The mystery of money
Global stability rests largely on money — yet it's an inherently unstable thing
*Originally published on Feb. 2, 2023.
Money is top of everyone's mind these days. High inflation rates make your money worth less. And high-interest rates to fight inflation make your money more expensive.
It's no wonder that money is such a preoccupation and source of stress. It's one of the strongest, most pervasive forces in our lives. Simply being a participant in modern life requires money: almost everything we do is directly or indirectly mediated by money.
Not only that, the stability of our economy and politics — both nationally and globally — rests on money. That's an unsettling thought considering how mercurial money is.
Even the experts and the officials who control the nation's purse strings find themselves confounded in their attempts to understand money and bring it to heel. And when money misbehaves, when governments and banks make bad monetary decisions, or when people lose faith in it, the result can be a financial crisis, political upheaval, and international chaos.
IDEAS talked with some experts about the mysteries of money. Here are some excerpts:
On how hard it is to understand money
Eric Helleiner: political science professor and co-author of The Future of the Dollar
"Sidney Webb, the famous British socialist — when Britain went off the gold standard in 1931 — is said to have said: 'Nobody told us we could do that.' Like, the sense that you don't even understand what your choices are. It's so complicated. But even experts have great difficulty, for example, predicting financial crises.
"And so every time we're in a bubble, people seem to think, 'Oh, this time is different.' That's the reason why assets are going up so exponentially. And then we have once again, a crash… I think it's because money is ultimately a sociological, political, economic phenomenon, and relies on psychology and emotions."
On the unnatural nature of money
Geoffrey Ingham: professor emeritus, Cambridge University
"The confusion is to identify money with material, things... Money is a complex social institution and to focus on the objective form — the material form whereby credit is transported — is to miss the complexity.
"[Money is] an abstraction. It's a product of human consciousness."
On how money is created
Jacob Goldstein: author and host of the podcast, What's Your Problem?
"Somebody who works at the central bank typically buys some bonds from a bank. So the commercial bank gives the central bank the bonds and the central bank gives the commercial bank money — that didn't exist before. There is this moment when the central bank is just creating money out of thin air.
"Now, commercial banks also create more money on top of that. When you get a loan from a bank, a bunch of money appears in your chequing account. Now, that money basically didn't exist before. It works because people are willing to give you stuff in exchange for those intangible numbers in your bank account. And they're willing to do it because they basically know that everybody's playing along."
On the monetary power imbalance between rich and poor countries
Shweta Banerjee: historian
"The international financial system, for instance, that we inherit today, and the triumph — or at least somewhat of a triumph — from what we understand as universal money rests on a long history of imperialism and colonialism... So every time a debt gets restructured in the context of Sri Lanka or any other country in crisis, it gets restructured from the point of view of the creditor. But it does not get restructured from the point of view of the borrower."
On the limited power of central banks to fight inflation
Stefan Eich: author and assistant professor of government, Georgetown University
"I worry that we are stuck in a kind of kabuki theatre moment of monetary policy, namely that central banks act with all their vigour to keep alive the late 1970s/early 1980s heroic narrative of independent central bankers, struggling against and defeating inflation, when their actions actually have remarkably little impact on what happens — and when inflation will eventually go down.
"And that's already beginning to happen right now. It's because of supply chain pressures easing, because of things happening that are fundamentally beyond the control of central banks... I think, frankly, the conversation on the inside is one of groping in the dark, of trying to figure out how to act in a context of deep uncertainty."
Guests in this episode:
Shweta Banerjee is a Vanier doctoral scholar in Department of History at the University of Toronto, formerly worked at World Bank.
Stefan Eich is an assistant professor of government at Georgetown University and author of The Currency of Politics The Political Theory of Money From Aristotle to Keynes.
Jacob Goldstein is the author of Money: The True Story of a Made-Up Thing and host of the podcast, What's Your Problem?
Eric Helleiner is a professor in the Department of Political Science and the Balsillie School of International Affairs at the University of Waterloo and author of several books on monetary and financial politics.
Geoffrey Ingham is emeritus professor of sociology and political economy at Cambridge University whose books include The Nature of Money.
*Quotes have been edited for clarity and length. This episode was produced by Chris Wodskou and is part of our series, The New World Disorder.
