How Do We Define a Currency?

29:09And here, what I would like to know, that it's a modern money, it's 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, 670 billion or so for pound and yen. And of course, yeah, this is global money that is arranged as well hierarchically, and it goes certainly beyond the boundaries of what the issuers expect.

29:45So let me stop there.

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30:42Giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform. All while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. 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 chat GPT what the traditional definition of money actually is, according to economists.

31:21And it said the three functions that we've basically been talking about today, unit of account, transaction method, store of value. 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 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.

32:05And 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. 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.

32:55In 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 that with you. I think that probably became clear. To me, means of payment or means of settlement is central.

33:40To 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. 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 means 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.

34:20And 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, in the broad history of 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?

35:12I 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 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.

36:16In 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.

37:08I 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 edifice 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.

37:46And 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 some not very tasteful pieces of jewelry, big necklaces and things like that. And we were all just fascinated by this.

38:21And 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.

38:52And 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 physical 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.

39:42But 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.

40:39You 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.

41:29And 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 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.

42:13So 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 of dislocation, in a period of, say, political revolution, then 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...

42:57I have my shiny rock. I have my shiny rock? Like, I don't know. I'd sort of rather have functioning society and no shiny rocks. Yeah, the problem is that quite often this for individual users is not a choice. Right. 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, Tabeca, 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, it's like, oh, I am converting a claim on my bank to a claim on the central bank.

43:37They 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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45:26exactly as expected and fully on brand. Because when the gesture is intentional and the impression matters, the right gift makes your message clear and leaves a lasting impact. Explore gifting with confidence at 4imprint.com. 4imprint, for certain. 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 she 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.

46:04Basically any form of currency around the world, 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? 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?

46:49I 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. I didn't know that. One of them was then built. I think in Maastricht, actually. And actually, the European Central Bank put out a wonderful flyer document of other designs that were not chosen, including a whole series of Euronotes that would have had cats on them.

47:42so 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 uh let's put somebody's face maybe and and so I think I think that there is that artistic convention that we tend to keep using let me add to that that if 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 old logos yeah so that in one way or the other they're trying to remind you of something that has existed in the past.

48:44And 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 while one politician broke the silence because There were no kings on these banknotes.

49:34And 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.

49:47If I may add also on the anecdotal dimension and the need for this physicality. So when the currency born in Argentina was in its death draws in 2000, 2001, And one, a lot of the provinces were really cash-strapped and started issuing these quasi-moneys, 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.

50:26and it could be a logo of a central bank, then do 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.

51:17podcasts, 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.

52:18And 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 on stable coins specifically, so at the moment, we have a bunch of stable coins 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?

52:52Well, I mean, I think if you hear people from the stable coin 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 promised to pay issued by a sovereign versus a promised to pay issued by a private agent. And we have plenty of promises to pay issued by private agents.

53:28And we'll see, you know, like we'll see if they survive. I think it's very much an open question and 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.

54:18And 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 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 stablecoins. Let me add to that that 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.

55:05Essentially, 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.

55:53But 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.

56:40And 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, silver, not to the same degree, although it's volatile too. But what is it about gold, do 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.

57:23But 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.

58:16Back 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 establishes itself as valuable over time through social convention, right?

59:02It's pretty crazy. And it's amazing that the idea that, in a way, the gold held that the New York Fed is this obligation to the United States to return it on demand at some point. And the incredible like 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 like social achievement in its own right. But they still want to go check that it's there every once in a while.

59:45That 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?

1:00:16Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Weisenthal. You can follow me at The Stalwork. Follow our producers, Carmen Rodriguez at CarmenArmand, Dashel Bennett at Dashpot, and Kale Brooks at Kale Brooks. For more Odd Lots content, go to Bloomberg.com slash Odd Lots. We have a daily newsletter and all of our episodes. And you can chat about all of these topics 24-7 in our Discord, discord.gg. And if you enjoy Oddbots, if you like it when we try to define what a currency actually is, then please leave us a positive review on your favorite podcast platform.

1:00:53And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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