How much do we trust the money we own, or the people who provide it? These may sound like silly questions, as we exchange cash routinely for all kinds of activity. But money itself, and the institutions that back it, are the product of a long and often turbulent process in the development of trust.
Historian Geoffrey Hosking, author of Trust: Money, Markets and Society, was prompted by the latest global financial crisis to investigate how trust has functioned in economic life, with money its symbolic focus. This goes back a long way. Humans, he believes, have an “inborn propensity to trust” and “money fixes it and makes it economically effective”. What has been used as money is fascinating. Gold or other precious metals have remained popular. But other currencies – based on everything from shells to bangles and cloth – have also worked as symbols of trust.
Money won more trust when backed by state authority. Hence images on coins of, say, rulers or emblems of city-states. But monarchs were not always the most reliable backers. “Absolute monarchs were known to be financially untrustworthy. If a monarch failed to repay a loan, what could you do about it?” says Hosking. “After all, he headed the law courts through which you might seek redress.”
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As rulers needed more money for expensive wars, so broader systems of public credit and institutional trust evolved. Britain showed how this could happen under a system where parliament took charge of the budget and made the repayment of loans a first priority. People could have absolute confidence in investing in the ‘national debt’. The Bank of England guaranteed the currency and law courts enforced contracts, all buttressing trust.
Essential groundwork for the industrial revolution, adds Hosking, was laid by other institutions protecting against financial insecurity. Insurance companies, the stock exchange and mutual financial institutions such as pension schemes could all generate money for investment – and strengthen trust. Even paper money championed confidence, carrying the promise to “pay the bearer on demand”.
But such systems were never as unassailable as was hoped. Shocks such as the South Sea Bubble in the 1720s remind us, notes Hosking, that people can “exercise trust beyond any objective evidence suggesting they should stop investing”. When trust was eventually lost, the impact was often calamitous, such as a run on a bank or the ruin of investors.
By the 20th century, a globalised system of financial confidence had been created, but the First World War undermined it. In Weimar Germany hyperinflation seemed to destroy any notion that money was a stable store of value. Then the Great Depression wrecked global economic confidence more broadly. This was followed in the 1940s by an attempt to rebuild trust and confidence through the regulation of banks, currencies and capital movements in the international economy.
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Only in the 1980s did that consensus break down. Especially in the US and Britain, distrust of state power trumped lingering anxiety about untrustworthy finance. Deregulation was all the rage. As long as this seemed to promote economic growth – what Hosking calls “the great trust-generating myth of our time” – all appeared well.
We now know that the deregulated world can produce its own loss of trust. Indeed the historical lesson, as Geoffrey Hosking sees it, is that today’s crisis was caused by “over-reliance on financial institutions which have forgotten the importance of building trustworthiness into their structure and functioning”.
Will this prompt a revival of more familiar models from the past, such as mutual organisations and co-operatives, or new ones? We do not yet know. But some have responded by returning to one of the oldest havens of all – gold. And so ancient instinct and bold innovation constantly interact, as we search for permanent confidence in our economy – and in our cash.
Chris Bowlby is a presenter on BBC radio, specialising in history.
This article was first published by BBC History Magazine in 2011