PDF Summary:Value(s), by Mark Carney

In Value(s), Mark Carney explores the evolution of economic value theory, from historical perspectives focused on objective value to contemporary subjective value theory. He examines how shifts in value perceptions impact markets, financial systems, and societies. Carney discusses the rise of modern currency and central banking, scrutinizing principles like trust and resilience that underpin stable monetary systems.

The book also analyzes emerging fintech innovations like cryptocurrencies and stablecoins. Carney considers how aligning societal values with changing financial frameworks can address risks while unlocking new potential benefits. Throughout, he emphasizes the need for clear communication and public oversight as financial innovations reshape how we perceive and measure value.

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Context

• The historical context and evolution of economic theories encompass a progression from ancient philosophers like Aristotle to medieval theologians known as canonists, who emphasized moral dimensions in commerce. This evolution continued with the Physiocrats in the 18th century, who viewed land as the primary source of value in the economy. Subsequently, figures like Adam Smith and David Ricardo formalized theories such as the Labor Theory of Value and comparative advantage, shaping modern economic thought. Lastly, Karl Marx critiqued capitalism, emphasizing the role of labor in value creation and predicting societal instability within the system.
• Adam Smith is known for his foundational work in economics, particularly his concept of the "invisible hand" guiding markets. David Ricardo expanded on Smith's labor theory of value and introduced the idea of comparative advantage in trade. Karl Marx critiqued capitalism, focusing on the exploitation of labor and the inherent instability within the system.
• Subjective value theory posits that the value of a good or service is determined by an individual's personal assessment of its utility or usefulness. Marginal utility is a key concept within this theory, stating that the satisfaction or benefit gained from consuming each additional unit of a good tends to decrease as more units are consumed. This principle helps explain why certain goods, like diamonds, can have higher value than essential goods like water, as it considers not just the intrinsic qualities of the goods but also individual preferences and scarcity. Subjective value theory and marginal utility are foundational in modern economics, shaping how we understand consumer behavior and market dynamics.
• Welfare economics is a branch of economics that focuses on how to best distribute resources for the overall well-being of society. Utilitarian philosophy, influential in welfare economics, emphasizes maximizing overall happiness or utility in decision-making, often through cost-benefit analyses. It considers the consequences of actions on the well-being of all individuals in society, aiming for the greatest good for the greatest number. Utilitarianism seeks to optimize outcomes by weighing the benefits and costs of different choices to promote the most favorable overall result.
• Determining the worth of goods without established market prices poses challenges because these goods do not have clear values based on existing market transactions. Factors like the inherent worth of human life or the value of environmental resources are not easily quantifiable in traditional economic terms. This difficulty arises due to the subjective nature of these goods, which do not have direct market equivalents for comparison. The concept of the 'knowledge problem' highlights the limitations of relying solely on market-based valuations for goods that lack established market prices.

The evolution and advancement of the financial system.

Currency functions as a means to assign value to goods and services, though this feature is not intrinsic. The establishment, distribution, upkeep, and supervision hold paramount importance. In this section, the author explores the evolution and detailed history of frameworks related to money and finance, scrutinizing different methods of currency supervision and the relationship between government regulation and business administration. The author emphasizes the fundamental principles such as trust, integrity, transparency, as well as solidarity and resilience, which are essential for the stability of currency and examines the ways in which new financial technologies could be more closely aligned with the priorities of society.

Currency has taken on different shapes and functions over the course of history.

In traditional economic theory, value is determined through its association with different elements. Money functions as a measure for comparing value, enabling smooth and uniform transactions across the various interactions within the economy. Technological progress and the creation of novel trading routes have likewise altered the fundamental nature of currency. The earliest forms of currency transitioned from the massive Rai stones of Yap to the mulberry paper banknotes of Imperial China, eventually giving way to metal-backed monetary systems, with silver and subsequently gold underpinning many countries' financial frameworks for an extended period. The late 19th and early 20th centuries saw a gold exchange system that was unparalleled in efficiency, but it eventually yielded to the changing forces of political, social, and economic environments. In modern society, most advanced economies operate under a system where the publicly issued currency's worth is anchored in the trust bestowed upon key institutions, with the primary one being the central bank.

Money has transitioned from a commodity-backed system to one reliant on fiat currency.

Currency functions as an acknowledged mechanism within social structures. The face value of various forms of currency, from ancient to modern, exceeds their intrinsic value. The production cost of a £20 polymer note is just a few pennies. Consequently, there are substantial motivations to degrade currency, essentially creating wealth without any foundational economic substance.

Currencies issued privately have frequently been found to be unsatisfactory. Throughout history, a multitude of private currencies, ranging from the initial banknotes in Europe to the uncontrolled 'wildcat' currencies of early America, were in circulation, lacking adequate oversight or backing from a central bank. Historically, such monetary units have invariably fallen due to excessive issuance, leading to their inevitable demise.

Governments have traditionally not been as effective as private institutions in maintaining the stability and worth of their currency for the populace. From the reign of Augustus to that of Marcus Aurelius, the amount of silver in Roman denarii was reduced by twenty-five percent. Henry VIII was also involved in the intentional devaluation of the currency throughout his reign.

The evolution of our perception of currency value has progressed from a period when it was distributed by private entities without any collateral, through the challenging times of its depreciation, to an era where it is bolstered by assets such as gold, and ultimately to the contemporary fiat money system, which is overseen by independent bodies with specific duties.

Money functions both as a method for maintaining wealth and as a standard for evaluating goods and services, in addition to facilitating the completion of transactions.

Money is traditionally defined by its function. Adam Smith described three key roles of money in his influential book, "The Wealth of Nations."

A method for safeguarding monetary resources. A mechanism intended to transfer purchasing power for goods and services from now to a future time. Money acts as a mechanism that simplifies the process of conducting transactions. A mechanism employed for the exchange of products and services. A method for assessing the worth of goods and services. A framework established to evaluate the value of particular products, financial savings, or credit facilities.

An asset must have the capacity to enable transactions in order to be recognized as a unit of account. For trade to be conducted efficiently, it is essential that a broad consensus exists among people recognizing it as a dependable repository of value. The value we assign to a currency, be it made from different materials or encoded digitally, hinges on our expectation that it will be equally esteemed by others, highlighting the critical role of collective trust and agreement in recognizing a currency's validity. Money serves as a universally acknowledged measure of value.

Money has undergone numerous transformations, evolving from massive stone discs to paper currency, culminating in the monetary system established by the Bank of Amsterdam.

Various forms initially gave rise to currency. Coins were first minted during the 7th century BCE, a time that coincides with the Lydian Empire's existence. Financial instruments were utilized to conclude transactions. The transition from the hefty, immobile stones used as currency on the island of Yap to the mulberry paper money of the Tang dynasty paved the way for the development of metal coinage and paper bills.

Banknotes, which first appeared in seventh-century China, became commonly used throughout Europe as the seventeenth and eighteenth centuries unfolded. Banknotes, once commonly issued by private firms, are now chiefly produced by organizations known as central banks, entities that have earned considerable trust from the public. The Bank of England, which was founded in the 1600s, started to issue paper currency and experienced an expansion of its roles as the financial system grew in complexity.

The legacy of the Amsterdam Bank highlights the necessity for a currency's stability to be founded on a distinct purpose, efficient management, and transparency. The institution offered a secure location for individuals to keep their money and went on to issue standardized deposit notes that facilitated transaction processes. The reliability of the currency was derived from its backing by valuable metals, including gold and silver. The bank, by extending credit to market participants, assumed a function that would subsequently become a defining characteristic of a central bank: serving as the principal source of emergency funding. Unfortunately, the financial institution fell victim to its own hubris, engaging in risky off-balance sheet financial endeavors and extending too much credit to a major 17th-century trading corporation. The bank's stability was swiftly undermined as the actual hazards in its financial reports were exposed, resulting in a frenzy that ended with its failure in 1790.

Essential to the stability of a monetary system are significant inputs from both governmental bodies and commercial organizations.

To maintain the reliability of the monetary system and to prevent the common risks of currency devaluation, two key approaches are utilized: tying the currency's worth to a tangible asset or ensuring its steadiness with the backing of reputable institutions. The system's longevity and widespread adoption across numerous generations were largely due to the trust its users placed in maintaining its foundational principles. Central banks have established themselves as the most effective protectors of currency value when they operate in alignment with their fundamental objective of meeting the populace's requirements.

The implementation of the gold standard served as a safeguard against the devaluation of currency.

Coins initially served as a means of trade, which over time evolved into a system where gold coins, often accompanied by silver ones, became a common method for executing monetary exchanges. Nations transitioned from using coins to issuing banknotes, which were initially and increasingly backed by precious metals, particularly gold, in some countries. The widespread alarm caused by the fear of a French incursion in 1797 led to numerous private banks failing and jeopardized the Bank of England's stability. William Pitt the Younger, serving as Prime Minister, took action to suspend the convertibility of paper currency into gold to preserve confidence in banknotes. For two decades, there was an active debate regarding the advantages of reinstating the ability to exchange currency. David Ricardo and Sir Henry Parnell, prominent advocates in the Bullionist discourse, argued that the refusal of banks to convert banknotes into gold could result in the overproduction of notes, thereby depreciating the currency and causing inflation. Ultimately, the gold standard was reinstated in 1821, marking the victory of the Bullionist perspective. In 1844, legislation was passed requiring that the Bank of England's currency issuance be fully backed by gold reserves, with a limited exception for a certain amount of notes not backed by gold.

As the preeminent economic and commercial force of the era, Britain extended the influence of the gold standard across its empire and beyond, solidifying its role as the key monetary system worldwide. During the latter part of the 1800s, the United States and several other nations transitioned from their earlier bimetallic currency system to embrace the worldwide standard based on gold.

The Bank of England underwent a transformation from The functioning of the global financial framework is underpinned by an essential support mechanism.

During the 19th century, the Bank of England's functions grew to encompass duties commonly associated with a modern central bank. In 1844, following a progression of more restrictive regulatory actions, the Bank obtained the sole privilege to circulate paper currency in England and Wales. As the complexity of the United Kingdom's private banking system grew, the Bank emerged as a crucial source of emergency liquidity. The Bank assumed responsibility for maintaining stability in the realms of finance and currency.

The Gold Exchange Standard was emblematic of a system built on confidence, open communication, and a robust commitment to resilience and collaboration.

The worldwide commitment to the gold exchange standard demonstrates the power of a shared social convention rooted in collective trust. Countries adopted it because of the UK’s dominance - it was the world’s premier commercial and financial nation, providing capital, markets and a stable, reserve currency. Initially, the system operated efficiently because major countries followed the agreed-upon regulations, collaborating to synchronize their interest rate policies, which in turn maintained confidence and deterred speculative attacks and potential devaluations of currency that could destabilize the system.

The operation of the gold standard embodied more than just the application of a core principle. The initiative's success hinges on a broad array of principles. The stability of the gold standard and the trust placed in central institutions were largely dependent on their commitment to maintaining the system, their accountability for the results, and the uniformity of their conduct. The gold standard established and upheld a significant level of openness, both within the country and across borders. The system's integrity fostered a sense of global unity, enabling nations to act in concert when faced with economic and financial disturbances. The duration of the gold standard was due to the continuous trust it upheld.

The collapse of the gold standard was shaped by the prevailing social norms and the political landscape.

Public disillusionment with the gold standard diminished trust, thereby undermining confidence and reducing the resilience of the economic framework. The persistence of these occurrences for an extended period can be attributed to inadequate supervision from governmental entities. The policies governing currency that were necessary to uphold the gold standard predominantly affected those with lower incomes, who had little influence over policy-making due to their lack of voting rights. The expansion of voting rights led to a significant shift in the balance of power. The rise of political factions championing the working class resulted in heightened calls for better wages, which in turn placed additional strain on the economic framework, challenging the capacity of central banks to manage wage inflation or ensure the stability of currency.

As trust in the prevailing economic system diminished, countries started to pursue remedies for their own monetary challenges rather than solving these issues via international cooperation. The endurance of the gold standard depended on the specific social, political, and economic conditions that existed when it was established remaining in place.

The contemporary monetary system relies on a centralized currency that is managed by autonomous central banks with defined objectives and is subject to democratic accountability.

Learning from the collapse of a system where currency was backed by gold, the majority of nations have adopted a monetary system where currency issued by the government is not backed by physical commodities. This currency's worth is not anchored in physical commodities like gold but is instead dependent on trust in institutions that prioritize the public good, especially those tasked with its upkeep.

Central banks, including the Bank of England, function within defined boundaries. The community bestows upon them their power, and they are accountable for how they employ this authority to achieve the economic goals deemed important by society. Central banks primarily have the responsibility to maintain the currency's stability and resilience.

Central banks have the fundamental goals of maintaining the currency's stability and protecting the robustness of the financial system, which are both crucial to preserving the public's confidence in the country's monetary system. The stability of a currency's value is maintained by producing banknotes of superior quality. A resilient financial system is essential for maintaining financial stability, one that can uphold assistance to the nation's households and businesses not only in times of economic growth but also through economic downturns.

To maintain public confidence, central banks should actively engage in clear communication, partake in local initiatives, and initiate educational programs.

Central banks are required to do more than just execute suitable strategies. They should further participate in open and honest communication, explicitly explaining how they use their power to achieve their stated objectives. The bank must engage in dialogue with the public, clarifying its decisions to secure their support instead of just making announcements on its own. While at the helm of the Bank of England, Carney and his team greatly enhanced their interactions and communications with various segments of the UK populace and academic bodies, making the complexities of finance more understandable and clarifying the central role of the institution in maintaining economic steadiness. Openness and engagement are now fundamental components of the modern monetary framework.

Innovative financial developments have had significant effects.

A significant achievement is the creation of a cohesive financial structure, underpinned by central banks that give precedence to the well-being of society. We must not view this as the unchangeable conclusion of historical progression or see it as immutable in future times. The characteristics of currency are ever-evolving, with new technologies and shifts in the economic landscape leading to fresh advancements. It is incumbent upon central banks and regulatory bodies to ensure that the public interest is at the forefront when supervising the progression of financial innovation. In today's world, it is of utmost importance that any currency introduced by either governmental bodies or private entities maintains its value, enables trade, and provides a reliable standard for economic transactions, all the while adhering to the tenets of resilience, transparency, cooperation, and ecological responsibility.

Digital monetary platforms significantly enhance the convenience and effectiveness of conducting transactions.

The history of financial innovation is extensive. The substantial progress in global commerce over the last millennium is likely due to the evolution of banking systems that maintain minimal reserves from deposits and the pivotal innovations in financial markets enabled by the invention of double-entry bookkeeping and the introduction of a system for recording financial transactions. The expansion of Adam Smith's concept of the invisible hand, driven significantly by the banking industry, was a key catalyst for the economic dynamism that sparked the onset of the Industrial Revolution.

The swift progression of financial technology, often referred to as fintech, is hastening the transformation of monetary and financial frameworks, influenced by substantial breakthroughs in encryption, mobile technology, the creation of algorithms, and the rapid expansion of computational capabilities.

Mark Carney posits that the rapid progression of technology could herald a significant transformation in the financial industry, expanding its scope to include a wider demographic by offering cost-effective, reliable, and secure financial services. Businesses can benefit from significant reductions in transaction costs both domestically and across international boundaries, while seamlessly integrating payment systems with smart contracts and generating new types of financial assets. The nascent financial structure shows promise of exceeding the previous one by demonstrating greater resilience, more in harmony with principles of environmental preservation, and exhibiting increased vitality. Those leading the transition into the modern financial epoch should draw upon lessons from the past.

Cryptocurrencies face significant challenges in serving as a form of currency and adhering to essential principles.

Cryptocurrencies represent a groundbreaking shift away from traditional government-issued currency systems, exemplifying a new model of digital currency that operates on tokenization. A multitude of computers support the networks that facilitate the operation of digital currencies like Bitcoin, ensuring that no single entity can dominate them.

The intriguing aspect of cryptocurrencies lies in their autonomous characteristics. Advocates maintain that digital currencies, like Bitcoin, are the contemporary counterparts to gold. Bitcoin earns confidence compared to conventional centralized currencies because of its unchangeable supply, which counters the historical trend of currency devaluation, and due to its autonomy from the fluctuations associated with private banking entities, as well as its preservation of user privacy, thereby avoiding the watchful eyes of tax authorities and law enforcement. In an increasingly fragmented and networked world, there is a belief that cryptocurrencies, underpinned by blockchain technology, might leverage these nascent efficiencies.

In terms of functionality, cryptocurrencies do not offer efficiency in transaction processing. The instability of their worth is evidenced by its unpredictable fluctuations, which can lead to significant increases or decreases in value, underscoring their unreliability in maintaining wealth. The price of Bitcoin has been up to ten times as volatile as that for sterling. The significant variations in its price can also be attributed to its lack of inherent worth or any form of external support. Individual perspectives or whims entirely dictate the value.

So far, cryptocurrencies have not served efficiently as a method for conducting transactions. Cryptocurrencies are seldom used as a method of payment for goods and services transactions. A handful of merchants are open to accepting them. Transactions are not only sluggish but also come with significant costs.

Cryptocurrencies are not utilized in the same manner as conventional units of account. Due to their substantial volatility, cryptocurrencies are seldom relied upon as dependable benchmarks for valuation, hindering their ability to function as a stable measure of value.

Digital currencies like Bitcoin generate significant carbon emissions, leading to a notable effect on the environment. The energy consumption, exceeding that of an entire nation like Argentina, offers a substantial opportunity that has remained under the radar in the global effort to tackle climate change.

While stablecoins offer potential benefits, they also present risks that require comprehensive regulatory measures and careful oversight by authorities.

Stablecoins could have more promise than cryptocurrencies because they can preserve a steady value through linkage to a foundational asset. Stablecoins, a type of cryptocurrency, are designed to maintain their value by being linked to underlying assets, which may include traditional currencies like the US dollar or assets like precious metals and oil.

Stablecoins have the potential to be reliable tools for transactions and preserving asset value, as they are not solely reliant on an algorithm for their valuation. They possess the ability to establish worldwide payment networks that are more streamlined, economical, and open to a wider audience. The advent of digital wallets and smart contracts has the potential to create a new economic landscape marked by peer-to-peer transactions that are immediate, cost-effective, and decentralized, all while integrating stablecoins smoothly.

Stablecoins have the potential to significantly improve the speed and ease of transactions both domestically and internationally. However, it is crucial to remain vigilant about the possible risks. Stablecoins must consistently mirror the value of their underlying assets, especially during periods of market turbulence, and it is essential that their transaction systems function dependably under any circumstances.

In light of the harsh lessons learned from the worldwide financial meltdown, where banks' excessive dependence on low-cost funding from wholesale money markets led to a catastrophic failure of the system necessitating taxpayer-funded rescues amounting to billions of dollars, regulators have ample cause for apprehension due to the possible widespread systemic dangers that could arise from the common use of stablecoins.

A vital element to scrutinize is the foundation that determines the value of stablecoins.

Context

• Rai stones of Yap are large stone disks carved out of limestone, used as a form of currency and status symbol by the native inhabitants of the Yap islands in Micronesia. These stones were quarried on various Micronesian islands and were highly valued for ceremonial gifts. Ownership of a rai stone was determined by its history rather than its physical location. Today, some rai stones can be seen in museums worldwide.
• Mulberry paper banknotes of Imperial China were a form of currency used during the Tang Dynasty. These banknotes were made from mulberry bark fibers, which were abundant in China. The use of mulberry paper banknotes represented an early form of paper money in the world, showcasing China's innovation in currency systems. The introduction of these banknotes played a significant role in the evolution of currency and financial systems globally.
• The gold exchange system of the late 19th and early 20th centuries was a monetary arrangement where countries held their reserves in gold but conducted international trade and settlements using each other's currencies, which were directly or indirectly linked to gold. This system allowed for increased flexibility in international transactions and helped stabilize exchange rates by pegging currencies to a fixed amount of gold. It was a transitional phase between the fully gold-backed currency system and the later adoption of fiat currencies managed by central banks. The system faced challenges and eventually gave way to more modern monetary frameworks due to changing economic, political, and social dynamics.
• Wildcat currencies of early America were privately issued banknotes that circulated in the 19th century. These currencies were often issued by banks without sufficient backing or regulation, leading to their unreliability. The term "wildcat" originated from the practice of some banks using illustrations of wildcats on their banknotes. These unregulated currencies were prone to depreciation and instability, causing financial challenges for individuals and businesses.
• The devaluation of Roman denarii under Augustus and Marcus Aurelius occurred due to a reduction in the silver content of the coins. This debasement was a common practice by Roman emperors to address financial issues and fund their endeavors. Augustus and Marcus Aurelius both faced economic challenges that led to the devaluation of the denarius to manage state finances. The gradual decrease in the silver purity of the denarius over time contributed to inflation and economic instability in the Roman Empire.
• The Bank of Amsterdam, established in 1609, was a prominent financial institution known for its secure money storage and issuance of standardized deposit notes. It played a crucial role in facilitating transactions and extending credit to market participants. However, the bank's stability was compromised in 1790 due to risky off-balance sheet financial activities and excessive credit extended to a major trading corporation, leading to its eventual failure.
• The Bullionist discourse was a historical economic debate that focused on the relationship between paper currency and gold reserves. Advocates of the Bullionist perspective argued for the importance of backing currency with gold to maintain its value and prevent inflation. This debate played a significant role in shaping monetary policies, particularly regarding the convertibility of paper currency into gold. Ultimately, the Bullionist viewpoint influenced the reinstatement of the gold standard in the early 19th century.
• The bimetallic currency system in the United States involved the use of both gold and silver as the basis for the country's monetary system. This system allowed for the circulation of both gold and silver coins at a fixed ratio established by law. The transition away from the bimetallic system in the U.S. occurred as the country moved towards adopting a gold standard, where the value of the currency was tied solely to gold. This shift was influenced by various economic and political factors during the late 19th century.
• William Pitt the Younger suspended the convertibility of the Bank of England's paper currency into gold in 1797 to maintain confidence in the banknotes during a period of financial instability caused by fears of a French invasion. This decision aimed to prevent a run on the bank and stabilize the financial system. The suspension was a temporary measure to address immediate concerns and was later followed by a debate on the advantages of reinstating convertibility. Ultimately, the gold standard was reintroduced in 1821.
• David Ricardo and Sir Henry Parnell were prominent figures in the Bullionist debate, which revolved around the convertibility of paper currency into gold. They argued that if banks refused to exchange banknotes for gold, it could lead to overissuance of notes, causing currency devaluation and inflation. Their stance supported the reinstatement of the gold standard to maintain the stability of the currency by ensuring that paper money was fully backed by gold reserves. This debate was significant in shaping monetary policy and the regulation of currency issuance during the 19th century.
• The collapse of the gold standard occurred when countries abandoned the practice of tying their currencies to a specific amount of gold. This shift was influenced by factors like economic pressures, political changes, and evolving global trade dynamics. The move away from the gold standard led to a more flexible monetary system but also introduced challenges related to currency stability and international economic cooperation. The transition marked a significant turning point in the history of monetary policy and financial systems worldwide.
• Central banks play a crucial role in maintaining currency stability by regulating the money supply, setting interest rates, and acting as lenders of last resort to stabilize financial markets. They aim to control inflation, ensure economic growth, and maintain confidence in the currency. Central banks also supervise commercial banks to uphold financial stability and protect the overall health of the economy. By implementing monetary policies and overseeing the banking system, central banks work to safeguard the value and integrity of the currency.
• Mark Carney, the former Governor of the Bank of England, has expressed views on financial technology, or fintech. He believes that advancements in technology could revolutionize the financial industry, making services more accessible, cost-effective, and secure. Carney sees the potential for fintech to reach a broader demographic and improve financial systems' resilience and environmental sustainability. He emphasizes the importance of learning from historical lessons while embracing innovations to ensure that new financial technologies benefit society and adhere to principles of transparency and cooperation.
• Stablecoins are a type of cryptocurrency designed to maintain a stable value by being pegged to a reserve asset like a fiat currency or a commodity. They aim to reduce the volatility typically associated with cryptocurrencies like Bitcoin. While stablecoins offer benefits such as faster and cheaper transactions, they also pose risks related to regulatory oversight, maintaining the peg to the underlying asset, and potential systemic implications if not managed properly. Regulatory scrutiny is crucial to ensure stablecoins operate reliably and transparently within the financial system.