value of money depends on trust. but it is not easy to trust paper money unless we trust the issuer. much of the financial history of the past 150 years is the story of our collective attempts to manage paper money. in a democracy, we wealth of nations, i, iv, p38. see kiyotaki and moore ( 2002 ). wealth of nations, i, iv, p38. rae ( 1895 ), p 49. smith recognised this too : “ though the wages of the workman are commonly paid to him in money, his real revenue, like that of all other men, consists, not in money, but in the money ’ s worth ; not in the metal pieces, but in what can be got for them ” wealth of nations, i, ii, p295. can ’ t force people to use paper money, although after the french revolution the jacobins had a try. they made it a capital offence to use commodities as money! this was a desperate and unsustainable action resulting from the jacobin policy of debasing their paper money – the assignat – to make up for a collapse in tax revenues and to finance a war against prussia. a more sensible solution is to create institutions in which we can have trust. on the front of this bank of england £20 note is written “ i promise to pay the bearer on demand the sum of twenty pounds ”. in essence, the promise is that the “ stuff ” that you can buy with this note does not change much from one year to the next. in other words, the general purchasing power of the note is broadly stable – we have price stability. our ability to maintain price stability depends upon an institutional framework which is expected to persist. that depends on all of us acting collectively – the value of a nation ’ s money is inherently a political choice. inflation arises when the collective political commitment to maintain price stability weakens. when high rates of inflation are anticipated, people wisely avoid holding paper money. as i said in my ely lecture in 2004, “ the demand for money today depends upon expectations of our collective decisions about the supply of money tomorrow. ” in the twentieth century germans saw their savings wiped out by hyperinflation. and as recently as 1990, argentina experienced hyperinflation. i have been told that when people gave up using paper money in argentina, they resorted to ious which were taken to the local catholic priest for endorsement. those io

debt has risen but household and financial sector debt is lower now and the lower post crisis levels have been stable for a number of years. advanced economy corporate debt, however, has grown rapidly in recent years in some major jurisdictions, particularly the us, and its riskiness has increased. the pricing of risk in financial markets is relatively compressed by historic standards, as is market volatility. but recent events suggest the market may be very sensitive to changes in expectations of growth or inflation. for uk assets, there has been the additional impact of fluctuations in brexit news and sentiment. the evaluation of brexit outcomes seems to have dominated responsiveness to near - term domestic news. all speeches are available online at www. bankofengland. co. uk / speeches as always, the risk picture is mixed. from a financial stability perspective, the right response to this picture is to ensure that the financial system is sufficiently resilient to a very severe but plausible correction in values should it occur. a colleague of mine recently asked me why the financial stability side of the bank was so gloomy, always pointing to risks on the horizon and seeing the glass as half empty at best? my answer was that it was our job to worry about what could plausibly happen - and to ensure that if it did happen, the glass did not suddenly empty entirely. all speeches are available online at www. bankofengland. co. uk / speeches