has accordingly formed speculative bubbles; against the background that the balance sheet of all cryptocurrencies which are not backed is ultimately completely empty, the growth in the volume of crypto-assets would be the result of a whole crowd following the greater fool theory.
- 34.
Given the global expansion of the money supply, government debt, problems in the banking system and inflation expectations, it may come as no surprise that crypto-assets are increasingly in demand following the rise in share prices. But ultimately, however, the thought experiment that a critical mass could prefer a cryptocurrency to a central bank currency is unrealistic. For state power would ban its use easily, e.g. just as “liberal” Prime Minister Justin Trudeau imposed a “bank freeze” on protesters.
- 35.
Of course, this will ultimately be a question of power alone and not a question of economic sense or convictions, see the comment and the example in the previous footnote. However, the opportunities offered by digitalisation were already surprising. They will not be the last.
- 36.
For the sake of completeness, it should be noted that commercial banks are of course not the only intermediaries, but also savings banks, money market funds and so on. This is not further differentiated in the following because it would not provide any further clarification for the focussed problem area.
- 37.
Bech and Garratt use the term “central bank cryptocurrencies” because of the underlying technology, but this makes no difference.
- 38.
- 39.
- 40.
The debate on currency competition, especially with regard to competition between public money and private money, has of course been going on for a long time, see, classical, Hayek (1976), Brunnermeier and Niepelt (2019), Bech and Garrat (2017), but the possibilities of digitalisation are adding a new dimension.
- 41.
The European Central Bank still officially emphasises the advantages of physical cash. But the potential of digital central bank money for surveillance and control alone should give the citizens of a free society pause for thought. “Nobody has any intention of building a wall” as Walter Ulbricht said 1961.
- 42.
Brunnermeier et al. (2019), whose lucid and instructive contribution has been cited here several times for good reasons, believe that in a cashless society “(…) private issuers would lose the discipline of public money, and their issuance would instead be shaped by other market forces” (26); but this is an irritating statement against the background that one can associate many terms with “public money”, but probably very little with “discipline”. It is precisely the lack of it that erodes its function as a store of value.
- 43.
However, this aspect appears among the arguments for a central bank digital currencies under the label “social inclusion”. We cannot go into the problem of what exactly is meant by this inclusion, but it seems worth pointing out that in its own context this argument seems rather flimsy.
- 44.
The other three are: “to define and implement the monetary policy of the Union”, “to conduct foreign-exchange operations consistent with the provisions of Article 219” and “to hold and manage the official foreign reserves of the Member States”. They will not be dealt with in more detail here, as none of these three is affected in the narrower sense by the effects of digitalisation which is focussed on.
- 45.
The quotation is taken from the sixth of his satires, lines 347–348. The question is an expression of moral indignation, since the wives of the Romans would seduce even the guards assigned to guard their marital fidelity. Money is always seductive.
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Dötsch, J.J. (2024). Primacy of Monetary Policy. In: Economic Policy in the Digital Age. Contributions to Economics. Springer, Cham. https://doi.org/10.1007/978-3-031-53047-0_5
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