Public trust in stable money lies at the heart of robust economic development. As monetary stability is no longer the first priority for central banks, trust and economic prosperity are at risk.

Without trust in society’s institutions and in the rule of law, economic prosperity is impossible. All of us, as economic actors, must feel confident that our property and the rewards of our labour are protected by a legal framework that is fair, impartial and transparent. Without this guarantee, economic development will simply stagnate. 

But there is another requirement for a society’s robust economic development—a stable, equable means of exchange, namely, money. Only when we trust that we can fairly exchange our property or our labour for the goods and services of others, both today and tomorrow, will we strive to do our best and thus advance society’s standard of living across the board.

Trusted, Stable Money Creates a Virtuous Circle

Stable money is not only necessary for the exchanges we make in our daily lives today but also incentivises us to save for the future. Saving for retirement only makes sense if we can feel confident that the money we put aside will retain its real purchasing power in the future. Collectively, our savings provide the pool of funds that finances others’ investments. And these investments increase productivity. Stable money, as such, generates a virtuous circle that improves all our lives.

This is not theory. Economic history teaches us the value of stable money over and over again. From Aristotle’s observation that money is anything that is generally accepted as payment for goods and services and repayment of debts — that is, that money is a convention or institution of a society — to today’s efforts by independent central banks to retain the purchasing power of their currencies, examples of the importance of stable money are legion, as are the lessons of what happens when people cannot trust their money. 

There have been many experiments with money over the centuries. The first largescale experiment with paper money was made in France by John Law after the death of Louis the 14th. Government debt, which was vast, was financed by the printing press, ultimately creating the first stock market bubble, which was followed by a mighty crash and runaway inflation. Later, in the nineteenth century, another approach to assure the stability of money was tried, linking it to precious metals. This also yielded dismal results, with periodic episodes of deflation suffocating economic production, wages and demand and contributing to the Great Depression of the 1930s.

One thing we have learned is that the responsibility for creating monetary stability should not be in the hands of politicians. Rather, this task should be overseen by independent institutions whose only concern is the stability of our money. For decades now we have enjoyed the benefits of such independent central banks. Trust in institutions like the Federal Reserve, the Bundesbank and the Swiss National Bank has allowed us to build a dynamic, global economic system. For over 40 years inflation has been steadily declining. And price stability has also been achieved. Economic development around the world has been thriving—until recently.

When Central Banks Ignore Their Mandate, Public Trust Erodes

Ironically, we observe, this monetary stability appears to have come with the heavy price of undermining the stability of the financial system itself. Low inflation and low interest rates have led to massive asset price increases. This has occasionally led to extremely high volatility on financial markets. Nowhere was this more evident than in the 2007-8 financial crisis. Low interest rates and easy monetary policies had led to enormous real estate bubbles in most industrialised countries. And when those property bubbles burst, they threatened to take down the entire global banking system. Stock prices quickly tumbled after the first tremors were felt and fears of a global depression were rampant.

The only institutions that could prevent utter economic collapse were the central banks, ignoring the fact that they themselves were at least partly responsible for creating the mess in the first place. Responding to the traumatised banking system, central banks recklessly lowered interest rates ever further and printed ever more money, flooding the shaken economy with cash to prevent a total economic meltdown. Their apparent success at meeting the crisis left central bankers brimming with self-confidence. In the months and years that followed, the world’s central bankers enjoyed near-universal admiration. After all, they saved us, didn’t they?

But only a very fine line separates self-confidence from hubris. Globally, the money supply simply exploded. Stable money was no longer a priority for central banks; a stable financial system was the paramount goal. Prudent forward-looking central banking was discarded, replaced with an attitude of “whatever it takes.” Why worry when you can walk on water? Unfortunately, this was still the attitude when the covid-19 pandemic struck. Superheroes to the rescue! And the remedy was the same: the money supply was again wildly inflated; this time not to finance the banking system, but to staunch the bleeding from enormous public deficits.

In short, central banks are fighting yesterday’s war with yesterday’s weapons and the outlook for today’s battle is not good. Any student of economic history knows how this will end: John Law 2.0.

Independent central banks were created to break the link between political expedience and monetary policy. When central bank ignore their mandate to provide society with stable money, our trust in these institutions will deteriorate. Once inflation raises its ugly head, as surely it will, our trust in our central banks and in their money will evaporate. 

We urgently need to rethink the institutions tasked with assuring the stability of our money. Otherwise, the next economic crisis will shatter our highly evolved economies and with it our prosperity.