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Michel Camdessus Central Banking Lecture Washington, 14 September 2022
Ethics of currency: a possible guide for central bankers?
Speech by François Villeroy de Galhau,
Governor of the Banque de France
Press contact: Mark Deen (mark.deen@banque-france.fr), Déborah Guedj
(deborah.guedj@banquefrance.fr)
Ladies and Gentlemen,
It is my great pleasure to be in Washington with you today, and to deliver this
speech in honour of Michel Camdessus. I would like to take this opportunity to
pay a special tribute to him, and express my personal gratitude. Michel is not
only one of my predecessors as a Governor of the Banque de France, but also
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a friend of mine and yes a master. My speech was prepared with his precious
"Camdessus
help, so today you can almost enjoy a Lecture by Michel
Camdessus himself".
"ethics of currency",
The theme we chose together, the has guided him
throughout his career. In the murky waters that we central bankers are
navigating, it should more than ever serve as a golden thread. I will briefly
discuss the reasons why I dare to talk about the ethics of currency (I), then
elaborate on the golden triangle of trust today (II) and finally raise the question
as to whether the international dimension of trust can still inspire us (III).
I. Why I dare to talk about the ethics of currency
common definition of
Before going any further, we must find a "ethics". Is it
take this word as a synonym for
possible to "morality"? For centuries, this
the "bridge of donkeys" philosophers'
question has been (pons asinorum) for
apprentices. Supporters of the synonym theory highlight a common etymology
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between the two words morality is the Latin translation of Greek ethos. Despite
their initially identical meanings, the two words nevertheless have followed
over time: "morality" can be a "hard concept", similar
different paths described as
to the fundamental rules engraved on Moses' stone tablets or in the code of
In contrast, "ethics"
Hammurabi. refer to a softer and less binding concept, a
kind of existential version of morality with a more personal dimension. I will use
the word ethics in that way in this speech. The question of interest rates is a
noteworthy example of the way a moral prohibition can evolve into a more
"fair" interest
flexible and ethical approach. From a moral overall ban, ethically
rates have been progressively distinguished from usury rate, with the latter still
being forbidden.
"Homo economicus" invented currency very early in human history, and it is
striking that almost as soon as currency was born, countless abuses were seen
as well: manipulation of gold or silver weight in coins, skewing of scales, and so
forth. Men therefore quickly summoned ethics to define how to govern its use.
However, human kind has also shown a tendency to exempt itself from the rules
it had previously established, before setting new rules again in order to respond
to the problems caused by deregulation.
With the acceleration of historical transformations, the 20th and early 21st
century have been particularly rich in the emergence of ethical issues. The Great
Depression, which started in 1929, led to protectionist reactions, which
themselves led to economic disasters; a powerful movement of social inspiration
reacted in turn by trying to bring back order in monetary affairs, and
multilateralism in international ones (see Part III). In the 1970s, however, neo-
liberal thinking inspired by men such as Milton Friedman and Friedrich Hayek
In Hayek's opinion for instance, trying to
caused a swing of the pendulum.
subject finance or the economy to ethical principles was a waste of time. Today,
after new crises and with the emergence of fresh concerns, the pendulum has
swung again. To give just one example, environmental concerns have acquired
an essential ethical dimension.
Another distinction is between the ethics of money and of currency. The ethics
of money are customary and widespread, and can be summed up by the words
of Alexandre Dumas, a famous French writer: "money is a good servant but a
bad
master". The ethics of currency that interest me today are obviously part of
this, but are perhaps less common. They have two specific features: (i) the
importance of institutions, of the "sovereign" dimension: there is no currency
without a public authority that guarantees it and is responsible for it (ii) the
importance of trust, which can be defined as being able to count on the
character, ability, strength or truth of someone or something. Today, we central
"produce"
bankers are responsible for trust: we it, and we stand accountable for
it. Such a responsibility entails a strong personal component: our behaviour has
to be flawless, and driven by real functional requirements and high ethical
standards. But let me today focus on the institutional and collective foundations
of trust.
II. The golden triangle of trust
Trust relies on three key elements, which together form the golden triangle of
trust: independence, mandate and accountability of central banks. They
cover different notions but they closely intertwine. Some may take them for
granted, but they are actually the result of a long historical progress, and each
of them is being challenged today.
Independence
Mandate Accountability
1. The long quest for the independence of the issuer, and its current
calling into question
As early as in the 4th century B.C., Aristotle famously identified the three
functions fulfilled by money: medium of exchange, unit of account, and store of
value. He complemented this brilliant theoretical approach with ethical
"unnatural" - -
guidelines,i opposing chrematistics or personal enrichment and
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virtuous economics oikonomia, literally household management, to the benefit
of the entire community. Aristotle had a strong influence on the European Middle
Ages, but his ethics of currency progressively faded into the background. In the
context of the financial turmoil of the Middle Ages, in around 1355, Nicholas
Oresme, a French scholastic philosopher, wrote his visionary Treatise on the
origin, nature, law and alterations of moneyii
in which he asserted that the
currency does not belong to the "prince"
but to the people, and therefore should
not be manipulated.
But it took several more centuries for trust in money to be "dematerialised": to
move from trust in a physical medium - gold and silver, and metallic currencies
- to trust in an institution. The 19th century, with the industrial revolution, saw the
expansion of banking and finance, and the creation of many central banks. It
was a first decisive step: a dedicated guardian was put in charge of issuing
banknotes, as a first "immaterial"
currency.
The second decisive step, mainly from late 20th century, was to make central
banks independent from political power: in the 1980s and 1990s most central
banks enshrined their independence in their statutes, including the Eurosystem
in order to ensure the stability of the single currency. The Eurosystem also
defined a target for inflation, as did the Fed in 2012, a few years after Ben
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Bernanke strongly advocated for it. But independence which I cherish does
not mean isolation. The context of the Russian war in Ukraine challenges us to
reinvent the dialogue with political authorities, for at least three reasons:
because geopolitics are today a major determinant of the economy; because
the energy markets, their regulation and pricing are key for inflation; and lastly
because fiscal choices regarding subsidies to households or even to firms are
far from neutral for monetary authorities. Another challenge, and a much more
tough one, is that the populist ideology creates an atmosphere of general
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mistrust of institutions and still more of independent ones. In the name of
popular sovereignty, we would return to a power of elected sovereign that would
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be absolute and not relative anymore. At worst, this would call into question
our democracy and its necessary checks and balances. At the very least, it is
imperative for us to be efficient in our mandate, and to increase our
accountability.
2. Efficiency of our mandate
Price stability, which is a prerequisite for long-term growth, is the primary
objective of most central banks. Broader mandates nevertheless apply to some,
notably the Federal Reserve with its dual objective on employment and inflation.
Other central banks have expressed sensitivity to inequalities, or to other issues,
and have therefore contemplated a broadening of their mandate. Some
this alleged "mission
observers questioned creep", and wondered whether
central banks have lost sight of their primary responsibility. Against this
Max Weber's -
backdrop, I will refer to distinction between ethics of conviction
a driver for a broad mandate but also to a risk of overpromising what central
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banks can actually deliver and ethics of responsibility a driver for realism
and a more focused mandate.
The Eurosystem's answer to that question
consists of a clearly hierarchical
mandate, with one primary objective, price stability; if fulfilled, we can and must
contribute to its secondary objectives of economic growth, social cohesion or
the environment. In addition to preventing potentially conflicting objectives,
achieving price stability is like killing two birds with one stone: monetary policy
can mitigate income inequality by affecting the movements in and out of
unemployment through its effects on the business cycle.iii And let me clarify that
the Eurosystem's
strong commitment to fight climate change is motivated first
and foremost by its profound implications for price stability, through impacts on
the economy and the financial system. In other words, we are acting in the very
name of our existing mandate.
Inflation has accelerated significantly over the past year, reaching 9.1% in the
euro area in August and 8.3% in the United States. Monetary normalisation is
It's too early to tell
consequently fully warranted in the euro area among others.
the final interest rates. But the neutral rate R* helps us to give some light on the
first part of the journey. I believe that in the euro area R* can be estimated as
below or close to 2% in nominal terms, and we could be there by the end of the
year. Until then, we definitely have to act, in a determined but orderly way. Doing
so is normalisation, only beyond R* would tightening begin if needed. The US is
obviously closer to tightening: due to several differences in the nature of inflation
across the Atlantic, the monetary answer must have its differences too. But in
it's not only a legal duty, it's also an
both cases, ethical commitment: ensuring
price stability is our responsibility; our will and our capacity to deliver on our
mandate cannot be subject to any doubt whatsoever.
3. Accountability
Turning to the third corner of the golden triangle of trust, accountability, you
"I know you think you
remember that famous sentence by Alan Greenspan:
understand what you thought I said but I'm not sure you realize that what you
heard is not what I meant".
This provocative sentence certainly captured the
difficulty for central banks to account for their monetary policy, but let's be clear,
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it belongs or must belong - to a bygone era. No matter how complex, it is
central banks'
duty to account for their monetary policy decisions in a
comprehensible manner; accountability is the natural counterpart for
independence. This necessary change has both a cyclical and a structural
component.
- The cyclical component pertains to the way we can combine agility and
predictability in a very uncertain environment. We should be careful not to return
to secrecy, or to unnecessarily add to financial and economic volatility.
Otherwise, as research at the Banque de France shows, economic agents may
begin to question our ability and commitment to fulfil our objectives, which could
translate into dis-anchored long-term inflation expectationsiv. I suggest in my
principles for this "new
recent Jackson Hole speech some predictability"v. Not
having a forward guidance does not mean, cannot mean, not having a narrative
and a monetary strategy.
- The structural component is that our communication must not only resist
the risk of "political dominance" or "market dominance"
that would run counter
to our independence, but two additional risks that appear more specific to the
current period. The first risk is the dictatorship of short-termism, imposed on us
by the recent series of crises. Of course, we have to deal with them, but we must
not become a prisoner of emergencies. We must continue to focus on the
longer-term, in keeping with our role of advanced sentinels: central banks rely
on their close monitoring of all financial and economic indicators, and also on
their anticipation of how they may evolve in the future.
The second risk is that of corporatist fragmentation. It is the other disease of the
century. Of course, we are not responsible for it, and we are not corporatists.
But we could be sinning by omission, by passiveness. Contrary to a long-
standing approach whereby central backs only dialogued with financial
specialists, we must now direct our communication at all economic agents,
including the general public. A better-informed society across categories allows
for a better understanding of monetary objectives, and hence a greater
efficiency of monetary policy. Tailored and active communication is now a
of central banks' actions. "Banque de France listens"
centrepiece In 2021, the
initiative included 17 events, with an audience of 300,000. This year, the Banque
de France organised its annual National Monetary Policy Forum, reaching an
on-line audience of 500,000. It adds up to sustained efforts on financial
education: in 2021, almost 40,000 young people benefitted from our actions,
and we are stepping up again in 2022.
III. Does the international dimension of monetary trust still exist?
Whether or not the international dimension of monetary trust can still inspire us
is a key question for the IMF, which has sought to embody it since 1944. It has
become a painful question, with the ongoing destructive Russian war in Ukraine
adding to the other illnesses of multilateralism in the last six years, from Brexit
to populism and (poorly-disguised) protectionism. Let us acknowledge it frankly:
the G20 is today not in good shape, whereas it had been key to great progress
over the last twenty years. And sanctions against Russia divide it. It is still hotly
debated whether these sanctions are necessary and efficient, or on the contrary,
whether they are counterproductive for the countries that initiated them. I believe
that we should stick to a few simple facts and principles: (i) the surge in the
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prices of raw materials primarily of oil dates back to rumours of war and then
to actual invasion in February, not to the sanctions that followed that invasion
(ii) in the short term, the Russian economy seems to be losing less ground than
expected, precisely because of that surge, but its long-term growth potential is
obviously greatly weakened by technological sanctions (iii) there are moments
where what is ethically fair prevails over what is economically necessary. Even
if from time to time there may be contradictions between the two, a sustainable
economy cannot exist without an ethical basis. But justice also enjoins us to deal
with the situation of the poorest countries and people in this crisis.
The world's community drive to achieve unity, while respecting diversity, should
nevertheless remain widely recognised as an essential aspect of the pursuit of
the universal common good. The tale of the euro is particularly inspirational in
this regard. After several decades of incremental progress and preparation, it
began in the 1990s, and it is worth reminding ourselves how far we have come,
and the extent to which we owe this unique success to the will of visionary
personalities such as Alexandre Lamfalussy or Jacques Delors. To move
towards a more resilient global system, the euro should play a more important
international role. It is at least a credible complement to the dollar as a safe
asset.
More broadly, in present adverse circumstances, we should assign top priority
to two courses of action. First, designing a consistent regulatory and monitoring
framework to ensure that the development of crypto-assets does not undermine
confidence in the financial system. The recent turmoil that has affected all types
of players within the crypto-asset ecosystem (stablecoins, DeFi protocol, lending
platforms, hedge funds) has highlighted yet again the intrisic weaknesses of this
market and the necessity to have a comprehensive regulatory framework at the
international level. In this sense, I welcome the upcoming update by the FSB of
its high-level recommendations on the regulation and supervision for global
stablecoin arrangements and other types of crypto-assets. In 2023, we will have
a global, consistent and comprehensive framework to tackle crypto-assets. The
speed of implementation by jurisdictions will be key. In the implementation path,
a critical aspect will be our ability to collect and share reliable data on the crypto
asset markets.
But regulation cannot be central banks' only
answer: it has to be accompanied
by their own innovations. The main rationale for central bank digital currencies
is to preserve the role of public money in a fast-moving economy. But with the
aim of avoiding international fragmentation, we have to pay special attention and
dedicate sufficient efforts then to cross-border interoperability, and hence to
wholesale CBDC as a way to ensure it.
The second paramount course of action is to reposition the IMF as a pivotal
stakeholder, at the very heart of the global financial safety net (GFSN). Today,
IMF resources account for a smaller share of GFSN resources, but there has
already been significant progress: the last general allocation that was carried
out in August 2021 amounted to USD 650 billion and was, to quote Kristalina
"a shot in the arm for the global economy at a time of unprecedented
Georgieva,
crisis." However, developing economies are the primary users of SDRs and yet
they have benefited much less from the general allocation: about two-thirds
were directed at developed economies, as a result of existing rules. Reallocating
SDRs is crucial in these current tense circumstances. The G7 commitment,
taken up by the G20, to bring reallocations to USD 100 billion must be kept and
implemented efficiently. We are not yet there. Part of these allocations have
been allocated to the PRGT Fund to finance low-income countries, including an
eventual Food Shock Window. Still, we have to find additional resources to
finance the subsidy account of the PRGT. Another part of these reallocations
(USD 37 billion at this stage) is about to become reality, by IMF Annual Meetings
in October if everything goes according to plan, thanks to the newly created
Resilience and Sustainability Trust (RST). I am sure I agree with the Managing
Director in wishing the RST to be higher in its amounts, quicker in its
disbursements, and not too conditional in its provisions. Indeed if we want to
fulfil our commitments, we have to care not only about the lending capacity of
the RST, but also about demand for RST facilities. France will be true to its word
and reallocate 4 billion SDRs, representing 20% of SDRs received.
The IMF must play a greater role in crisis prevention for vulnerable countries.
Despite recent initiatives, there is still considerable room for improvement to
make the GFSN more effective for these countries, notably for prevention. This
is even more pressing in a context of unstable geopolitics, looming food crisis,
commodities price volatility and more frequent natural disasters linked to climate
change. I therefore welcome the recent proposal of a new Food Shock Window.
However, our efforts should not stop there.
*
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As Sophocles wrote, "trust dies but mistrust blossoms".
Let me conclude by
stressing that trust as a shared treasure also has a key human foundation, which
we have patiently built over time. International meetings in Basel at the Bank for
International Settlements -which I have the honour to chair-, or here in
Washington at the IMF, are not places for mundane agreement, but forums for
true dialogue, by building on a common diagnosis, and sharing openly our
we won't be leaked, instrumentalised or
concerns: we know that distorted. This
is the only way for trust to prosper, and this is how we will progress together.
Michel Camdessus himself has symbolised this value of humanity like none
other in his behaviour and relationships. I thank you for your attention.
i
Aristotle, Nicomachean Ethics, 4th century B.C.
ii
Nicholas Oresme, Treatise on the Origin, Nature, Law, and Alterations of Money, circa 1355
iii
BIS, Inequality hysteresis and the effects of macroeconomic stabilisation policies, Luiz Awazu Pereira da Silva,
Enisse Kharroubi, Emanuel Kohlscheen, Marco Lombardi and Benoît Mojon, May 2022
iv
Istrefi, K. and Piloiu, A., 2014. Economic Policy Uncertainty and Inflation Expectations, Banque de France
Working papers 511; Istrefi, K. and Piloiu, A., 2020, Public opinion on central banks when economic policy is
uncertain, Revue d'Economie Politique
v
François Villeroy de Galhau, Monetary policy post-pandemic : balancing between science and art,
predictability and reactivity, speech, Jackson Hole, 27 August 2022