Money is a near-universal social institution. It evolved to support human cooperation and to control and coordinate the life of humankind. Like other core institutions, such as marriage and language, the forms that money takes may differ widely. The values and norms governing money’s use, and the practices associated with it, also vary widely.
For the individual, money is also a psychological symbol. Money allows each person to enjoy the fruits of others’ work. For many billions of people, obtaining money is the sole purpose of their everyday life.
But there is a difference in how we, as individuals, treat marriage and language, on one hand and money on the other.
With marriage and language, we try to uphold certain standards, not just for ourselves but as role models for our children and others. We often fail in this, as individuals, but we feel responsible. We act like trustees of an asset that bridges generations and stretches over geographic boundaries. As Durkheim said of religion, it acts as a communal bridge to the unknown, carrying us together into an uncertain future, thus helping to form social bonds.
In the case of money, we hand over responsibility for it, i.e. for how it functions as a social institution, to governments and official guardians appointed by the state, i.e. central banks and regulators. Certainly, we use money to plan, budget and execute our individual and corporate plans. We face budget constraints. But we leave money’s governance to others.
The theory is that society controls these guardians through the mandate given them by governments, representing society. In this myth, the guardians are our agents. In practice, however, this arrangement is widely seen as giving power to money and banking to the financial elite.
The result is predictable. For more than a decade, monetary policy has benefitted two groups above all others: the State, which has enjoyed almost unlimited access to funds at almost zero cost, and the asset-rich investors whose wealth it has multiplied. You do not need to be a public-choice genius to work out the politics of money.
Why were the central banks were given independence (CBI)? The myth says this was in order to attain price stability. In practice, many motives were involved – ranging from envy of the Bundesbank, a desire by the income UK Labour government in 1997 to lose its inflationary reputation and, as for the US – well, the Fed has never really had legal independence anyway. Its one great period of anti-inflation policy reflected the determination of one man – Paul Volcker – who sensed the changing mood of the public and secured presidential backing for what he wanted to do anyway.
CBI has been the most wonderful public relations tool of central banks but, in practice, has made little difference. I cannot think of an instance when a leading central bank has adopted a policy that differed in any major way from what its sponsoring government(s) would have done if left free to decide for themselves (though there are laudable exceptions to this generalisation among emerging and developing countries’central banks).
Indeed, it is possible that governments would have shown greater concern for financial stability than blinkered, inflation-targeting central bankers did in the run-up to the great crash.
Have the benefits of price stability been worth the costs of the methods used to pursue it?
As the evidence comes in it is clear that the narrow obsession of leading central bank policy-makers with the output gap, signs of consumer inflation and the real economy blinded them to increasing threats to banks and financial markets. Minutes of meetings showed these topics were virtually banned from meetings of the FOMC and MPC during critical years. Why? Because the central banks were run by economists who sneered at such matters and knew little about how markets worked in practice.
Things may have changed recently but it is too late. The public does not trust money to serve the general interest.
It is a universal social institution seen as having been captured by special interests. When central bankers inveigh against the dangers of Bitcoin and other crypto-currencies they assume what they should not: that their currencies provide a trusted, reliable standard. They do not.
Money has become an elite sport, something for speculators in contemporary art and other exotic assets to play with, something that has become so plentiful it is treated with contempt by the super-rich. If you have a family fortune of $15 bn, even if it is to be divided among several children, what is a mere $500 million for a Leonardo, even if it is fake?
Art is rare when money is common.