Money is as money does
Fiat and other chiropractic monies
Writing in the Financial Times last week, Brendan Greeley asks everyone to please stop calling it "fiat" money. The label implies that state monies (such as the US dollar) have value only because of a government's say-so.
Some, crypto true believers for example, accept this premise and conclude that government fiat is meaningless and so state money is worthless. Others, adherents of modern monetary theory for example, share the premise that government fiat is what gives money its value, but conclude instead that government therefore faces no financial constraints to spending. Greeley's argument is a good response to both "fiat" positions: that money is a kind of credit, it is someone's liability, and so its value has much to do with that someone's assets. Regular readers will not be surprised to hear that I agree.
This perspective explains the importance Soon Parted places on reading the central bank's balance sheet. The Fed is a bank, in some ways like and in other ways not like other banks. The Fed's assets are mostly government debt and US mortgages—important markets but not fundamentally different from other banks. Its balance sheet is now over $8 trillion, which is huge, but less than an order of magnitude larger than JPMorgan. On the liability side, the Fed has four big positions: currency to the public, reserves to banks, overnight reverse repo to money funds, and the Treasury's general account. It is hard to call any of this "fiat."
One of Greeley's points, which I want to amplify and extend, is that bank money has value in part because of the regulatory and supervisory institutional system of which banks are a part. Credit money, in other words, is what it is because of the entire complex of institutions and social behaviors surrounding it.
Many take the opposite perspective, that money is one thing or another (money is gold, money is what the state says it is, money is what extinguishes tax liabilities). Regardless of which specific thing money is taken to be, these views lead to the idea that many problems can be fixed by intervening at a single well-chosen point. Theorist Max Haiven offers a helpful characterization (p. 251) of this class of monetary reforms as "chiropractic." Many examples come to mind: "one need only control the money supply to control the price level"; "the Treasury should mint a trillion-dollar coin"; "blockchain can democratize the financial system".
All such views are wrong, or mostly wrong, because money works through the relationships among many institutions. No single point, not even important points like the state or the central bank, can be a pivot for the entire monetary system. Chiropractic interventions dangle a false hope, disguised by the arcana of actual monetary mechanics and by the very familiarity of money in its daily use. That hope is at times compelling to the point of distraction.
The non-chiropractic perspective, that money is a social phenomenon and so single-point interventions cannot have their intended effect, applies directly to conversations about monetary innovations that Soon Parted has lately been dipping into.
CBDCs and the bank disintermediation debate
One such innovation is taking place at the very center of the monetary system—central bank digital currencies. These will be a claim on central banks that will be held by the public like banknotes, but will be usable for electronic payments like bank deposits or crypto. Recent developments suggest CBDCs might be in widespread use within the decade.
One line of debate, which shows the risk of chiropractic thinking, is about the possibility of bank disintermediation. If the public switches en masse from holding deposits to holding CBDC, then banks could be left without an important source of funding:
One extreme viewpoint on this could be called alarmist: "it would allow a run on the banks." Alarmists fail to see that central banks will surely anticipate and plan for the possibility of bank disintermediation. This could lead, for example, to the creation of new funding facilities for banks to offset the issuance of CBDC. Another extreme viewpoint is that CBDC is a nothingburger: "CBDCs are no different from banknotes." This fails to recognize that no central bank will invest years in developing a new technology and a new asset class that they do not intend to be widely used. CBDCs are not just like currency, because they are electronic. It is entirely possible that a movement into or out of CBDC would be much larger and faster than is possible with banknotes.
Both alarmists and nothingburgerists imagine the introduction of CBDC as a chiropractic intervention: that the new mechanism comes into being while nothing else changes. But in the event, CBDC will be the outcome of negotiations, which will lead to possibly complex realignments on the part of banks and others to accommodate the changes.
This post is about "fiat" and chiropractic money, so I'll leave the intricacies of CBDC for the future. But in a way that's just the point: Soon Parted is all about the way that those negotiations, realignments and accommodations are expressed through the monetary system.