How to Define Currency: Three Central Banking Experts Reveal What Money Really Is

A Princeton University panel explores why defining money remains surprisingly complex in our digital age.

Key Takeaways

• Money fundamentally exists as a social convention rather than having inherent physical properties or value
• The traditional three functions of money (unit of account, means of exchange, store of value) can actually be separated in practice
• Central banks distinguish between "front-end money" (what users see) and "back-end money" (central bank reserves) to maintain monetary control
• Historical perspective reveals that private money issuance was normal for centuries before central bank monopolies emerged
• Trust in monetary stability requires maintaining a one-to-one exchange rate between public and private sector money
• Physical design elements remain important even in digital currencies, as evidenced by stable coin logos mimicking traditional currency symbols
• Global money hierarchies exist where dollars, euros, and other major currencies circulate far beyond their issuing nations' borders
• Technology changes force societies to revisit fundamental questions about money that have persisted for centuries
• The appeal of gold during uncertainty reflects people's intuitive understanding that physical assets differ from promises to pay

Timeline Overview

• 00:00-15:00 — Introduction to Princeton Economic History Workshop panel on currency biography; Stefan Ingves opens with money as social convention, distinguishing public vs private sector money and front-end vs back-end systems
• 15:00-30:00 — Rebecca Spang challenges the notion of currency as immortal, explaining how "currency" as a concept emerged from 18th-19th century nationalism; early modern France used different coins for circulation vs accounting
• 30:00-45:00 — Iñaki Aldasoro defines money as hierarchical promises to pay, emphasizing payment settlement over traditional functions; discusses global money circulation beyond sovereign boundaries
• 45:00-60:00 — Panel discussion on traditional three-function definition; experts debate separating means of payment from exchange, citing examples like Finland's currency revaluation
• 60:00-75:00 — Exploration of physicality in money, from politicians wanting to see gold reserves to the material substrate underlying digital currencies; discussion of trust and abstraction in fiat systems
• 75:00-90:00 — Design elements in currency from euro banknote creation to stable coin logos; Bitcoin's evolution from circuit board illustrations to gold-colored token photography
• 90:00-105:00 — Competition between central bank digital currencies and private stable coins; comparison to 1800s debates over private vs public bank note issuance; concluding thoughts on gold's enduring appeal

The Social Convention of Money: Beyond Physical Reality

Modern currency exists primarily as a shared social agreement rather than deriving value from physical properties. Stefan Ingves, who led Sweden's central bank for 16 years, opened the Princeton discussion by emphasizing this fundamental insight. "Money is a social convention. Money is something about what we have in our heads," he explained, noting how societies have transitioned from seashells to digital entries on hard drives. This perspective helps explain why politicians visiting central banks invariably request to see the gold reserves, despite understanding that modern monetary systems operate through trust rather than precious metal backing. The abstraction of fiat money creates a psychological tension between our evolved preference for tangible objects and the reality of contemporary monetary systems.

• Central bank governors consistently observe politicians' desire to physically examine gold reserves rather than discuss abstract monetary concepts, revealing deep-seated human preferences for tangible value stores
• The transition from physical objects to digital abstractions represents a continuation of money's evolution rather than a fundamental break from historical patterns
• Modern monetary control requires maintaining the fiction of physical backing while operating through purely abstract systems of trust and convention
• Technology changes force societies to revisit age-old questions about monetary legitimacy and control, though the underlying issues remain consistent across centuries
• Stefan Ingves noted that "since money is a convention, there is almost nothing new under the sun when it comes to money, but technologies do change"
• The dual nature of money as both abstract concept and desire for physical manifestation creates ongoing tensions in monetary system design

Historical Perspective: Currency as Political Construction

Rebecca Spang's historical analysis reveals that the concept of "currency" as we understand it today emerged from specific political circumstances rather than representing eternal monetary truth. The word "currency" itself reflects 18th and 19th-century revolutionary nationalism, where having distinct money became a marker of national identity alongside flags and anthems. Before this period, monetary systems operated with far greater complexity and flexibility. In early modern France, circulation coins called "écu" depicted royal shields but had no denomination markings, while accounting occurred in "livres" that existed only as units of measurement. The king retained authority to revalue circulating medium during political disruptions, creating intentional separation between what people used for transactions and how they maintained records.

• John Locke's 1692 treatise "Some Considerations of the Consequences of the Lowering of Interest and Raising the Value of Money" used "current" 28 times but never mentioned "currency"
• 18th-century Britain minted almost no pennies or shillings, yet people continued keeping accounts in pounds, shillings, and pence systems
• Private sector controlled money creation by choosing whether to bring gold and silver to royal mints for stamping, with economic growth largely enabled by private bills of exchange
• French Revolutionary assignats demonstrated continued market-based thinking, with the National Assembly declining to mandate specific exchange rates between paper and coin
• European colonial powers imposed the "one country, one money" model globally, partly because local monetary knowledge prevented their competitive success
• Modern assumptions about monetary immortality contrast sharply with historical evidence of regular monetary recreations every 30-40 years

Hierarchical Money: Promises to Pay in Modern Systems

Contemporary monetary systems operate through hierarchical arrangements of promises to pay rather than simple commodity exchange. Iñaki Aldasoro from the Bank for International Settlements described money as "the primal or primordial tokenization" of credit and debt relationships binding society together through financial commitments. This framework distinguishes between ultimate means of payment (central bank reserves and cash) and various forms of credit that promise delivery of those ultimate instruments. Bank deposits represent promises to deliver cash or achieve payment finality through central bank settlement systems. The critical insight involves recognizing that most circulating money consists of debt instruments issued by private institutions, validated through their connection to higher levels in the monetary hierarchy.

• Bank reserves at central banks and physical cash constitute the ultimate means of payment, with all other instruments representing promises to deliver these base forms
• The "singleness of money" concept, following Thomas Sargent's framework, requires maintaining par conversion between deposits and reserves to sustain public trust
• Global money circulation demonstrates hierarchical patterns, with $13.5 trillion in dollar liabilities and $2.7 trillion in euro-denominated liabilities existing outside their issuing regions
• Private money creation follows Hyman Minsky's observation that "anyone can create money; the problem is getting it accepted" by obtaining validation from higher monetary hierarchy levels
• Modern institutional arrangements create legal frameworks supporting promises to pay, but historical precedent shows government backing isn't universally necessary for monetary function
• Crisis situations reveal intuitive public understanding that money outranks credit, leading to predictable flight-to-safety behaviors during financial stress

The Three Functions Debate: Challenging Traditional Definitions

The traditional economist definition of money—unit of account, medium of exchange, and store of value—proves more flexible in practice than theoretical models suggest. Panel experts agreed that these functions can separate under specific circumstances, challenging assumptions about monetary unity. Stefan Ingves provided the example of Finland's currency redenomination, where removing zeros from the currency created a lasting split between transaction practices and pricing discussions. For years after the change, people continued using old nominal values when discussing major purchases like used cars, adding zeros back to reach familiar price ranges. This demonstrates that unit of account functions can persist independently from circulating currency, suggesting more complexity in monetary psychology than standard economic models acknowledge.

• Means of payment represents the most fundamental monetary function, distinguished from simple exchange because it includes non-reciprocal transactions like parking fines
• Unit of account logically precedes settlement mechanisms since societies need agreement about what they're settling before creating payment systems
• Store of value emerges as a derivative function following from unit of account and settlement capabilities rather than being independently essential
• Rebecca Spang emphasized differentiating payment from exchange to avoid defaulting to barter assumptions that ignore governmental roles in monetary systems
• Iñaki Aldasoro noted that settlement function drives all other monetary characteristics, with successful settlement requiring prior accounting agreement
• Historical examples of function separation occurred regularly during periods of monetary instability, suggesting flexibility rather than rigid integration

Physical vs Digital: The Material Substrate of Trust

The relationship between physical and abstract money reveals persistent human psychological needs even in increasingly digital systems. Despite operating sophisticated electronic payment systems, central bankers report universal political interest in physically examining gold reserves, suggesting deep-seated preferences for tangible value representations. This creates ongoing tensions in monetary system design as societies navigate between psychological comfort with physical objects and operational efficiency of digital systems. Rebecca Spang emphasized that completely digital money still requires material infrastructure—electricity, semiconductors, computers—meaning the physical/abstract distinction represents configuration choices rather than fundamental technological evolution. The interaction between material substrate and symbolic meaning varies across societies and historical periods rather than following linear progression toward abstraction.

• Politicians consistently request to see gold reserves during central bank visits, revealing psychological preferences for tangible monetary representations despite understanding abstract systems
• Digital money infrastructure depends on physical components including electricity generation, semiconductors, and computing hardware, making complete dematerialization impossible
• Stefan Ingves observed that trust in fiat money requires either long-term stability track records or physical backup systems, explaining why some populations hold dollar bills or gold as insurance
• Historical monetary systems regularly combined physical objects with abstract accounting, contradicting narratives of simple progression from concrete to abstract
• Even ancient gold systems faced authenticity challenges through dilution and debasement, demonstrating that physical backing never guaranteed monetary integrity
• The "wiring" and "plumbing" metaphors commonly applied to monetary systems reflect human-constructed rather than naturally occurring phenomena, representing sedimented social conventions

Design Elements: Visual Identity in Monetary Systems

Currency design serves important psychological and political functions even as money becomes increasingly digital. The European Central Bank's approach to euro banknote design illustrates these challenges, creating non-national imagery while maintaining familiar currency aesthetics. Designers selected fictional architectural elements—bridges that existed nowhere specifically—to avoid nationalist symbolism while preserving visual conventions that signal "money" to users. Rejected designs included euro notes featuring cats, highlighting the arbitrary nature of monetary visual conventions. This pattern continues in digital contexts, where stable coin projects invariably create logos mimicking traditional currency symbols, suggesting persistent psychological needs for visual monetary identifiers regardless of technological substrate.

• Euro banknote design deliberately avoided national symbols while maintaining traditional currency aesthetics through fictional architectural imagery, with one fictional bridge later constructed in the Netherlands
• Swedish political resistance to euro adoption partly emerged from aesthetic concerns, with one politician declaring the proposed designs "all ugly" due to absence of royal imagery
• Argentine provincial quasi-currencies during the 2001 crisis were legally bonds but designed to look exactly like traditional banknotes to facilitate user familiarity
• Bitcoin imagery evolved from circuit board illustrations in early journalism to gold-colored physical tokens manufactured by investors, eventually becoming the standard visual representation
• Stable coin projects consistently adopt logos and branding that echo traditional currency design elements, suggesting continued importance of visual monetary identification
• The Bloomberg photo of stacked Bitcoin tokens from 2014 became iconic imagery that shaped public perception of cryptocurrency as physical objects rather than digital records

Central Bank Digital Currencies vs Private Alternatives

The emerging competition between central bank digital currencies and private stable coins represents a contemporary version of 19th-century debates over monetary issuance authority. Stefan Ingves drew direct parallels to historical conflicts between private bank note issuance and central bank monopolies, noting that banking associations historically claimed institutions would collapse if states monopolized paper money creation. The current technological shift forces similar political decisions about whether general publics should access central bank money directly or operate only through private intermediaries. Different nations are reaching varying conclusions: the United States appears to favor private sector solutions, the European Union develops public digital currency options, while India, Brazil, and China pursue distinct approaches reflecting their economic priorities and technological capabilities.

• Private stable coin advocates' vocal opposition to retail central bank digital currencies indicates they perceive direct competitive threats to their business models
• Historical precedent from the late 1800s shows similar industry resistance when central banks gained monopolies over physical banknote issuance, yet banking systems survived the transition
• Current competition may produce different outcomes across jurisdictions, creating what Stefan Ingves termed "the great game of our monetary future in a 100% digital world"
• Legal distinctions between stable coins and money market funds remain minimal, with differences primarily involving transaction engineering and legacy system integration rather than fundamental structure
• Reserve management arrangements create additional complexity, with some stable coins utilizing money market funds for asset backing, creating interconnected dependencies
• The fundamental political choice involves determining whether public access to central bank money serves broader economic interests compared to private intermediation models

Conclusion: The Enduring Challenge of Monetary Definition

The future of currency definition ultimately depends on how societies balance technological capabilities with enduring human psychological needs and political preferences. Money's evolution reflects changing social conventions rather than natural progression toward predetermined endpoints, with each technological shift resurrecting fundamental questions about trust, control, and social coordination that have persisted across centuries of monetary development.

Practical Implications

• Policymakers must recognize that monetary design choices are political decisions rather than purely technical optimizations, requiring careful consideration of public psychology and social acceptance
• Financial institutions should prepare for continued competition between public and private money issuance models, with different regulatory outcomes likely across jurisdictions
• Central banks need to maintain the one-to-one exchange rate between public and private sector money to preserve monetary control and public trust in the system
• Technology companies entering monetary spaces must understand that successful adoption requires more than technical innovation—it demands navigation of complex social conventions and regulatory frameworks
• Ordinary citizens benefit from understanding money as hierarchical promises to pay rather than simple commodity exchange, providing better crisis preparation and financial decision-making capabilities
• International coordination on digital currency standards becomes increasingly important as global money circulation continues expanding beyond traditional sovereign boundaries