The heart-wrenching pandemonium in Kabul coincided with the seeming tranquility of the annual central banking symposium at Jackson Hole, Wyoming. For the second year in a row, central bankers stayed home, amid fears of the resurgent coronavirus. Newspapers ran file photos of Fed officials strolling beside Jackson Lake.
Market participants are preoccupied with timing of the taper, the Fed’s plan to reduce its current high level of asset purchases. That is not beside the point, but neither is it the most important decision facing the Biden administration with respect to the conduct of economic policy. Who to nominate to head the Federal Reserve Board for the next four years? For a glimpse of the background to that question, a good place to start is a paper re prepare for a Bank of England workshop earlier in the summer
Central Bank Digital Currency in Historical Perspective: Another Crossroads in Monetary History, by Michael Bordo, of Rutgers University and the Hoover Institution, brings to mind the timeless advice of Yogi Berra: when you come to a crossroad, take it.
Bordo briefly surveys the history of money and banking. Gold, silver and copper coinage (and paper money in China) can be traced back over two millennia, he notes, but three key transformations can be identified in the five hundred years since Neapolitan banks began experimenting with paper money.
First, fiduciary money took hold in the eighteenth century, paper notes issued by banks and ostensibly convertible into precious metal (specie) held in reserve by the banks. Fractional banking emerged, meaning that banks kept only as much specie in the till as they considered necessary to meet the ordinary ebb and flow of demands for redemption, leaving them vulnerable to periodic panics or “runs.” Occasional experiments with fiat money, issued by governments to pay for wars, but irredeemable for specie, generally proved spectacularly unsuccessful, Bordo says (American Continentals, French assignats).
Second, the checkered history of competing banks and their volatile currencies, led, over the course of a century, to bank supervision and monopolies on national currencies, overseen by central banks and national treasuries.
Third, over the course of the seventeenth to the twentieth centuries, central banks evolved to take on additional responsibilities: marketing government debt; establishing payment systems; pursuing financial stability (and serving as lenders of last resort when necessary to halt panics); and maintaining a stable value of money. For a time, the gold standard made this last task relatively simple: to preserve the purchasing power of money, maintain a fixed price of gold. But as gold convertibly became ever-harder to manage, nations retreated from their fiduciary monetary systems in fits and starts. In 1971, they abandoned them altogether in favor of fiat money. It took twenty years to devise central banking techniques with which to seek maintain stable purchasing power.
As it happens, the decision-making at the last fork in the road of the international currency and monetary system is laid out with great clarity and charm in a new book by Jeffrey Garten, Three Days at Camp David: How a Secret Meeting in 1971 Transformed the Global Economy (2021, Harper) Garten spent a decade in government before moving to Wall Street. In 2006 he returned to strategic consulting in Washington, after twenty years at Yale’s School of Management, ten of them as dean.
The special advantage of his book is the way Garten brings to life the six major players at the Camp David meeting – Richard Nixon, John Connally, Paul Volcker, Arthur Burns, George Shultz, Peter Peterson, and two supporting actors, Paul McCracken an Henry Kissinger – and explores their stated aims and private motives. The decision they took was momentous: to unilaterally quit the Bretton Woods system, to go off the gold standard, once and for all. It was a transition the United States had to make, Garten argues, and in this sense bears a resemblance to Afghanistan and the present day:
A bridge from the first quarter-century following [World War II] –where the focus was on rebuilding national economies that had been destroyed and on re-establishing a functional world economic system – to a new emvironment where power and responsibility among the allies had to be readjusted . with the burden on the United States being more equitably shared and with the need for multilateral cooperation to replace Washington’s unilateral dictates.
What about Nixon’s reelection campaign in 1972? Of course that had something to do with it; politics always has something to do with policy, Garten says. But one way or another, something had to be done to relieve pressure on the dollar. “The gold just wasn’t there” to continue, writes Garten.
The trouble is, as with all history, that was fifty years ago. What’s going on now?
Read, if you dare, the second half of Michael Bordo’s paper, for a concise summary of the money and banking issues we are facing. Their unfamiliarity is forbidding; their intricacy is great. The advantages of a digital system may be manifest. “Just as the history of multiple competing currencies led to central bank provision of currency,” Bordo writes, “ the present day rise of cryptocurrencies and stable coins suggests the outcome may also be a process of consolidation towards a central bank digital currency.”
But the choices that central bankers and their constituencies must make are thorny. Wholesale or retail? Tokens or distributed ledger accounts? Lodged in central banks or private institutions? Considerable work is underway, Bordo says, at the Bank of England, Sweden’s Riksbank, the Bank of Canada, the Bank for International settlements, and the International Monetary Fund, but whatever research the Fed has undertaken, “not much of it has seen the light of day.”
Who best to help shepherd this new world into existence? The choice for the US seems to be between reappointing Fed chair Jerome Powell, 68, to a second term, beginning in February, or nominating governor Lael Brainard, 59, to replace him. President Biden is reeling at the moment. I am no expert, but my hunch is that that preferring Brainard to Powell is the better option overall, for both practical and political ends. After all, what infrastructure is more fundamental to a nation’s well-being than its place in the global system of money and banking?
(This is EP’s Final edition for August 29, 2021 . Its Bulldog edition, and a discussion thread for paying subscribers, can be found at davidwarsh.substack.com.)