On money, debt, trust and central banking

BIS Working Papers  |  No 763  | 
11 January 2019



The paper discusses the properties of a well functioning monetary system, in both its day-to-day operation and the longer run. It defines a monetary system as money plus the mechanisms for the execution of payments. It draws on theory, history and practical experience.


The paper provides a framework to paint a coherent picture of a broad set of issues typically analysed separately in economics. The framework covers money, payments, monetary operations, cryptocurrencies, money neutrality, free banking, inflation and the relationship between monetary and financial stability. The paper highlights the role of trust-building institutions, notably central banks. It draws on the lessons of the history of money, credit, banks and central banks.


Treating the issues separately obscures important relationships. Trust is the foundation of a well functioning monetary system. The distinction between money and credit, both underpinned by trust, is overdone. A demand-determined, elastic supply of credit is essential for the system to operate at all and to set interest rates. But in the longer run, too elastic a supply can undermine monetary and financial stability. The notion that the monetary base, rather than the interest rate, is the system's ultimate anchor is incorrect. For similar reasons, the same is true of the common view that changes in the monetary base drive the supply of money. As concepts, monetary and financial stability are joined at the hip, but the processes underlying them are quite different. As regards price stability, it is not appropriate to think of the price level as the inverse of the price of money. The common view that, in the long run, money affects only prices is highly suspect. When inflation is low, thinking of it as distinct from relative price changes muddies the waters. As regards financial stability, the focus should be on the forces that generate financial booms and busts. Ensuring lasting monetary and financial stability is the main challenge ahead. The current monetary system, with prudential regulation and central banks at its core, is not perfect and must be improved. But it provides the best basis on which to build further. Cryptocurrencies are not a viable alternative.



This essay examines in detail the properties of a well functioning monetary system - defined as money plus the mechanisms to execute payments - in both the short and long run, drawing on both theory and the lessons from history. It stresses the importance of trust and of the institutions needed to secure it. Ensuring price and financial stability is critical to nurturing and maintaining that trust. In the process, the essay addresses several related questions, such as the relationship between money and debt, the viability of cryptocurrencies as money, money neutrality, and the nexus between monetary and financial stability. While the present monetary system, with central banks and a prudential apparatus at its core, can and must be improved, it still provides the best basis to build on.

JEL classification: E00, E30, E40, E50, G21, N20

Keywords: monetary system, money, debt, payments, trust, monetary stability, financial stability, central bank