26 Oct The nature of money

The nature of money is elusive. For centuries, economists and other scholars in the social sciences have debated the taxonomy and qualities of money, and while some areas of consensus have been reached, the concept of money remains slippery. Value and price are still very different things, as Antonio Machado once said, yet we often don’t even know what value is, while prices fluctuate too wildly to be taken seriously. Ultimately, the debate over value and its translation into money mirrors the debate over truth — which depends on the lens through which it is viewed, to paraphrase Clarín. Truth, like money, is inaccessible. Or rather, one can only approach it through faith. We will return to faith later.

This brief introduction leads us to the role of central bankers in our society — and, today, to one in particular: Mario Draghi, perhaps the last great central banker.

Without going back as far as Mesopotamia, where money first emerged — though there is no academic consensus on what motivated such an invention — I must anchor this short piece in 1971 in order to pay tribute to Mario Draghi, when the Nixon administration broke the convertibility of the US dollar into gold at a fixed exchange rate. Since the end of World War II, the international financial order had been based on what was called the “gold-dollar standard.” All national currencies fixed their exchange rate, with limited variability, against the dollar, which in turn was convertible into gold at a fixed rate.

Thus, the United States undertook to maintain a gold reserve backing its own dollar, while the rest of the world held dollar reserves to defend the exchange rate of their respective currencies. The entire model pivoted, beyond the dollar itself, on gold — a metal to which all human societies had historically attributed intrinsic value, despite its volatility, its dependence on economic cycles, and its limited usefulness for sustaining life: unlike cereal grains, which once served as money, gold cannot feed us; nor, unlike salt — another former form of money that gave rise to the word “salary” — can it preserve food.

Nevertheless, gold underpinned a system of prices and capital accumulation through the dollar, even after the pure “gold standard,” without any intermediate currency, began to crack during World War I and collapsed after the Great Depression of 1929. That crisis showed, among other things, that it was impossible to manage economic cycles if money was tied to an asset — gold — whose supply was subject to the same swings as the economy itself.

In a sense, humans wanted to have faith in gold as a stable, intrinsic store of value — a way to order all other prices — but that faith was lost once it became clear that gold, too, suffered the same fate as other assets during economic cycles and, worse still, made it harder to recover from financial crises. But let us not dwell further on that.

Returning to 1971: once the United States renounced guaranteeing the convertibility of its currency into gold, the dollar came to depend solely on faith — that is, on the confidence of its holders in its purchasing power, its value, and its acceptance by social agents. Thus was born fiat money — money based purely and exclusively on faith. And after the U.S., all other currencies followed. There would be no more gold or silver reserves in central banks to convert banknotes into precious metals — the logic once believed to bring stability and order to monetary systems.

However, the same problem that brought down the gold and gold-dollar standards could just as easily bring down fiat money. The rise in public spending tied to the Vietnam War and Lyndon B. Johnson’s “Great Society” programs led markets to suspect that the Federal Reserve no longer held enough gold to back all the dollar bills it had issued. That distrust undermined the dollar’s value, forcing the U.S. to issue debt in German marks and ultimately leading to the breakdown of the gold-dollar system. If the U.S. government had already “rigged the game” by issuing more dollars than it had gold to support, what could that same government do if it could now issue money with no backing at all?

This realization — which materialized in high inflation and the pro-cyclical effects of election years (as governments printed money to boost spending ahead of votes) — gave rise to a new monetary paradigm: to prevent collapse, fiat money required central bank independence and a public inflation target to anchor the currency’s value.

That model, in turn, demanded central bankers who stood above politics — figures occupying a higher plane, almost sovereigns anointed by the finger of God — in whom citizens could place their trust without bias. These central bankers became “cardinals” of a new church, founded on faith that must remain incorruptible, eternal guardians of the value of the currency underpinning society itself. Mario Draghi is the finest example of that secular religion — and with a single phrase, “whatever it takes; and believe me, it will be enough,” he halted the greatest financial assault ever mounted against our single currency, the euro.

Since then, social media and new interpretations of transparency have also reached central banks, burying their mystique and diluting their authority. The quiet word has been sacrificed to the frenzy of opinion, with central bankers eager to play political roles ill-suited to their cardinal’s robes. A new tone for an age in which digital private currencies — speculative virtual instruments, sometimes even issued by presidents like Trump — proliferate.

It should come as no surprise, then, that I consider Mario Draghi the last great central banker — a man who, looking toward the horizon, I believe will be very hard to match.

Congratulations and thank you, Mario Draghi. Ora pro nobis.