Is the Financial System Fit for Purpose?
Legal and Economic Conceptions of Money
Principal Investigator: Professor Rosa Lastra
Professor Dr Rosa María Lastra is the Sir John Lubbock Chair in Banking Law and Chair of the Institute of Banking and Finance Law the Centre for Commercial Law Studies (CCLS), Queen Mary University of London. She is a member of the Monetary Committee of the International Law Association (MOCOMILA), founding member of the European Shadow Financial Regulatory Committee (ESFRC), research associate of the Financial Markets Group of the London School of Economics and Political Science, member of the European Banking Institute (EBI) and member of the European Law Institute (ELI). She is a member of two expert panels of the European Parliament: the Monetary Panel since 2015 and the Banking Union (Resolution) Panel since 2016.
Co-Investigators: Dr Jason Grant Allen (HU Berlin), Simon Gleeson (Clifford Chance), Dr Michael Kumhof (Bank of England), and Professor Saule T. Omarova (Cornell).
What is the relation between “money”, the technology used to create it, and human institutions? Whose job is it to define money, and what do we do with competing definitions between the disciplines? Where are the weak points in contemporary theories about money? What is ignored or neglected? Does money evolve over time and differ over societies?
“What is money?” is a question asked by both lawyers and economists. Both disciplines are concerned with the creation and the use of money, and there is a history of interaction between them. Lawyers regularly approach money by looking at the (economic) functions of money as a unit of account, a store of value, a medium of exchange, and a means of payment. There is a venerable tradition in economics emphasising the foundation of money in a legal convention—indeed, legal notions are often foundational to economic theory (whether government “debt”, precious metal “commodities”, or indeed the concept of “payment”).
However, both disciplines have blind spots and internal controversies, some long-standing. It is precisely these that are being exercised by changes in the technologies and institutions involved in creating money today—most notably in digital payments. And in recent years the traffic has been mostly one-way. The “law and economics” movement has subjected law to the methods and rationality of economics, but less effort has been made to explore the role of law in constituting categories that economics necessarily assumes (including “payment”, “debt”, “credit”, “commodities”, and “property”). Either way, insufficient effort has been made to integrate legal and economic approaches at a fundamental, conceptual level.
This project will reconsider the intersection between law and economics with an emphasis on the contribution that law can make to economic conceptions of money. This will include addressing: What are the functions of money, and how do these functions relate to each other? What is the most important function of money today? Generally, no hierarchy is postulated between the different functions of money, nor is any comprehensive theory advanced as to how money in different monetary systems might change with technology or over time. As new digital means of payment are created at an increasing pace—led by private entities—this becomes an increasing challenge for regulators and central bankers. What is the thing that functions, what role does law play in its creation, and how might understanding that help us to develop functional analysis?
Closely related to this is development of the concept of “quasi money”. The proliferation of private payment systems calls for closer engagement with legal and economic definitions of money. Can the legal perspective help us to draw a line between what is money and what is not? Can it help explain how something moves in and out of a category over time, and to understand money-ness as a spectrum rather than a binary property?
A third task is to better understand the private creation of money via the banking system. If there is a banking system included in macroeconomic models, it is usually assumed to play an intermediation role rather than determining money creation. Can law provide an insight into long-standing disagreements among economists on the private creation of money? Law offers support for economic theories both antagonistic and supportive of private money creation. What role does law play in competing economic theories, and what assumptions about the legal aspect of money do they make rightly or wrongly?
What is central bank money? Are central bank reserves accurately described as liabilities of the central bank? What else could they be? And how does the central bank relate to the “government” and the “public” or the “nation”? These are aspects with a decidedly constitutional aspect, and the legal perspective is an essential input into credible and creative economic thinking.
These questions are essential to financial and monetary policy in the coming decade. They concern the fundamentals of money and its creation, and in so doing bear on several policy questions that are highly topical today: Are “cryptocurrencies” money, or could they ever be? Is money really changing as we move towards a cashless society? What is the relationship between “commodities”, “securities”, and “money” and what do we do with apparent hybrids or things that move between these categories? Should central banks launch digital currencies, and, if so, how should those currencies be designed? What is the role of commercial banks and other private institutions in the creation of money? Are our national, regional, and international regulatory frameworks adequate to regulate the revolution in digital financial services currently underway?