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  5. Monetary Innovations in the History of Economics
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Monetary Innovations in the History of Economics

Paper Session

Saturday, Jan. 4, 2025 12:30 PM - 2:15 PM (PST)

The Marker Union Square San Francisco, Bogart
Hosted By: History of Economics Society
  • Chair: Nina Eichacker, University of Rhode Island

A Friedmanian Reading of Monetary Policies in the Great Recession

Sylvie Rivot
,
University of Haute-Alsace

Abstract

Bearing in mind that Friedman's predictions on the relationships between nominal output and the quantity of money depend on the monetary aggregate under consideration (M1, M2 or M3?), the paper offers a reading of the Great Recession (2007-2009) through Friedman's lens. The first point worth examining is the period probably been mislabeled as the "Great Moderation". Just as in the 1920s, after a fairly long period of inflation that seemed to be under control, when the rate of money growth started to fall, the first impact was on the prices of financial and real assets rather than on the prices of goods and services.
Next, we investigate the comparison between the first crash of 1929, which led to the Great Depression, as that dramatic event is now understood, and the crash of 2007, which did not repeat the same catastrophe. It seems to be seldom noticed that the policy reaction of the US Federal Reserve, which led to the explosion of the Fed's balance sheet, did not correspond to a rise in the money supply. Thus, the attempt to avoid credit defaults played a much more important role than the desire to maintain a constant money supply, as Friedman would have demanded.
To conclude, examining the Great Recession through Friedmanian lenses means, on the policy side, first considering what is at stake in terms of central banks' ability to maintain stable monetary growth. On the theoretical side, it brings back to the fore the relevant monetary theory of macroeconomics, in particular the distinction between money and finance.

Discretion and Liquidity: A Minskian Perspective on Decentralized Finance

Daniel H. Neilson
,
Bard College at Simon's Rock

Abstract

In early work on the role of a central bank in responding to financial instability, monetary economist Hyman Minsky wrote that "[i]n its very essence the central bank is the operator of the discretionary element in the financial system" (Minsky 1964, p. 271). Discretion—the choice of when and how to act—is, under the arrangements of financial capitalism, tantamount to liquidity—the choice of when and how to spend. In the bank-based payment system, the central bank has a special relationship to discretion and liquidity, as issuer of the means of final settlement, and it is this relationship that allows the central bank to serve as lender of last resort, even with no other actor can act on their own discretion. Recent crypto developments, particularly in the space of decentralized finance, have explicitly sought to reduce or eliminate discretionary action in financial relations. This impulse continues to guide DeFi and even perhaps CBDC developers, without apparent awareness of the connection between liquidity and discretion. The novelty of discretionless programmable contracts notwithstanding, liquidity remains the central issue that finance must solve—whether TradFi or DeFi. Discretionless finance therefore runs the risk of failing to anticipate, or even of exacerbating, liquidity events.

The Relevance of Keynes for Understanding Contemporary Monetary Innovations

Jacopo Maria Magurno
,
University of Milano

Abstract

This paper explores the potential of drawing on Keynes’s theoretical and conceptual corpus to critically assess current evolutions of the monetary system. To do so, it analyses various monetary innovations developed after the 2007-08 global financial crisis, as central banks were forced to innovate their operations to overcome the limits of the existing monetary system. The first part of the paper focuses on the notion of "convention" developed by Keynes in Chapter 12 of his General Theory to shed light on unconventional monetary policy interventions, such as quantitative easing, forward guidance, negative interest rate policies, and the creation of new standing facilities. These interventions are interpreted as attempts to re-establish, both domestically and internationally, the convention on which the regular functioning of financial markets is based. The second part of the paper applies Keynes's concept of international clearing to multi-currency cross-border Central Bank Digital Currency (CBDC) arrangements to explore how these may contribute to act not just as a payment system but as a source of funding for temporary balance of trade disequilibria, providing an alternative to the use of the dollar in international settlements. The reference to Keynes’s theoretical framework contributes not only to highlight the underlying trends in contemporary monetary innovations, but also to suggest paths for further reforming the monetary architecture to face present challenges.

Hayek’s Dream Meets Distributed Ledgers: Asset-referenced Stablecoins as Commodity Reserve Currencies

Angela Ambrosino
,
University of Torino
Luca Fantacci
,
University of Milano

Abstract

Hayek’s notion of currency competition is frequently evoked to describe a plausible outcome of the proliferation of cryptocurrencies, and more specifically of payment tokens. The underlying distributed ledger technology (DLT), conceived to allow transactions “without a trusted third party”, may indeed appear, in this perspective, as the enabling technology for the Denationalization of money. However, DLT can be used to create a wide variety of cryptocurrencies, with very different implications in terms of monetary stability. In this paper, we focus specifically on “asset-referenced tokens” (ART), a relatively neglected typology, which yet has several significant embodiments and is explicitly envisaged by the recent EU regulation MiCA (Markets in Crypto-Assets). We offer a survey of ARTs backed by commodities and suggest that they may be viewed as a form of money that embodies the principles of monetary reform supported by Hayek and aimed at establishing a commodity reserve currency under a regime of currency competition.

Discussant(s)
Jacopo Maria Magurno
,
University of Milano
Carlo D'Ippoliti
,
Sapienza University of Rome
Nina Eichacker
,
University of Rhode Island
Daniel H. Neilson
,
Bard College at Simon's Rock
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • B3 - History of Economic Thought: Individuals