One great theme of the post-2008 financial world is that money is a social construct, a way to keep track of what society thinks you deserve in terms of goods and services. That has always been true, but modern finance has made it more obvious. I think that 15 years ago it was easier to think that money was an objective fact. Money is a kind of stuff, you might have thought, stuff with some predictable value that you can exchange for goods and services, and you can acquire a quantity of it and then you own that money and can use it however you like to buy things.There doesn't seem to be any way to link to Levine's individual posts; the site is here, and this came from his post for February 28.
But the response to the 2008 global financial crisis, and to its later European aftershocks, made it clear that something else was going on. Who has money and what they can do with it can be adjusted by the actions of central banks and national treasuries; banks can be bailed out; costs can be socialized. The fiscal response to Covid-19 reinforced this point: Money is a tool of social decision-making, not an objective thing that you get through abstract merit.
There has also been the enormous rise of cryptocurrency, which taught two somewhat opposite lessons about this theme. On the one hand, the value of cryptocurrency is so clearly socially constructed: A Bitcoin was worth roughly nothing a decade ago, and roughly $41,000 today, solely because people collectively decided to ascribe value to Bitcoin. Bitcoin provided a clear and salient example of the fact that money gets its value from people agreeing that it’s valuable.
On the other hand, though, crypto enthusiasts have always pitched it as a way around the traditional methods of social construction of money. Crypto is unregulated money, censorship-resistant money, money whose value is not subject to the whims of a central bank. These claims are not always true in practice — as crypto has become more valuable and more integrated with the mainstream financial system, it has become more subject to the same sorts of regulation — but they do highlight how the traditional system works. “Money is only useful if the government lets you use it” is now a thing that a lot of people believe, though often with the corollary “but Bitcoin fixes that.”
As of Friday Russia had about $630 billion of foreign currency reserves, a large cushion designed to allow it to withstand economic sanctions and prop up the value of the ruble. But “foreign currency reserves” are not an objective fact; they are mostly a series of entries on lists maintained by foreign-currency issuers and intermediaries (central banks, correspondent banks, sovereign bond issuers, brokerages). If those people cross you off the list, or put an asterisk next to your entry freezing your funds, then you can’t use those funds anymore.
And so over the weekend the U.S., the European Union, the U.K., Switzerland, Singapore and other countries announced harsh sanctions against Russia for its unprovoked invasion of Ukraine. There are a lot of these sanctions — banning Russian flights through European airspace, limiting Russian banks’ access to the SWIFT interbank messaging system, etc. — but the most drastic might be U.S., U.K. and EU bans on any transactions with the Russian central bank. The bulk of Russia’s foreign reserves are held in the form of securities, deposits at other central banks and deposits at foreign commercial banks. A ban on transactions with Russia’s central bank means that it can’t sell those securities or access those deposits. Its foreign currency reserves turned out to be mostly useless. Adam Tooze writes:
The crucial thing is that reserves of euros and dollars can be put to work only by selling them in western financial markets. Those transactions require intermediary banks. And those banks can be blocked from engaging in transactions involving Russia’s central bank. To do this to a fellow central bank involves breaking the assumption of sovereign equality and the common interest in upholding the rights to property. It is a major step not easily taken against a central bank as important and as much part of the Western networks as the central bank of Russia.
Russia’s foreign reserves consist, in the first instance, of a set of accounting entries. But in a crisis the accounting entries don’t matter at all. All that matters are relationships, and if your relationships get bad enough then the money is as good as gone.
There is a lot to dislike, or at least to be uncomfortable with, in this situation. There are the Bitcoiners’ complaints: Financial transactions are a private matter, letting authorities interfere with them is bad for freedom, dictators (or democracies) can arbitrarily cut off money to people they dislike, etc. But there are also more specific complaints about “weaponizing the dollar”: The U.S.-dollar-based international financial system, and the international financial system broadly, is an extremely valuable engine for global prosperity because people basically trust it to be reliable and neutral and rules-based; they trust that a dollar in a bank is usable and fungible, that the dollar system protects property rights. “Money is a social construct,” sure, in the back of everyone’s mind, but it is a well-constructed construct, one that works. Making the Russian central bank’s money disappear undermines that valuable trust. This is arguably bad for the dollar’s long-run dominance: Russia will develop its own ways around SWIFT, China will push other countries to adopt its digital yuan, everyone will use Bitcoin, etc. But it is also arguably bad for global prosperity: Trustworthy rules-based trade works better and produces more value than arbitrary uncertain trade.
But what I want to suggest is that this weekend’s actions are evidence that the basic structure is good. What I want to suggest is that society is good, that it is good for people (and countries) to exist in a web of relationships in which their counterparties can judge their actions and punish bad actions. If money is socially constructed and property is contingent then money is a continuing, dynamic, ever-at-risk reward for prosocial behavior.