As the world races toward digital currencies, with over 130 countries now exploring their potential, history offers vital insights into what the future might hold for crypto. This month, China’s central bank revealed its digital currency, the e-CNY, has already been used for transactions worth 7 trillion yuan, or nearly $1 trillion. Proponents of these new forms of money believe a combination of smartphones, cryptography, and computing power will transform the financial system.
However, the story of money’s evolution, as highlighted in a recent study by economists Adam Brzezinski, Nuno Palma, and François Velde, offers some cautionary lessons. While the allure of new technology is strong, history reminds us that many of today’s innovations echo the financial systems of the past.
Central Banks and Public Accounts: A Return to the Past
The concept of central-bank digital currencies (CBDCs), where the public can hold accounts directly with the central bank, might seem groundbreaking. Yet, as several economists note, this idea is not entirely new. In the 19th century, both the Bank of England and the Bank of Spain took deposits from the public. In fact, in 1900, the Bank of Spain held over half of the country’s current accounts.
Such historical precedents suggest that while digital currencies may seem like a radical departure from traditional banking, they are in many ways a return to earlier practices. The separation between the physical and digital forms of money might feel innovative, but the centralisation of monetary control has long been a hallmark of financial systems.
Crypto Enthusiasts Face Historical Reality
One key ambition for many crypto enthusiasts is to liberate money from government control, but history shows that monetary policy—state manipulation of money—has been around almost as long as money itself. Even in eras where coins were made of precious metals like gold or silver, governments routinely altered their weight or purity to control their value.
This manipulation often meant that the face value of a coin could differ from the actual worth of its material. As Brzezinski and his co-authors point out, until the 19th century, coins often lacked a face value. Instead, the unit of account—the standard by which prices were set—was sometimes an old, discontinued coin, creating what historian Carlo Cipolla termed “ghost money.”
Learning from France’s Inflation Experiment
The study of monetary history also provides sobering lessons for policymakers experimenting with new forms of money. In the 1720s, France’s government attempted to combat inflation by cutting the value of its coins by 45%. The goal was to lower prices. Yet, despite the drastic change, prices were slow to fall. “Everyone is so accustomed to sell dearly that no one can bring themselves to lower their prices,” reported one observer at the time. The ill-conceived policy led to an industrial recession, with a 30% reduction in active looms.
This episode serves as a cautionary tale for today’s central bankers. Abrupt shifts in monetary policy, even with the best intentions, can lead to unintended consequences. Such historical examples suggest that while digital currencies may be poised to revolutionise the financial system, they are unlikely to be immune from the challenges that have plagued monetary policy for centuries.
Natural Experiments in Monetary Policy
While randomised trials in economics are difficult, history occasionally provides what Brzezinski and his colleagues call “natural experiments.” One such experiment unfolded in early modern Spain when ships carrying precious metals from the Americas were lost to hurricanes, privateers, or enemy navies. These disasters, which reduced Spain’s money stock by about 4% on average, had a measurable impact on the country’s economy. Credit dried up, consumer prices adjusted slowly, and sheep-flock sizes declined by 7%.
These historical “experiments” underscore the fragility of economies that rely too heavily on finite physical assets, such as precious metals. As the world transitions to digital currencies, the lessons from these natural experiments remind us that new forms of money may bring risks that need careful management.
The Future of Money: Digital, Yet Familiar
While the future of money may involve a shift to entirely digital forms, history suggests that the underlying dynamics of money will remain unchanged. John Law, a visionary Scottish banker in the 18th century, attempted to replace metal-based currency with fiat paper money in France. His experiment ended in runaway inflation. Today’s digital revolution may similarly transform the form of money, but it won’t eliminate the fundamental challenges of managing its value.
As Brzezinski and his co-authors caution, it is far cheaper to learn from the mistakes of the past than to repeat them in the present.
