This chapter deals with the history of money in ancient times. We start with ancient Mesopotamia, where fundamental value (silver and barley) was stored in temples. Clay tablets circulated openly, supporting fundamental value and contractual arrangements. Coinage in ancient Greece and Rome was a step forward in terms of ease of use but involved the risk of debasement – reduction of the content of precious metals. We describe debasement of coins from the late Roman empire to the Middle Ages, then move to China, where the first banknotes were printed in the early part of the second millennium. The use of paper in finance spread to Europe, where it became the key technology supporting the rise of banks in the late Middle Ages and the Renaissance. We describe the rise of central banks in Europe, starting from Sweden and ending with Germany and Italy. We draw several lessons from these experiences. The main one is that a successful money is a private–public partnership, where “public administration” and “private interest” combine and complement each other. The chapter ends with the birth of telecommunication in the nineteenth century and its early applications at the beginning of the twentieth century, which gave rise to radical changes in monetary technology in the subsequent period.

This chapter wraps up the arguments and delineates possible avenues ahead for central banks. Central banks may become Banks of the State, financing government deficits as they have done recently. This may imply a retreat from central bank independence. With large holdings of public securities in central bank balance sheets, the pressure to finance governments would increase. Another option is for central banks to change their job profile, becoming Banks for Everybody. This would happen if they decided to issue all-purpose retail central bank digital currencies. This would risk weakening private initiative in the payment industry, a sector where private markets have worked well recently. The third avenue is for central banks to remain Banks of the Banks, the dominant model that prevailed until the Great Financial Crisis of 2008–09. Central banks would continue to exert rigorous surveillance and use their regulatory powers to encourage further progress and foster efficiency and stability in the underlying settlement infrastructures. We express support for this line but also highlight some challenges, first and foremost the regulation of crypto assets and the extension of safety nets and central bank competence on “shadow banking,” the growing unregulated segment of financial markets.

This chapter explores the world of stablecoins, crypto assets pegged to a benchmark. The explosive growth of stablecoins in recent years is explained by the fact that they try to remedy a major drawback of cryptocurrencies, the instability of their price. The standard adopted for the peg is usually the US dollar: One stablecoin should always be equal to one dollar. Most stablecoins are “collateralized” by a portfolio of assets supposed to match the total value of the stablecoins issued against them. Others are “algorithmic”; the peg is obtained through a trading rule governed by an algorithm. One risk of collateralized stablecoins is that the collateral sits in an inherent uncomfortable trade-off: To yield attractive returns, the collateral pool has to sacrifice part of its liquidity, but this puts the stability of the stablecoin’s balance sheet at risk. The same conundrum characterizes another important asset class, money market funds. For the reason just explained, money market funds experienced severe liquidity problems during the financial crisis. On the other side, algorithmic stablecoins, having no collateral, have no intrinsic value, which explains why they were subject to spectacular failures. The chapter concludes with some indications on the regulation of stablecoins and on the possible use of them in facilitating the flow of workers’ remittances.

This chapter deals with the relationship between digital monies and basic societal values such as privacy and individual freedom. Threats to privacy and related concerns have risen in the digital age. Information technologies allow companies and governments to collect, store, maintain, and disseminate information on all dimensions of individual and collective life. Privacy is a basic human need defended by legislations and constitutions worldwide. Privacy helps explaining the attractiveness of cash. Some of today’s commercial applications of information technology imply intrusions into the personal sphere. Societal concerns about anonymity, because it facilitates unlawful and criminal activity, must also be taken into consideration, but there are reasons why some privacy of monetary transactions should be preserved, and cash is uniquely suited for that. Another question concerns freedom to choose the money. This idea was proposed originally by the so-called Austrian school of thought. Followers of the school of thought associated with Friedrich von Hayek argued that currencies should compete with one another. That school however underestimated important objections; first and foremost is the collective interest ingredient of a well-functioning money, which makes private competition ill-suited as means for promoting good monies. The chapter concludes explaining why some of these objections apply to crypto assets as well.

This chapter deals with cash (banknotes and coins), the oldest and most traditional form of money in existence. Cash involves a paradox: On the one hand, it is technologically less advanced that modern means of payments like cards and apps, so one could presume that it should decline in use and eventually disappear. On the other, however, evidence for almost the whole world shows that the demand for cash is increasing, although it is used less frequently for certain types of transactions like online commerce, retail stores, and restaurants. Criminal activities may explain part of the puzzle, but not much. One advantage of cash is that it can be seen and touched, therefore appealing to the senses and conveying a sense of security. Another is that it ensures absolute privacy of transactions. Other important characteristics explaining the popularity of cash are that it is simple (it requires no technology or complication whatsoever); definitive (it instantly settles any financial obligation); private and personal (it appeals to the desire of confidentiality); and self-sufficient (it does not depend on any other infrastructure functioning). We conclude therefore that physical cash is a useful complement of a robust and diversified monetary system, in which digital means of payments gradually prevail.

This chapter is devoted to global competition for monetary dominance. Correspondent banking, the backbone of international transactions, largely uses Society for Worldwide Interbank Financial Telecommunication (SWIFT), the main messaging system for cross-border payments. Correspondent banks play a role akin to a “central bank” in international transactions. They are trusted intermediaries of transactions on behalf of others. One problem is that correspondent banking leads to dominant positions of some banks in that essential service. There are economies of scale and network externalities here, hence the tendency for concentration and monopoly of power. Can digitalization help solve these problems? In principle, a network of interoperable central bank digital currencies (CBDCs) could be the solution. This would be a very different CBDC from the “retail version” described earlier. Its design would be different, along with the risks involved. We then discuss the geopolitics of money and the advantages and drawbacks of having an international currency that serves as reserve asset or invoicing instrument. At present, the dominance of the US dollar is unchallenged; neither the euro nor the Chinese yuan are plausible contenders. CBDCs are unlikely to change this status quo: The international role of currencies is determined by other factors, such as economic size, the stability of the currency itself, and the breadth of the underlying financial markets.

This chapter deals with banks as creators and stores of money. We first offer an overview of the economic theories developed in the 1960s and 1970s, where the role of banks depended on their function of transmitting monetary policy of the central bank to the rest of the economic system. We then discuss more modern interpretations that explain the role of banks based on their ability to resolve the informational asymmetry between investors (borrowers) and savers (lenders). Financial innovation raises the question of whether banks may disappear, replaced by financial markets and digital credit management techniques, including artificial intelligence, that minimize the need for human intervention. The experience of financial crises has given new life to reform proposals where banks would be split into a depositary institution providing payment services and an investment arm providing long-term credit and financing itself at long maturities. A related proposal, also aiming at reducing the risk of crises, would subject depository institutions to a 100 percent reserve constraint (the so-called Chicago proposal). At the end of the chapter, reasons are given as to why these proposals should be discarded because they would neither reduce the risk of crises nor give rise to a more efficient intermediation system.

This chapters describes the changes in monetary technology that occurred in the twentieth century. We start with a description of the Gold Standard, the global monetary system in the late nineteenth and early twentieth centuries. We characterize that system as a “mountain of paper on a plinth of gold”: gold has fundamental value but is rarely seen in circulation, whereas paper has no fundamental value, but represents it and circulates widely. Scientific discoveries and technological advances in that period resulted in the application of telecommunication to payment transfers and messaging. The first remarkable application was Fedwire, the interbank payment and settlement system created in the United States by the Federal Reserve shortly after its founding. We show how Fedwire worked and how it gave rise for the first time to a single US monetary system based in the dollar, where payments were “final” and irrevocable. The great step to digitalization occurred in the 1950s, with the computerized ledgers first introduced in the United States by Bank of America to handle checks, an arrangement soon adopted by all banks. This gave rise to an explosion of new payment means: credit and debit cards, and, after the rise of the internet in the 1990s, online banking and payment platforms and applications. We note that these new technologies have a common characteristic: They settle in bank books and ultimately in central bank books.

This chapter deals with “digital cash.” A central bank digital currency (CBDC) is a liability of the central bank toward a nonbank holder – an individual or a company. The technology, a web of interconnected computer terminals, is widely available. Central banks already host deposits from banks, so technically the CBDC would only be an extension. From an economic and financial standpoint, however, there is major difference, because the opening of the central bank balance sheet to the public would tend to lead to bank disintermediation. Banks extend the credit to households and firms; bank disintermediation therefore has a contractionary effect on credit and economy growth. This effect is stronger in financial crises, in which deposit holders tend to shift massively toward “safe assets.” A CBDC risks constituting a channel of deposit runs. Some central banks, therefore, plan to apply strict quantitative limits. There is a trade-off here: The stricter the limits, the lower the significance and usefulness of the CBDC. By and large, global central banks are still grappling with these problems, and research is ongoing. The limited experience of countries that have already launched a CBDC (China, Nigeria, Bahamas) is not positive. There has been very little demand for CBDCs because they provide very little value added over existing private means of payment. The jury is still out as to whether the most important central banks (Federal Reserve, European Central Bank, etc.) will actually go ahead and issue CBDCs.

This chapter discusses the interaction between the multiplicity of existing digital payment means (cards, apps, etc.), and the common element that all of them settle on bank and central bank ledgers. The combination of the two is discussed using a metaphor: a tree that has roots well planted in the soil (the central bank) and a top that divides itself into main branches (private depository institutions) and smaller twigs and leaves (payment cards, apps, platforms). A broad description of the existing payment universe is given, explaining how the different instruments work. The existing system essentially amounts to one in which payments are still made by banks, but their technical implementation is outsourced to other entities, belonging to the fintech sector. This leads to the conclusion that the alleged payment “revolution” is actually an “evolution”: Forms change but the elements that ensure the solidity and reliability of the system are unchanged. Finally, we provide an overview of the costs of different payment tools (cards, apps, platforms): both their overall cost and the way that cost is divided between service providers and users.

This chapter argues that the risks of deflation and inflation and the financial crises at the start of the twenty-first century led to a “crisis,” with declining public confidence in money and the institutions that govern it, primarily the central banks. We describe the alternation of stability ad instability phases in the last half century. The postwar stability phase based on the Bretton Woods system ended in 1971. The end of the Great Inflation in the early 1980s opened the way to another stability phase, lasting until the Great Financial Crisis of 2008–09. A trait of this period was the liberalization and expansion of global capital markets. In the subsequent period – 2008 to today –the boom of digital and crypto finance took place. This period coincides with unprecedented activism of central banks aimed at supporting economic activity, fending off the risks of deflation and, in Europe, preserving the cohesion of the euro under threat from sovereign debts and a fragile banking sector. Lax monetary conditions, inflation, debilitated banks – these factors created an easier ground for competitors to challenge a traditional financial sector in a state of crisis.

This chapter summarizes the content of the book, with some key questions in mind: Can money change radically as a result of digitalization? Can digital money make life better for the ordinary citizen? What are the risks involved? How should the boundaries between private sector and government be designed?

A new economic model begins to emerge. After the turn of the century, the worldview made of free markets, globalization, and liberal democracy met multiple crises. While the political pendulum swings back toward government control, economists and independent agencies should promote balance, mitigating the tendency toward the extremes of public opinions divided into opposite camps. The tendency toward a stronger presence of the government in the economy must be controlled; the perimeter of open and competitive markets should not be restricted to the point at which they lose their creative force. In this book we reflect on these developments through the prism of one of the most ancient and fundamental societal institutions: money. Money is a mirror of society; it reveals the drivers, contradictions, strengths, weaknesses, and failures of society at large. We build on two convictions. The first is the value of history, to tell us what money is, what purpose should it serve, and how best it should be designed and governed. The second is that the fundamental purpose and requirements of money do not change through time or space. What changes are the manifestations of money. Technology is part of this process and should be used to serve money’s purposes better.

This chapter starts with the standard economic classification of the functions of money, then broadens the analysis to consider other related functions. In economics textbooks, money is said to serve three purposes: as a means of payment, unit of account, and store of value. After briefly explaining these functions, we revisit five monetary reforms enacted in Europe in the last century, showing how the monetary functions have been affected by those reforms: Reichsmark stabilization of 1923; Deutschmark introduction in 1948; German monetary reunification of 1990; and the introduction of the euro in 1999 and euro banknotes in 2002. These examples show that when the continuity of these functions is severed, monetary instability may result. Next we consider the requirements necessary to a successful money. Among them are portability; indestructibility; homogeneity; divisibility; stability in value, and cognizability. After considering the relationship between money and the state, we discuss supranational monies and the extreme ideal proposed by early philosophers and some modern economists: a single money for the world. We conclude that disconnecting money from the state (or from polity in a broader sense) is technically possible but difficult in practice. Money without states and monies with a less-than-complete political entities attached are more likely to be fragile and subject to confidence crises.

This chapter and Chapter 9 deal with crypto assets: first cryptocurrencies specifically (this chapter) and then stablecoins (Chapter 9). We look at the structures underpinning cryptocurrencies to see whether they can fulfil the classical attributes of money, that is, as a means of transactions, store of value, and unit of account, plus the other more complex functions discussed earlier. This chapter offers a complete overview of how cryptocurrencies work: blockchains, miners, distributed ledgers, and so on. It recaps the history of Bitcoin and details the structure of the transactions and its informational characteristics. Then we rate the performance of Bitcoin: transaction speed, user costs, mining rewards, privacy, environmental cost. We also consider variants of the Bitcoin scheme, such as Ethereum, with the potential advantages of “proof of stake” as opposed to “proof of work,” from the point of view of private users and social costs. Finally, we deal with security aspects: fraud, technical failures, scalability, and so on. The real-world case of El Salvador, the only country that attempted an official use of Bitcoin, with disastrous results, is mentioned. The conclusion is that Bitcoin and its peers are unlikely to be used broadly either as means of payment or as stores of value. However, they may eventually establish an interesting niche as part of diversified portfolios.