Money Printing, Explained Gently for Sleep | A SleepWise Story

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Good evening and welcome back to
Sleep Wise.

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Tonight we drift into one of the
strangest and quietest stories

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of the modern world, the story
of money and the careful

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machinery that keeps it
standing.

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It is a story of paper and
promises, of printing presses

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and central banks of trust that
build slowly and sometimes thins

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without anyone quite noticing.
That may sound like a subject

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for textbooks and serious
offices, but tonight we will

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approach it softly.
No charts, no jargon, no need to

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remember every figure.
We will simply move slowly

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through the idea and let it
unfold at the pace of breath.

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Money is one of those things so
familiar that we almost stop

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seeing it.
A coin in a pocket, a note

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tucked into a wallet, a number
that appears on a screen when a

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wage arrives.
It moves through our days

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quietly doing its work, asking
nothing of us but our continued

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belief in it.
And there, in that small word

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belief, lies one of the deepest
mysteries of ordinary life.

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For a piece of paper has no
intrinsic worth.

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A linen note printed with
intricate patterns is in itself

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only that linen and ink.
A coin is only metal.

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A digital balance is only an
entry in a Ledger maintained by

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someone else.
And yet these small things

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command the movement of food, of
housing, of medicine, of Labor.

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They do this not because of what
they are, but because of what we

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have agreed they mean.
This agreement is older than

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nations.
Long before central banks, long

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before printed money, people
exchanged grain for tools, salt

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for cloth, shells for cattle.
Somewhere along the way, certain

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objects became trusted enough to
serve as middle steps.

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A merchant in one market would
accept a piece of silver because

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she knew another merchant in
another market would also accept

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it.
The thing itself mattered less

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than the shared confidence that
surrounded it.

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We have inherited this strange
arrangement and refined it

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across centuries.
The money in our pockets today

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is more abstract than the silver
of ancient markets.

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And yet it works.
For the same reason we believe

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it will work.
The people we hand it to believe

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it will work.
The shops that receive it

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believe their suppliers will
too.

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A long, invisible chain of
confidence runs beneath every

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ordinary purchase, and most days
we never feel it to night.

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We will trace the quiet story of
that belief, how it has held,

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how it has sometimes broken, and
how in our own century it has

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come to rest on institutions.
Most of us rarely think about

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central banks with their careful
committees and their power to

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create new money with a
keystroke.

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There is no need to follow every
step closely.

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Just let the shape of the story
arrive.

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If these slow journeys help you
rest, you can follow Sleep Wise

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and share it with someone who
might enjoy falling asleep while

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learning something new.
And now, with the night around

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us and the world's quiet
machinery of money still gently

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turning, let us begin to
understand why this machinery

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matters.
We begin not in a modern central

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bank, but in a city that learned
almost a century ago what

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happens when money loses its
meaning entirely.

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The city is Berlin.
The year is 1923.

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Germany has emerged from the
First World War defeated,

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indebted and bound by the Treaty
of Versailles to pay reparations

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of a magnitude few economies
could absorb.

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To finance the war years, the
government had quietly suspended

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the gold backing of its currency
in 1914 and run the printing

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presses harder than peacetime
had ever required.

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By the early 1920's, the mark
was already drifting downward.

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Then in January 1923, French and
Belgian troops occupied the Ruhr

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industrial region.
After Germany fell behind on

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payments.
The German government responded

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by paying striking Ruhr workers
with freshly printed money.

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The drift became a fall.
At the centre of the operation

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sat the Reichsbank, led by its
president, Rudolf Havenstein.

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Under his direction, more than
130 printing firms and nearly

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woben 800 presses worked around
the clock to produce bank notes

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in ever larger denominations.
The numbers on the notes climbed

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past anything an ordinary person
could comprehend.

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Bills of 100 million marks one
billion, 100 billion.

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Each issue trying to catch a
value that was already moving

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away from it.
The texture of daily life began

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to bend.
A loaf of bread that had cost

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about 250 marks in January 1923
cost roughly 200 billion marks

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by November.
Wages were paid twice a day and

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spent immediately because by
evening, the morning's pay would

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buy less.
Photographs from the period show

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children using bundled banknotes
as building blocks and

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householders feeding marks into
stoves because the paper was

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cheaper than firewood.
Pensioners who had saved across

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a lifetime found that their
savings now bought a single

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newspaper or nothing at all.
It was not chaos in the

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cinematic sense.
People still went to work, still

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tried to feed their families,
still wrote letters and rode

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trams.
But the quiet contract beneath

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ordinary life had cracked.
The word 1000 stopped meaning

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much, then million, then
billion.

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Numbers grew so large that they
emptied themselves of feeling.

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The end came not from one
decisive act, but from a careful

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rebuilding of belief.
In November, Nyah 23, Germany

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introduced a new currency called
the Renton Mark, backed

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nominally by mortgaged German
land.

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A new official, Jalmar Shacht,
was appointed currency

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commissioner.
The new notes were issued in

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strictly limited quantity and,
remarkably, almost overnight,

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prices began to stabilize.
The crisis ended not because the

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underlying problems had been
solved, but because people chose

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tentatively to believe in the
new arrangement.

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The Weimar experience left a
long shadow over German thinking

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about money.
It is one of the reasons the

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modern Bundesbank and later the
European Central Bank, treat

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price stability with such
seriousness.

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Decades later, on a different
continent, another currency

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would walk a similar path.
Zimbabwe in the late 1990s had

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been one of the more productive
economies in southern Africa,

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with a strong agricultural
sector and a relatively stable

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currency.
The Zimbabwean dollar,

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introduced at independence in
1980, had once traded at near

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parity with the US dollar.
But around the year 2000,

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several pressures began to
compound.

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A government land reform program
disrupted commercial farming.

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Agricultural output fell
sharply, foreign investment

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retreated, and tax revenues
weakened.

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The state's expenses did not.
To cover the widening gap, the

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Reserve Bank of Zimbabwe began
to issue increasing amounts of

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new currency.
Gideon Gono, who became governor

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in 2003, presided over this
period.

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As output fell and money
expanded, prices climbed.

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Inflation moved from high to
alarming to almost

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incomprehensible.
By 2007 and into 2008.

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The numbers entered a territory
economists could no longer

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measure with precision because
by the time figures were

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gathered, prices had already
moved again.

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Independent estimates suggest
that monthly inflation in

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Zimbabwe peaked around 79.6
billion percent in November

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2008.
To make sense of such a figure,

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imagine prices roughly doubling
every 24 hours.

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The denominations on the
banknotes climbed in step.

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The Reserve Bank issued
$1,000,000 notes, then billion

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dollar notes.
In January 2009, it issued a

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$100 trillion note.
The figure on the paper was so

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large it almost looked like a
typographical error.

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In practice, a single note
bought less than a bus fare.

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Across Harare, the texture of
daily life shifted, as it had in

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Berlin.
Shop shelves emptied because

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importers could not predict
prices.

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People queued for bread at dawn.
Wages were spent immediately,

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often in the same hour they were
received.

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Where the Weimar story had its
wheelbarrows, the Zimbabwean

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story had its persistent
shopkeepers updating prices

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several times a day and
households turning to barter and

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to U.S. dollars passed hand to
hand.

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In April 2009, the Zimbabwean
dollar was effectively abandoned

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for everyday use.
The country moved to a basket of

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foreign currencies, primarily
the US dollar and the South

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African Rand.
The official currency was not

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loudly buried.
It simply faded out of use,

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replaced by quieter substitutes.
Like the Weimar episode, the

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Zimbabwean experience was not
caused by ordinary central bank

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policy.
It emerged from collapsing

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productive capacity, lost
institutional credibility and a

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state that found the printing
press easier than the

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alternatives.
These are extreme cases, the far

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end of a long spectrum, but they
are useful to hold in mind

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tonight.
Beneath every bank note, in

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every pocket, lies an
institution, a promise, and a

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great deal of quiet trust.
In our own century, that

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institution has a name we hear,
often without thinking about it

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carefully, the central bank.
For most of human history, the

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people who made money were
rulers.

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Kings stamped their faces onto
coins.

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Empires set the weight of silver
in their denarii.

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The right to issue currency was
bound to the right to govern,

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and the value of money to the
trust placed in the sovereign

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behind it.
That arrangement still echoes

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faintly in our own time.
But the institution that issues

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money today is no longer a king.
It is a central bank, a small,

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careful technical organization
usually housed in a serious

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building run by economists and
lawyers rather than monarchs.

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And although central banks are
now woven into every advanced

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economy, they are surprisingly
recent.

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The Federal Reserve, the central
Bank of the United States, was

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founded in December 1913.
That may sound like a long time

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ago, but it is younger than the
automobile, younger than the

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airplane, younger than
electricity in most American

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homes at the time.
Before the Federal Reserve, the

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United States had passed through
long stretches of banking

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instability with periodic panics
in which depositors lost

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confidence in private banks and
rushed to withdraw their

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savings. the Fed was created to
provide a steady hand during

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such moments.
The Bank of England is far

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older.
Founded in 1694, originally to

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help finance government debt, it
evolved across centuries into

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the model that many later
central banks would borrow from.

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The Bank of Japan was founded in
1882.

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The German Bundesbank emerged in
its modern form in 1957, deeply

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shaped by the Weimar memory.
The European Central Bank, the

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youngest of the major
institutions, was established in

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1998 to manage the new euro.
These institutions do many quiet

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things.
They set short term interest

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rates, the cost of borrowing
money in their respective

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economies.
They serve as lenders of last

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resort to commercial banks
during moments of stress.

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They oversee the soundness of
the banking system.

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And, crucially, they have the
power to create new money

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electronically, with the key
strokes of authorized officials.

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This last power is the one that
matters most for tonight's

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story.
It is worth pausing on that idea

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00:16:39,960 --> 00:16:43,680
because it can sound stranger
than it is.

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When a central bank creates
money, it does not typically run

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physical printing presses.
Except for the small portion

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that circulates as paper and
coin.

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Most modern money exists as
digital entries in the accounts

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commercial banks hold at the
central bank.

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When the central bank chooses to
expand the money supply, it

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credit these accounts.
The new money is real in every

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sense that matters.
It can be lent out, spent and

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used to purchase assets.
But it began as a decision

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recorded in a Ledger.
That power is enormous, and

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central bankers have long known
it.

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Through most of the 20th
century, they used it with great

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caution.
The story of how that caution

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slowly loosened is one of the
quieter dramas of modern

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economic history, and it is
where our journey turns next.

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To understand what central banks
do today, it helps to know what

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they used to be constrained by.
For most of the 20th century,

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the major currencies of the
world were tethered to something

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physical.
Most often, that something was

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gold.
The idea was simple.

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In principle, a currency was
worth a certain amount of gold,

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and that promise stood behind
every bank note.

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If you held a dollar or a pound,
you held a small claim on the

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gold reserves of the issuing
country.

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This arrangement, called the
gold standard, dominated

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international finance through
the 19th century and the early

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decades of the 20th.
The discipline it imposed was

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00:18:50,560 --> 00:18:53,920
real.
A country could not simply print

235
00:18:53,920 --> 00:18:58,760
more money than the gold in its
vaults would justify, because

236
00:18:58,920 --> 00:19:03,680
doing so would invite a run on
those reserves.

237
00:19:04,600 --> 00:19:08,880
If too many holders demanded to
convert their notes into metal,

238
00:19:09,480 --> 00:19:14,400
the arrangement could break.
Central banks under the gold

239
00:19:14,400 --> 00:19:19,560
standard were less the masters
of money than its keepers.

240
00:19:20,000 --> 00:19:23,280
The system did not survive the
First World War.

241
00:19:23,840 --> 00:19:30,280
Most combatant nations suspended
gold convertibility in 1914 to

242
00:19:30,280 --> 00:19:34,240
finance the war by printing
money and borrowing.

243
00:19:35,280 --> 00:19:38,560
Attempts to restore the old
system after the war were

244
00:19:38,560 --> 00:19:43,840
uneven, and the Great Depression
of the 1930s shattered what

245
00:19:43,840 --> 00:19:48,280
remained of it.
By the end of the 1930's, the

246
00:19:48,280 --> 00:19:52,160
world's monetary order was in
pieces.

247
00:19:52,520 --> 00:19:58,280
Then in July 1944, with the
Second World War still under

248
00:19:58,280 --> 00:20:04,720
way, delegates from 44 nations
gathered at a mountain resort in

249
00:20:04,720 --> 00:20:10,440
Bretton Woods, NH, over 3 weeks.
They negotiated a new

250
00:20:10,440 --> 00:20:15,120
International Monetary system.
The agreement tied the major

251
00:20:15,120 --> 00:20:20,720
currencies to the US dollar at
fixed exchange rates and tied

252
00:20:20,720 --> 00:20:24,560
the dollar to gold at $35 per
oz.

253
00:20:25,480 --> 00:20:31,200
The dollar became the anchor.
Gold remained somewhere behind

254
00:20:31,200 --> 00:20:34,120
it.
For nearly three decades, this

255
00:20:34,120 --> 00:20:37,320
arrangement held trade.
Expanded.

256
00:20:37,600 --> 00:20:42,480
Currencies were predictable.
The painful instabilities of the

257
00:20:42,480 --> 00:20:47,960
1920s and 1930s seemed to have
been laid to rest.

258
00:20:48,760 --> 00:20:51,640
But the system carried a quiet
tension.

259
00:20:52,560 --> 00:20:56,200
The United States issued the
dollars the rest of the world

260
00:20:56,200 --> 00:21:01,000
needed for trade, and as it did
so, more dollars circulated

261
00:21:01,000 --> 00:21:05,560
abroad than there was gold in
American vaults to redeem them.

262
00:21:05,960 --> 00:21:10,840
By the late 1960s, foreign
governments and central banks

263
00:21:11,160 --> 00:21:16,800
were aware of this gap.
Some, notably France, began

264
00:21:16,800 --> 00:21:22,800
converting their dollar reserves
into gold, drawing down American

265
00:21:22,800 --> 00:21:25,680
holdings.
Pressure mounted.

266
00:21:26,040 --> 00:21:32,600
On August 15th, 1971, President
Richard Nixon appeared on

267
00:21:32,600 --> 00:21:37,400
American television and
announced that the United States

268
00:21:37,400 --> 00:21:42,000
would no longer convert dollars
into gold at the fixed rate.

269
00:21:42,960 --> 00:21:48,320
The link between the dollar and
gold, already strained, was

270
00:21:48,320 --> 00:21:51,480
simply cut.
It is hard to overstate how

271
00:21:51,480 --> 00:21:54,160
quietly enormous this moment
was.

272
00:21:55,000 --> 00:21:59,520
From that evening forward, every
major currency in the world was,

273
00:21:59,520 --> 00:22:05,840
in technical terms, Fiat.
Its value rested not on metal in

274
00:22:05,840 --> 00:22:11,520
a vault, but on the credibility
of the institution that issued

275
00:22:11,520 --> 00:22:15,200
it.
The central bank had become the

276
00:22:15,200 --> 00:22:18,720
sole guardian of the value of
money.

277
00:22:20,080 --> 00:22:24,320
The decade that followed the end
of the gold link did not go

278
00:22:24,320 --> 00:22:27,480
smoothly.
Freed from the discipline of

279
00:22:27,480 --> 00:22:32,080
metal, but inheriting a world of
rising oil prices, labor

280
00:22:32,080 --> 00:22:37,720
tensions, and growing government
spending, the major economies of

281
00:22:37,720 --> 00:22:43,560
the 1970s drifted into a strange
new condition.

282
00:22:43,920 --> 00:22:49,000
Prices rose, Growth slowed.
Unemployment climbed.

283
00:22:49,720 --> 00:22:54,720
Economists, who had long assumed
that inflation and unemployment

284
00:22:54,720 --> 00:23:00,080
moved in opposite directions,
found themselves facing both at

285
00:23:00,080 --> 00:23:03,080
once.
They gave it a name that

286
00:23:03,080 --> 00:23:07,200
captured the discomfort of the
period, stagflation.

287
00:23:07,520 --> 00:23:12,280
In the United States, consumer
price inflation, which had

288
00:23:12,280 --> 00:23:17,440
hovered around 1 or 2% for most
of the post war period, climbed

289
00:23:17,440 --> 00:23:26,120
past 5% in the early 1970s, then
passed 10% by 1974, then settled

290
00:23:26,160 --> 00:23:31,160
uneasily before climbing again
toward the end of the decade.

291
00:23:31,560 --> 00:23:37,720
The 1973 oil embargo, when Arab
oil producing nations cut

292
00:23:37,720 --> 00:23:41,880
exports in response to Western
support for Israel during the

293
00:23:41,880 --> 00:23:47,440
Yom Kippur War, quadrupled the
price of crude almost overnight.

294
00:23:48,480 --> 00:23:53,440
A second oil shock followed in
1979 after the Iranian

295
00:23:53,440 --> 00:23:56,440
revolution.
The cost of nearly everything

296
00:23:56,440 --> 00:24:00,960
that moved on wheels or warmed
to home rose with it.

297
00:24:01,440 --> 00:24:05,760
Through these years, the Federal
Reserve responded cautiously,

298
00:24:06,240 --> 00:24:10,600
raising interest rates at times
but reluctant to push the

299
00:24:10,600 --> 00:24:15,520
economy into recession.
The result was that inflation

300
00:24:15,840 --> 00:24:21,960
became embedded in expectations.
Workers demanded higher wages

301
00:24:22,360 --> 00:24:25,160
because they expected higher
prices.

302
00:24:26,080 --> 00:24:31,320
Businesses raised prices because
they expected higher wages.

303
00:24:31,600 --> 00:24:37,480
The spiral fed itself.
In August 1979, President Jimmy

304
00:24:37,480 --> 00:24:43,160
Carter appointed Paul Volcker as
chairman of the Federal Reserve.

305
00:24:44,000 --> 00:24:48,200
Volcker was a towering man, both
literally and in reputation,

306
00:24:48,520 --> 00:24:52,480
known for his disciplined mind
and willingness to make

307
00:24:52,480 --> 00:24:56,960
unpopular decisions.
He took the position with a

308
00:24:56,960 --> 00:25:01,840
clear conviction inflation had
to be broken, and the only tool

309
00:25:01,840 --> 00:25:06,240
that would break it was a sharp
and sustained rise in interest

310
00:25:06,240 --> 00:25:08,360
rates.
He moved quickly.

311
00:25:08,920 --> 00:25:14,520
By 1980 and into 1981, the
Federal Reserve pushed its

312
00:25:14,520 --> 00:25:18,200
benchmark interest rate above
19%.

313
00:25:19,040 --> 00:25:22,360
Borrowing costs across the
economy followed.

314
00:25:22,960 --> 00:25:28,120
Mortgages, business loans and
consumer credit became

315
00:25:28,120 --> 00:25:32,440
punishingly expensive.
The result was the deepest

316
00:25:32,440 --> 00:25:36,880
recession the United States had
experienced since the 1930s.

317
00:25:37,560 --> 00:25:43,160
Unemployment rose past 10%.
Farmers, builders, and small

318
00:25:43,160 --> 00:25:46,640
business owners suffered
visibly.

319
00:25:47,600 --> 00:25:53,080
Volcker received death threats.
Members of Congress called for

320
00:25:53,080 --> 00:25:56,160
his removal, but the strategy
worked.

321
00:25:56,440 --> 00:26:02,200
By the mid 1980s, inflation had
fallen to around 4% and

322
00:26:02,200 --> 00:26:06,600
continued downward.
The painful medicine had broken

323
00:26:06,600 --> 00:26:11,080
the spiral, and the experience
left a generation of central

324
00:26:11,080 --> 00:26:18,360
bankers with a deep conviction.
Price stability, once lost, was

325
00:26:18,360 --> 00:26:21,560
extraordinarily costly to
restore.

326
00:26:22,440 --> 00:26:26,480
Far better to protect it
carefully year after year than

327
00:26:26,480 --> 00:26:30,640
to let it slip and face another
Volcker recession.

328
00:26:31,000 --> 00:26:36,000
That conviction became the
foundation of modern central

329
00:26:36,000 --> 00:26:39,840
banking.
It would shape the next decades

330
00:26:39,840 --> 00:26:42,960
in ways no one quite
anticipated.

331
00:26:43,360 --> 00:26:49,560
When Paul Volcker stepped down
in August 1987, his successor

332
00:26:49,960 --> 00:26:54,880
inherited an institution that
had recovered its credibility.

333
00:26:55,680 --> 00:27:01,240
Inflation was tamed, the economy
was growing, and the Federal

334
00:27:01,240 --> 00:27:05,280
Reserve was widely regarded as
one of the most respected

335
00:27:05,280 --> 00:27:08,440
institutions in American public
life.

336
00:27:09,440 --> 00:27:14,160
The new chairman was Alan
Greenspan, A quietly spoken

337
00:27:14,160 --> 00:27:18,560
economist with a long career in
private consulting and a

338
00:27:18,560 --> 00:27:22,600
reputation for careful
technocratic thinking.

339
00:27:23,600 --> 00:27:28,160
He would hold the position for
more than 18 years.

340
00:27:28,480 --> 00:27:34,080
Greenspan's first Test came
almost immediately on October

341
00:27:34,080 --> 00:27:38,880
19th, 1987, a date that would be
remembered as Black Monday.

342
00:27:39,320 --> 00:27:45,800
The Dow Jones Industrial Average
fell by 22% in a single trading

343
00:27:45,800 --> 00:27:48,240
day.
Markets around the world

344
00:27:48,240 --> 00:27:50,880
followed.
There was real fear of a

345
00:27:50,880 --> 00:27:57,040
cascading collapse, a repeat of
1929 and the new electronic age.

346
00:27:57,400 --> 00:28:01,800
The Federal Reserve, only weeks
into Greenspan's tenure,

347
00:28:02,200 --> 00:28:07,600
responded with unusual speed.
It issued A brief statement

348
00:28:07,600 --> 00:28:10,800
affirming its readiness to
provide liquidity to the

349
00:28:10,800 --> 00:28:15,280
financial system, and it cut
short term interest rates.

350
00:28:16,280 --> 00:28:22,320
The panic subsided.
Within months, markets had

351
00:28:22,320 --> 00:28:26,040
stabilized.
The lesson was noted carefully,

352
00:28:26,040 --> 00:28:29,640
not just by economists but by
investors.

353
00:28:30,480 --> 00:28:35,200
The Federal Reserve, it seemed,
would not stand passively while

354
00:28:35,200 --> 00:28:39,800
markets fell.
It would act, and the experience

355
00:28:39,800 --> 00:28:45,960
of seeing it act decisively and
successfully planted a quiet

356
00:28:45,960 --> 00:28:50,720
expectation that would grow.
Over the years, the pattern

357
00:28:50,840 --> 00:28:56,440
repeated.
In 1998, a large hedge fund

358
00:28:56,440 --> 00:29:01,080
called Long Term Capital
Management, run partly by Nobel

359
00:29:01,080 --> 00:29:06,200
winning economists, ran into
severe trouble after the Russian

360
00:29:06,200 --> 00:29:08,800
government defaulted on its
debt.

361
00:29:09,160 --> 00:29:14,160
The fund's positions were so
large and so interconnected with

362
00:29:14,160 --> 00:29:18,120
the major banks that its
collapse threatened the broader

363
00:29:18,120 --> 00:29:22,000
system.
The Federal Reserve coordinated

364
00:29:22,000 --> 00:29:26,640
a rescue and cut interest rates
to calm the markets.

365
00:29:27,480 --> 00:29:34,280
Again, the strategy worked.
Then came the.com crash of 2000

366
00:29:34,400 --> 00:29:39,680
and 2001.
Technology stocks, which had

367
00:29:39,680 --> 00:29:44,720
soared through the late 1990s on
optimism about the new Internet

368
00:29:44,720 --> 00:29:49,920
economy, fell sharply when many
of those companies failed to

369
00:29:49,920 --> 00:29:54,240
generate profits.
The broader stock market

370
00:29:54,240 --> 00:29:57,200
followed.
The Federal Reserve, under

371
00:29:57,200 --> 00:30:03,480
Greenspan cut interest rates
aggressively, from around 6 1/2%

372
00:30:03,480 --> 00:30:11,560
in 2000 to 1% by 2003.
By this point, a phrase had

373
00:30:11,560 --> 00:30:15,880
entered the language of
financial markets, the Greenspan

374
00:30:15,880 --> 00:30:19,560
put.
The term came from the world of

375
00:30:19,600 --> 00:30:25,200
options trading, where a put
option protects a holder against

376
00:30:25,200 --> 00:30:28,720
losses.
The idea was that the Federal

377
00:30:28,720 --> 00:30:33,720
Reserve under Greenspan would
reliably cut rates and ease

378
00:30:33,720 --> 00:30:37,080
conditions whenever markets fell
significantly.

379
00:30:38,080 --> 00:30:42,320
Investors began to factor that
expectation into their

380
00:30:42,320 --> 00:30:45,840
decisions.
It was not a formal policy.

381
00:30:46,360 --> 00:30:50,320
Greenspan himself never
described his approach in those

382
00:30:50,320 --> 00:30:53,600
terms.
But the pattern had become

383
00:30:53,600 --> 00:30:57,600
recognizable.
Each crisis was met with lower

384
00:30:57,600 --> 00:31:03,040
rates and more liquidity.
Each time, the strategy seemed

385
00:31:03,040 --> 00:31:08,800
to work, and each time the
implicit promise to markets grew

386
00:31:08,800 --> 00:31:12,480
a little stronger.
Something subtle was happening

387
00:31:12,480 --> 00:31:16,680
through these years, though it
was difficult to see while it

388
00:31:16,680 --> 00:31:20,960
was happening.
With each successive crisis, the

389
00:31:20,960 --> 00:31:25,080
response of the world's major
central banks grew a little

390
00:31:25,080 --> 00:31:28,720
larger.
The rates cut a little deeper.

391
00:31:29,280 --> 00:31:33,120
The easing held in place a
little longer.

392
00:31:33,800 --> 00:31:38,640
What had begun as emergency
intervention slowly became

393
00:31:38,800 --> 00:31:44,080
expected practice.
In 1987, the Federal Reserve had

394
00:31:44,080 --> 00:31:48,280
cut rates and provided liquidity
for a few weeks before

395
00:31:48,280 --> 00:31:53,560
withdrawing the support.
In 1998, the easing lasted

396
00:31:53,560 --> 00:31:58,560
longer and ran widerafterthe.com
crash. the Fed kept its

397
00:31:58,560 --> 00:32:05,400
benchmark rate at 1% through
2003 and 2004, the lowest level

398
00:32:05,680 --> 00:32:11,520
in nearly half a century.
Each step seemed reasonable in

399
00:32:11,520 --> 00:32:15,920
isolation.
Each step was also a step

400
00:32:15,920 --> 00:32:20,480
further from the cautious
posture of the Volcker years.

401
00:32:20,760 --> 00:32:24,240
Outside the United States, the
pattern was visible, too.

402
00:32:24,960 --> 00:32:30,320
The European Central Bank,
founded in 1998 to manage the

403
00:32:30,320 --> 00:32:36,320
new euro, was younger and more
conservative by design, but it

404
00:32:36,320 --> 00:32:40,960
also cut rates
significantlyduringthe.com

405
00:32:40,960 --> 00:32:45,320
aftermath, The Bank of England
followed similar contours.

406
00:32:45,880 --> 00:32:50,360
The Bank of Japan, dealing with
its own long slowed down

407
00:32:50,360 --> 00:32:54,120
following the collapse of its
real estate and stock market

408
00:32:54,120 --> 00:32:59,800
bubbles in the early 1990s, had
already cut its policy rate

409
00:32:59,800 --> 00:33:06,640
effectively to 0 by 1999.
It was the first major central

410
00:33:06,640 --> 00:33:11,520
bank to discover what happens
when rates run out of room to

411
00:33:11,520 --> 00:33:15,120
fall.
A new orthodoxy was forming.

412
00:33:15,680 --> 00:33:20,200
Central banks could and should
smooth the business cycle.

413
00:33:20,680 --> 00:33:24,720
They could lean against
downturns with lower rates and

414
00:33:25,040 --> 00:33:29,160
looser conditions.
They could prevent recessions

415
00:33:29,160 --> 00:33:31,520
from deepening into something
worse.

416
00:33:32,440 --> 00:33:37,520
The painful boom and bust
patterns of earlier eras, this

417
00:33:37,520 --> 00:33:40,320
thinking went, were not
inevitable.

418
00:33:40,800 --> 00:33:44,440
They could be managed.
There was a great deal of

419
00:33:44,440 --> 00:33:49,560
confidence in this view.
By the mid 2000s, economists

420
00:33:49,560 --> 00:33:54,840
spoke of the Great Moderation, a
period of unusually stable

421
00:33:54,840 --> 00:34:00,200
growth and low inflation across
the advanced economies.

422
00:34:01,120 --> 00:34:04,480
Central bankers were widely
praised.

423
00:34:05,080 --> 00:34:08,280
Greenspan was called the
Maestro.

424
00:34:08,960 --> 00:34:13,280
Beneath that confidence,
however, certain quieter

425
00:34:13,280 --> 00:34:18,000
dynamics were building.
Low interest rates encouraged

426
00:34:18,120 --> 00:34:21,840
borrowing.
They pushed investors to seek

427
00:34:21,840 --> 00:34:24,639
higher returns in riskier
places.

428
00:34:25,360 --> 00:34:29,880
They lifted asset prices,
particularly in housing.

429
00:34:30,800 --> 00:34:34,159
The American housing market
climbed steadily through the

430
00:34:34,199 --> 00:34:39,960
early 2000s, supported by easy
credit and by financial

431
00:34:39,960 --> 00:34:43,719
innovations that allowed
mortgages to be bundled,

432
00:34:44,080 --> 00:34:50,480
repackaged and sold worldwide.
For a time, this all seemed to

433
00:34:50,480 --> 00:34:54,120
be working.
Homeowners felt wealthier.

434
00:34:54,760 --> 00:35:00,320
Banks reported strong profits.
Mortgage lenders extended credit

435
00:35:00,320 --> 00:35:04,800
to borrowers who would have been
turned away in earlier decades.

436
00:35:05,440 --> 00:35:09,320
But each layer of confidence
rested on the layer beneath it.

437
00:35:10,080 --> 00:35:15,960
And beneath all of them quietly
lay an assumption that house

438
00:35:15,960 --> 00:35:21,400
prices would continue to rise,
that the central bank would

439
00:35:21,400 --> 00:35:26,000
continue to manage things
smoothly, and that the system

440
00:35:26,280 --> 00:35:29,000
was stronger than it had ever
been.

441
00:35:29,480 --> 00:35:32,880
None of those assumptions,
however, would survive the

442
00:35:32,880 --> 00:35:40,240
events of 2007 and 2008.
Let us slow our breath for a

443
00:35:40,240 --> 00:35:43,600
moment before stepping into what
came next.

444
00:35:44,600 --> 00:35:48,760
The years we have travelled
through were ones of confidence,

445
00:35:48,880 --> 00:35:54,240
of careful management, of an
institution growing steadily

446
00:35:54,240 --> 00:35:56,640
more central to the world's
economy.

447
00:35:57,080 --> 00:36:01,160
The crisis that arrived in 2008
did not come from nowhere.

448
00:36:01,800 --> 00:36:06,200
It came from the slow
accumulation of small risks

449
00:36:06,280 --> 00:36:10,600
beneath that confidence, and
from the discovery of how

450
00:36:10,600 --> 00:36:15,200
connected the system had become.
The first cracks appeared in

451
00:36:15,200 --> 00:36:18,840
2007.
American homeowners with

452
00:36:18,840 --> 00:36:23,560
subprime mortgages, loans
extended to borrowers with

453
00:36:23,560 --> 00:36:27,960
weaker credit, began to fall
behind on their payments.

454
00:36:28,680 --> 00:36:33,400
House prices, which had risen
for years, began to fall.

455
00:36:34,280 --> 00:36:38,760
The bundled mortgage securities
sold around the world, often

456
00:36:38,760 --> 00:36:44,040
rated as safe by major credit
agencies, began to lose value.

457
00:36:44,800 --> 00:36:50,120
Banks that held these securities
or that had insured them faced

458
00:36:50,160 --> 00:36:55,320
unexpected losses through 2007
and into 2008.

459
00:36:55,600 --> 00:37:00,680
The strain intensified.
The investment bank Bear

460
00:37:00,680 --> 00:37:05,480
Stearns, a name with more than
80 years of history, collapsed

461
00:37:05,480 --> 00:37:11,520
in March 2008 and was sold in a
rushed deal to JP Morgan Chase

462
00:37:11,520 --> 00:37:16,240
with Federal Reserve support.
The mortgage giants Fannie Mae

463
00:37:16,240 --> 00:37:21,040
and Freddie Mac were placed into
conservatorship in September.

464
00:37:21,840 --> 00:37:27,160
The system trembled.
Then on September 15th, 2008,

465
00:37:27,600 --> 00:37:31,960
the investment bank Lehman
Brothers filed for bankruptcy.

466
00:37:32,560 --> 00:37:36,120
It was one of the largest
bankruptcies in history.

467
00:37:36,800 --> 00:37:41,160
Unlike Bear Stearns months
earlier, Lehman was allowed to

468
00:37:41,160 --> 00:37:44,400
fail.
The decision was debated then

469
00:37:44,440 --> 00:37:49,400
and is still debated now.
What was undeniable was the

470
00:37:49,400 --> 00:37:52,640
effect.
Within days, credit markets

471
00:37:52,640 --> 00:37:56,240
around the world froze.
Banks stopped lending to one

472
00:37:56,240 --> 00:37:59,320
another.
Money market funds treated as

473
00:37:59,320 --> 00:38:02,920
nearly as safe as cash faced,
runs.

474
00:38:03,720 --> 00:38:07,680
The American International
Group, an insurance giant,

475
00:38:08,200 --> 00:38:13,080
required an emergency loan from
the Federal Reserve to avoid

476
00:38:13,080 --> 00:38:17,080
collapse.
The financial architecture that

477
00:38:17,080 --> 00:38:22,000
quietly underpinned global trade
was suddenly visible, and it was

478
00:38:22,000 --> 00:38:24,880
shaking.
At the center of the response

479
00:38:24,960 --> 00:38:30,360
stood Ben Bernanke, who had
succeeded Greenspan as chairman

480
00:38:30,360 --> 00:38:34,120
of the Federal Reserve in
February 2006.

481
00:38:35,080 --> 00:38:40,320
Bernanke was a scholar of the
Great Depression, a quietly

482
00:38:40,320 --> 00:38:44,280
spoken academic from Princeton
who had spent his career

483
00:38:44,440 --> 00:38:48,800
studying exactly the kind of
crisis now unfolding around him.

484
00:38:49,800 --> 00:38:54,520
His professional life had
prepared him to recognize what

485
00:38:54,520 --> 00:38:57,600
was happening and to act
quickly.

486
00:38:57,960 --> 00:39:01,440
The Federal Reserve cut interest
rates aggressively.

487
00:39:02,120 --> 00:39:07,600
By December 2008, the benchmark
rate had reached a range of 0 to

488
00:39:07,640 --> 00:39:14,240
1/4 of 1%, effectively as low as
conventional policy could go.

489
00:39:15,120 --> 00:39:19,040
Economists called this the 0
lower bound.

490
00:39:19,920 --> 00:39:24,640
Beyond it, the traditional tool
of monetary policy could no

491
00:39:24,640 --> 00:39:29,080
longer be used.
This was the moment when the old

492
00:39:29,080 --> 00:39:33,960
toolbox ran out.
The Federal Reserve had cut

493
00:39:33,960 --> 00:39:39,360
rates as far as they could go.
The crisis continued.

494
00:39:40,120 --> 00:39:44,200
Unemployment was rising.
Banks were still fragile.

495
00:39:44,440 --> 00:39:49,240
Something else would have to be
tried, and what came next would

496
00:39:49,240 --> 00:39:54,160
change the practice of central
banking in America and across

497
00:39:54,160 --> 00:39:58,400
the developed world.
What the Federal Reserve did

498
00:39:58,400 --> 00:40:03,480
next had been discussed in
academic papers and tried by the

499
00:40:03,480 --> 00:40:08,560
Bank of Japan, but never at this
scale by the American central

500
00:40:08,560 --> 00:40:12,520
bank.
It was called quantitative

501
00:40:12,560 --> 00:40:16,280
easing.
The name itself is gentle and

502
00:40:16,280 --> 00:40:20,200
technical, but the underlying
action was significant.

503
00:40:20,920 --> 00:40:25,960
With interest rates at 0, the
Federal Reserve began creating

504
00:40:25,960 --> 00:40:31,640
new money and using it to
purchase assets directly from

505
00:40:31,640 --> 00:40:35,760
the financial system.
The mechanics set out simply

506
00:40:36,160 --> 00:40:40,680
worked like this.
The Federal Reserve creates new

507
00:40:40,680 --> 00:40:43,360
electronic money in its own
accounts.

508
00:40:44,200 --> 00:40:49,600
It uses that money to buy
government bonds and other

509
00:40:49,600 --> 00:40:54,240
securities from banks and
financial institutions.

510
00:40:54,640 --> 00:40:58,560
The sellers receive freshly
created money in their accounts

511
00:40:58,560 --> 00:41:02,880
at the Federal Reserve, and the
Federal Reserve adds the

512
00:41:02,880 --> 00:41:06,480
purchase securities to its own
balance sheet.

513
00:41:07,320 --> 00:41:10,520
The amount of money in the
financial system grows.

514
00:41:10,960 --> 00:41:15,920
The supply of those assets in
private hands shrinks.

515
00:41:16,920 --> 00:41:21,080
The hope was that this would
lower long term interest rates,

516
00:41:21,640 --> 00:41:27,520
encourage lending, support asset
prices, and nurse the economy

517
00:41:27,520 --> 00:41:32,800
back to health.
The first round, later called QE

518
00:41:32,800 --> 00:41:39,960
One, began in November of 2008.
The Federal Reserve committed to

519
00:41:39,960 --> 00:41:45,600
purchasing up to $600 billion in
mortgage-backed securities.

520
00:41:46,600 --> 00:41:51,200
Over the following months, this
expanded to include longer term

521
00:41:51,200 --> 00:41:54,320
government bonds.
The numbers grew with each

522
00:41:54,320 --> 00:41:58,800
phase.
QE 2 was announced in November

523
00:41:58,800 --> 00:42:04,520
of 2010 with another 600 billion
in Treasury purchases.

524
00:42:05,360 --> 00:42:13,680
QE 3 began in September of 2012.
Without a fixed end date, the

525
00:42:13,680 --> 00:42:17,320
Federal Reserve would simply
continue buying assets each

526
00:42:17,320 --> 00:42:21,280
month until the labor market
improved.

527
00:42:21,680 --> 00:42:25,560
The effect on the Federal
Reserve's own balance sheet was

528
00:42:25,560 --> 00:42:30,200
striking.
Before the crisis, the Fed had

529
00:42:30,200 --> 00:42:36,720
held roughly $900 billion in
assets accumulated over decades

530
00:42:37,040 --> 00:42:43,400
of ordinary central banking.
By the end of 2014, that figure

531
00:42:43,400 --> 00:42:49,560
had grown to over $4 trillion.
The institution had expanded its

532
00:42:49,560 --> 00:42:54,480
balance sheet by more than four
times what had taken nearly a

533
00:42:54,480 --> 00:42:58,560
century to build.
This was not the printing of

534
00:42:58,560 --> 00:43:02,480
physical bank notes.
No new currency was being

535
00:43:02,480 --> 00:43:05,760
trucked from a mint to flood the
streets.

536
00:43:06,760 --> 00:43:12,120
The expansion happened almost
entirely as digital entries in

537
00:43:12,120 --> 00:43:15,920
the accounts banks held at the
Federal Reserve.

538
00:43:16,560 --> 00:43:19,480
But it was money creation in the
truest sense.

539
00:43:19,880 --> 00:43:25,120
New financial assets had been
called into existence by an act

540
00:43:25,120 --> 00:43:28,840
of central bank authority.
There was a great deal of debate

541
00:43:28,840 --> 00:43:32,680
at the time about whether this
would work and whether it was

542
00:43:32,680 --> 00:43:36,520
wise.
Some economists warned that it

543
00:43:36,520 --> 00:43:41,400
would lead to runaway inflation.
Others argued that without it,

544
00:43:41,840 --> 00:43:45,480
the recession would have
deepened into something far

545
00:43:45,480 --> 00:43:49,520
worse, perhaps another Great
Depression.

546
00:43:49,880 --> 00:43:54,120
The Federal Reserve under
Bernanke leaned on the

547
00:43:54,120 --> 00:43:57,440
historical lesson he had studied
for decades.

548
00:43:58,200 --> 00:44:02,720
The failure of central banks to
act in the early 1930s, he

549
00:44:02,720 --> 00:44:06,960
believed, had turned a recession
into catastrophe.

550
00:44:07,640 --> 00:44:09,920
He would not repeat that
mistake.

551
00:44:10,240 --> 00:44:14,200
What began at the Federal
Reserve did not stay at the

552
00:44:14,200 --> 00:44:18,320
Federal Reserve.
Across the Atlantic and across

553
00:44:18,320 --> 00:44:23,880
the Pacific, other major central
banks faced their own versions

554
00:44:23,880 --> 00:44:28,200
of the same problem.
Their economies were stalling.

555
00:44:28,720 --> 00:44:34,520
Their interest rates were
approaching 01 by 1.

556
00:44:34,960 --> 00:44:39,360
They reached for the new tools.
The European Central Bank,

557
00:44:39,840 --> 00:44:44,560
headquartered in Frankfurt,
faced a particularly delicate

558
00:44:44,560 --> 00:44:49,320
situation.
The eurozone contained 19

559
00:44:49,320 --> 00:44:54,640
countries with shared currency
but separate fiscal policies.

560
00:44:54,920 --> 00:45:00,360
After the 2008 crisis, a follow
on sovereign debt crisis

561
00:45:00,360 --> 00:45:05,880
erupted, with Greece, Ireland,
Portugal, Spain and Italy facing

562
00:45:05,880 --> 00:45:09,400
severe pressure on their
government bonds.

563
00:45:10,360 --> 00:45:15,080
Investors began to question
whether the eurozone itself

564
00:45:15,520 --> 00:45:19,920
could hold together.
Some countries were shut out of

565
00:45:19,920 --> 00:45:24,720
borrowing markets.
In July of 2012, the president

566
00:45:24,720 --> 00:45:29,440
of the European Central Bank,
Mario Draghi, gave a short

567
00:45:29,440 --> 00:45:33,000
speech in London that has since
become famous.

568
00:45:33,600 --> 00:45:39,600
He said the ECB would do, in his
words, whatever it takes to

569
00:45:39,600 --> 00:45:44,000
preserve the euro.
The phrase was carefully chosen.

570
00:45:44,560 --> 00:45:48,440
Markets understood immediately
that the central bank was

571
00:45:48,440 --> 00:45:53,360
prepared to use its balance
sheet on a scale not previously

572
00:45:53,360 --> 00:45:57,200
contemplated.
Bond yields in stressed

573
00:45:57,200 --> 00:46:01,760
countries began to fall as soon
as Draghi finished speaking.

574
00:46:02,200 --> 00:46:08,480
The ECB later followed through
with its own large scale asset

575
00:46:08,600 --> 00:46:13,280
purchase programs beginning in
2015.

576
00:46:14,280 --> 00:46:19,800
By the late 20 tens, its balance
sheet had grown several times

577
00:46:19,800 --> 00:46:22,920
over.
The eurozone had become

578
00:46:22,920 --> 00:46:28,160
accustomed to extraordinary
central bank support in Japan.

579
00:46:28,440 --> 00:46:32,480
The experience was in some ways
the deepest.

580
00:46:33,280 --> 00:46:37,360
The Bank of Japan had been
wrestling with low growth and

581
00:46:37,360 --> 00:46:43,040
low inflation since the early
1990s, when its asset price

582
00:46:43,040 --> 00:46:48,640
bubble had collapsed and left
behind decades of slow recovery

583
00:46:49,520 --> 00:46:52,720
rates.
There had been at or near 0 for

584
00:46:52,720 --> 00:46:56,560
years before the rest of the
world joined them.

585
00:46:57,440 --> 00:47:04,520
I An April of 2013, under its
newly appointed governor,

586
00:47:04,920 --> 00:47:10,080
Haruhiko Kuroda, the Bank of
Japan launched what it called

587
00:47:10,080 --> 00:47:13,920
quantitative and qualitative
monetary easing.

588
00:47:15,040 --> 00:47:19,160
The central bank committed to
doubling the country's monetary

589
00:47:19,160 --> 00:47:23,960
base within two years,
purchasing government bonds at

590
00:47:23,960 --> 00:47:27,960
an aggressive pace.
Even the Bank of England, with

591
00:47:27,960 --> 00:47:32,600
its long history of monetary
discipline, joined the new

592
00:47:32,600 --> 00:47:36,360
approach.
Its first quantitative easing

593
00:47:36,360 --> 00:47:43,480
program began in March of 2009
and successive rounds followed.

594
00:47:43,880 --> 00:47:48,040
By the mid twenty 10's, the
major central banks of the world

595
00:47:48,040 --> 00:47:51,440
were running similar experiments
in parallel.

596
00:47:52,440 --> 00:47:56,720
The combined size of their
balance sheets had grown into

597
00:47:56,720 --> 00:48:01,880
the 10s of trillions of dollars.
Interest rates across the

598
00:48:01,880 --> 00:48:05,080
developed world were unusually
low.

599
00:48:05,880 --> 00:48:11,400
In some places, including parts
of Europe and Japan, short term

600
00:48:11,400 --> 00:48:17,560
rates fell below 0 into the
strange territory of negative

601
00:48:17,560 --> 00:48:21,760
interest rates.
Depositors were being charged to

602
00:48:21,760 --> 00:48:26,320
hold money in certain accounts.
The world had entered an era of

603
00:48:26,320 --> 00:48:30,440
monetary policy unlike anything
in its recorded history.

604
00:48:30,800 --> 00:48:35,680
Here is where the story takes an
unexpected turn, and where it is

605
00:48:35,680 --> 00:48:39,840
worth slowing down for a moment
to consider what happened.

606
00:48:40,160 --> 00:48:44,840
Common intuition and a great
deal of older economic theory

607
00:48:45,400 --> 00:48:50,280
would have predicted one obvious
outcome from all this monetary

608
00:48:50,280 --> 00:48:54,360
expansion.
If central banks were creating

609
00:48:54,360 --> 00:48:58,280
trillions of dollars of new
money, prices in the broader

610
00:48:58,280 --> 00:49:03,040
economy ought to rise.
Goods should cost more.

611
00:49:03,600 --> 00:49:08,640
Wages should climb.
Inflation, the textbooks

612
00:49:08,640 --> 00:49:12,520
suggested, would arrive in
proportion to the printing.

613
00:49:12,920 --> 00:49:17,680
For more than a decade after
2008, it did not.

614
00:49:18,040 --> 00:49:22,680
Across the United States, the
eurozone, Japan and the United

615
00:49:22,680 --> 00:49:27,320
Kingdom, consumer price
inflation remained stubbornly

616
00:49:27,320 --> 00:49:32,840
low through the 20 tens.
Central banks had set an

617
00:49:32,840 --> 00:49:38,920
inflation target of around 2 per
cent, considered the level of

618
00:49:38,920 --> 00:49:43,120
mild healthy price growth for
most of the decade.

619
00:49:43,480 --> 00:49:47,600
They undershot it.
Some quarters saw inflation

620
00:49:47,600 --> 00:49:53,440
drift below 1 per cent.
Japan flirted with outright

621
00:49:53,440 --> 00:49:59,920
deflation, the slow falling of
prices that economists generally

622
00:49:59,920 --> 00:50:04,240
consider more dangerous than
mild inflation.

623
00:50:04,600 --> 00:50:08,440
This was a puzzle economists
discussed at length.

624
00:50:09,280 --> 00:50:13,760
The amount of new money created
by central banks dwarfed any

625
00:50:13,760 --> 00:50:17,640
peacetime monetary expansion in
modern history.

626
00:50:18,600 --> 00:50:23,080
By traditional measures, it
ought to have produced visible

627
00:50:23,080 --> 00:50:26,960
inflation, perhaps even severe
inflation.

628
00:50:27,240 --> 00:50:31,240
It did not.
Some who had predicted runaway

629
00:50:31,240 --> 00:50:36,160
inflation in the early 20 tens
were left year after year

630
00:50:36,560 --> 00:50:40,120
wondering when their forecasts
would come true.

631
00:50:40,360 --> 00:50:45,000
There were partial explanations.
The global financial system was

632
00:50:45,000 --> 00:50:49,520
deleveraging, with banks and
households repaying old debts

633
00:50:49,880 --> 00:50:53,960
rather than taking on new ones,
which absorbed some of the new

634
00:50:53,960 --> 00:50:57,720
liquidity.
Globalization continued to pull

635
00:50:57,720 --> 00:51:02,000
manufactured goods prices
downward as production moved to

636
00:51:02,000 --> 00:51:08,000
lower cost regions.
Technological progress kept many

637
00:51:08,000 --> 00:51:14,760
prices flat or falling.
Wages in advanced economies grew

638
00:51:14,760 --> 00:51:19,480
slowly, restrained by
globalization and by quieter

639
00:51:19,480 --> 00:51:23,680
changes in labor markets.
But there was another effect

640
00:51:23,680 --> 00:51:29,000
that ran through every advanced
economy, even if it was less

641
00:51:29,000 --> 00:51:32,520
often discussed alongside
consumer prices.

642
00:51:33,360 --> 00:51:39,720
Asset prices rose substantially.
Stock markets reached new highs

643
00:51:39,880 --> 00:51:44,400
through the 20 tens.
Government bonds rallied as

644
00:51:44,400 --> 00:51:48,760
their yields fell.
House prices in major cities,

645
00:51:48,760 --> 00:51:53,320
particularly London, New York,
Sydney and Toronto, climbed to

646
00:51:53,320 --> 00:51:57,960
levels that strained the budgets
of ordinary working families.

647
00:51:59,000 --> 00:52:02,400
The wealth of those who owned
assets grew.

648
00:52:03,080 --> 00:52:06,960
The position of those who did
not stayed the same.

649
00:52:07,360 --> 00:52:13,640
This produced a strange decade.
Economists could honestly report

650
00:52:13,640 --> 00:52:18,120
that inflation, measured through
a basket of consumer goods,

651
00:52:18,600 --> 00:52:22,720
remained calm.
Anyone trying to buy a home,

652
00:52:22,720 --> 00:52:26,640
however, or save toward
retirement, or invest in the

653
00:52:26,640 --> 00:52:31,600
major asset classes, was living
in a world where prices had

654
00:52:31,600 --> 00:52:36,080
risen substantially.
There were, in effect, two

655
00:52:36,080 --> 00:52:40,440
stories about prices unfolding
at the same time.

656
00:52:40,880 --> 00:52:46,160
Where the new money had gone was
the question economists would

657
00:52:46,160 --> 00:52:51,520
spend years trying to answer.
To understand why a decade of

658
00:52:51,560 --> 00:52:56,360
unprecedented money creation
produced so little consumer

659
00:52:56,360 --> 00:53:02,240
price inflation, it helps to
look more closely at how newly

660
00:53:02,240 --> 00:53:07,280
created central bank money
actually moves through an

661
00:53:07,280 --> 00:53:10,560
economy.
When a central bank purchases

662
00:53:10,560 --> 00:53:14,840
bonds from a commercial bank,
the seller receives an

663
00:53:14,840 --> 00:53:20,200
electronic credit in its reserve
account at the central bank.

664
00:53:20,600 --> 00:53:25,400
That reserve money is not the
same as the money you spend in a

665
00:53:25,400 --> 00:53:28,960
shop.
It sits inside the banking

666
00:53:28,960 --> 00:53:34,320
system used by banks to settle
transactions with one another

667
00:53:34,880 --> 00:53:38,240
and to meet regulatory
requirements.

668
00:53:39,160 --> 00:53:43,000
For the new money to reach the
broader economy, commercial

669
00:53:43,000 --> 00:53:47,960
banks would need to lend it out
and borrowers would need to

670
00:53:47,960 --> 00:53:52,400
spend it.
Only then would it touch goods,

671
00:53:52,480 --> 00:53:56,560
services, wages and consumer
prices.

672
00:53:56,880 --> 00:54:02,840
In the years after 2008, that
final step was less complete

673
00:54:02,880 --> 00:54:07,120
than expected.
Banks, recovering from the

674
00:54:07,120 --> 00:54:12,360
crisis and facing stricter new
regulations, were cautious about

675
00:54:12,360 --> 00:54:15,920
lending.
Households and businesses

676
00:54:16,080 --> 00:54:20,360
scarred by the recession were
cautious about borrowing.

677
00:54:21,400 --> 00:54:25,800
Much of the new central bank
money therefore stayed inside

678
00:54:25,800 --> 00:54:31,200
the financial system, held as
bank reserves or used to bid up

679
00:54:31,200 --> 00:54:35,960
the prices of financial assets.
There is a useful, if

680
00:54:35,960 --> 00:54:42,240
simplified, way to picture this.
Imagine the financial system as

681
00:54:42,240 --> 00:54:46,920
an upper floor of a great house,
with a broader economy on the

682
00:54:46,920 --> 00:54:51,160
floor below.
Quantitative easing flooded

683
00:54:51,160 --> 00:54:56,240
water on to the upper floor.
The water raised the level there

684
00:54:56,240 --> 00:55:00,320
substantially.
Some of it eventually trickled

685
00:55:00,320 --> 00:55:04,440
down through the pipes into the
floor below, but much of it

686
00:55:04,440 --> 00:55:07,080
remained where it had been
poured.

687
00:55:07,560 --> 00:55:11,360
This helps explain the strange
pattern of the 20 tens.

688
00:55:11,960 --> 00:55:16,240
Asset prices, which respond
directly to the abundance of

689
00:55:16,240 --> 00:55:19,720
money in the financial system,
rose sharply.

690
00:55:20,600 --> 00:55:26,240
Consumer prices, which respond
more to wages and to supply and

691
00:55:26,240 --> 00:55:30,560
demand in the wider economy,
rose only mildly.

692
00:55:31,400 --> 00:55:35,640
The link between money creation
and inflation, once taught as

693
00:55:35,640 --> 00:55:40,680
nearly automatic, turned out to
be more conditional than the

694
00:55:40,680 --> 00:55:45,960
older textbooks had suggested.
It also helps explain why

695
00:55:45,960 --> 00:55:52,200
hyperinflation did not arrive.
Weimar Germany and Zimbabwe had

696
00:55:52,200 --> 00:55:56,560
not simply printed money.
They had printed money into

697
00:55:56,560 --> 00:56:01,600
economies whose productive
capacity had collapsed and whose

698
00:56:01,600 --> 00:56:04,280
institutional credibility was
broken.

699
00:56:05,240 --> 00:56:10,480
New money chased A shrinking
supply of goods and prices ran

700
00:56:10,480 --> 00:56:13,960
wild.
The post crisis advanced

701
00:56:13,960 --> 00:56:18,520
economies, by contrast, had
functioning industries, working

702
00:56:18,520 --> 00:56:22,240
supply chains, deep
institutional trust, and

703
00:56:22,240 --> 00:56:25,320
significant slack in their labor
markets.

704
00:56:26,160 --> 00:56:29,960
New money entered a system that
could absorb it.

705
00:56:30,440 --> 00:56:34,360
But this lesson came with a
quieter warning.

706
00:56:35,400 --> 00:56:40,280
The conditions that allowed
monetary expansion to coexist

707
00:56:40,560 --> 00:56:44,600
with stable consumer prices were
not permanent.

708
00:56:45,040 --> 00:56:49,240
They depended on the broader
economy continuing to function

709
00:56:49,240 --> 00:56:52,920
smoothly and on people
continuing to trust the

710
00:56:52,920 --> 00:56:58,720
institutions that managed money.
Both of those assumptions would

711
00:56:58,720 --> 00:57:02,880
be tested in the events of the
early twenty 20's.

712
00:57:03,240 --> 00:57:06,440
The test arrived sooner than
anyone expected.

713
00:57:07,200 --> 00:57:14,280
In the early months of 2020 a
new virus moved across the world

714
00:57:14,960 --> 00:57:19,800
and within weeks the global
economy was undergoing something

715
00:57:20,360 --> 00:57:24,640
it had never experienced quite
this way before.

716
00:57:25,000 --> 00:57:29,360
Governments closed borders.
Workplaces shuttered.

717
00:57:29,920 --> 00:57:34,800
Restaurants, theatres, airports
and shops fell quiet.

718
00:57:35,680 --> 00:57:41,440
Demand for some things collapsed
almost overnight, while demand

719
00:57:41,440 --> 00:57:46,720
for others, like home delivery
and digital services, suddenly

720
00:57:46,720 --> 00:57:50,880
surged.
For central banks, the speed of

721
00:57:50,880 --> 00:57:55,360
the shock left little time for
measured deliberation.

722
00:57:56,240 --> 00:58:01,120
Within days of the worst of the
early panic, the Federal Reserve

723
00:58:01,120 --> 00:58:07,000
cut interest rates back to near
0, where they had not been since

724
00:58:07,000 --> 00:58:11,600
the previous crisis.
It announced new lending

725
00:58:11,600 --> 00:58:16,600
facilities, and it returned
almost immediately to

726
00:58:16,600 --> 00:58:21,160
quantitative easing on a scale
that surprised even those who

727
00:58:21,160 --> 00:58:25,760
had grown used to the tool.
The numbers tell part of the

728
00:58:25,760 --> 00:58:30,040
story.
In the spring of that year, the

729
00:58:30,040 --> 00:58:35,000
Federal Reserve expanded its
balance sheet by roughly $3

730
00:58:35,000 --> 00:58:41,880
trillion in a matter of months.
By comparison, the entire first

731
00:58:41,880 --> 00:58:46,480
round of quantitative easing a
decade earlier had been about

732
00:58:46,480 --> 00:58:51,000
600 billion.
What had been an experimental

733
00:58:51,000 --> 00:58:56,200
measure was now being deployed
almost casually, at speeds and

734
00:58:56,200 --> 00:58:59,560
sizes never previously
contemplated.

735
00:58:59,920 --> 00:59:03,760
Other major central banks moved
in the same direction at the

736
00:59:03,760 --> 00:59:07,320
same pace.
The European Central Bank

737
00:59:07,600 --> 00:59:11,680
launched a new pandemic
emergency purchase program.

738
00:59:12,600 --> 00:59:17,360
The Bank of England restarted
its asset purchases.

739
00:59:17,760 --> 00:59:23,160
The Bank of Japan expanded its
already enormous program.

740
00:59:23,840 --> 00:59:27,560
The combined response of the
world's major central banks

741
00:59:27,560 --> 00:59:33,640
across that year exceeded the
total monetary expansion of the

742
00:59:33,640 --> 00:59:37,840
previous decade.
This was not central bank action

743
00:59:37,840 --> 00:59:40,880
alone.
Governments around the world

744
00:59:40,880 --> 00:59:46,320
also acted with unusual speed,
sending direct payments to

745
00:59:46,320 --> 00:59:52,440
households, supporting payrolls
and propping up businesses that

746
00:59:52,440 --> 00:59:57,200
could not operate.
The combined fiscal and monetary

747
00:59:57,200 --> 01:00:00,880
response was unprecedented in
peacetime.

748
01:00:01,280 --> 01:00:03,640
There were good reasons for the
urgency.

749
01:00:04,160 --> 01:00:08,920
Without rapid action, the sudden
collapse in economic activity

750
01:00:09,480 --> 01:00:14,560
could have cascaded into
widespread bankruptcies, mass

751
01:00:14,680 --> 01:00:20,200
unemployment and a financial
crisis layered on top of the

752
01:00:20,200 --> 01:00:23,880
public health crisis.
The painful memory of the

753
01:00:23,880 --> 01:00:29,760
previous decade was still fresh.
Policy makers were determined

754
01:00:29,800 --> 01:00:34,920
not to let that happen again.
For a time, the response

755
01:00:34,920 --> 01:00:38,920
appeared to work.
Financial markets, which had

756
01:00:38,920 --> 01:00:43,440
fallen sharply in the early
weeks of the shock, recovered

757
01:00:43,440 --> 01:00:47,040
quickly.
Stock indexes returned to

758
01:00:47,040 --> 01:00:50,520
previous highs and then climbed
beyond them.

759
01:00:51,440 --> 01:00:56,640
Household savings, supported by
direct payments and reduced

760
01:00:56,640 --> 01:01:01,160
spending opportunities, grew
during the early months of the

761
01:01:01,160 --> 01:01:05,200
pandemic.
But beneath the calm financial

762
01:01:05,200 --> 01:01:10,360
surface, conditions were
shifting in ways that would soon

763
01:01:10,360 --> 01:01:16,040
make themselves visible.
The system that had absorbed

764
01:01:16,040 --> 01:01:21,800
monetary expansion so quietly
during the 20 tens was no longer

765
01:01:21,800 --> 01:01:24,560
the same system it had been
then.

766
01:01:24,800 --> 01:01:30,520
Slowly at 1st, and then
unmistakably, something began to

767
01:01:30,520 --> 01:01:33,360
change.
Through the second year of the

768
01:01:33,360 --> 01:01:38,080
pandemic, as economies reopened
and people returned to spending,

769
01:01:38,680 --> 01:01:43,520
prices started to rise.
At first, the increases were

770
01:01:43,520 --> 01:01:48,200
dismissed as temporary, the
result of supply chain hiccups,

771
01:01:48,320 --> 01:01:53,000
shipping costs, the shortage of
a few specific goods.

772
01:01:53,640 --> 01:02:00,160
Used cars climbed, lumber
climbed, then groceries, then

773
01:02:00,160 --> 01:02:04,480
rents, then services.
By the middle of the following

774
01:02:04,480 --> 01:02:08,200
year, the pattern was
undeniable.

775
01:02:08,880 --> 01:02:14,000
Consumer price inflation in the
United States crossed levels not

776
01:02:14,000 --> 01:02:20,240
seen in 4 decades, reaching a
peak above 9% in the summer.

777
01:02:21,080 --> 01:02:26,080
The eurozone followed with
inflation pushed further by an

778
01:02:26,080 --> 01:02:30,440
energy crisis as Russia's
invasion of Ukraine disrupted

779
01:02:30,440 --> 01:02:35,320
gas supplies.
The United Kingdom climbed past

780
01:02:35,440 --> 01:02:40,320
10%.
Even Japan, which had spent

781
01:02:40,320 --> 01:02:45,680
decades trying to coax inflation
back to its modest 2% target,

782
01:02:46,440 --> 01:02:51,520
began to see prices rise.
Several forces were at work, and

783
01:02:51,520 --> 01:02:54,400
economists are still debating
how to weigh them.

784
01:02:55,240 --> 01:03:00,360
Supply chains designed for the
careful efficiency of previous

785
01:03:00,360 --> 01:03:06,200
decades had been disrupted in
ways that took years to mend.

786
01:03:07,120 --> 01:03:11,720
Workers in many sectors had not
returned to the labor market in

787
01:03:11,720 --> 01:03:16,040
the same numbers as before,
leaving wages to climb and

788
01:03:16,040 --> 01:03:22,320
services and hospitality.
Energy prices spiked.

789
01:03:23,040 --> 01:03:28,480
Shipping costs multiplied.
The pile of household savings

790
01:03:28,480 --> 01:03:32,760
accumulated during the pandemic
now poured into spending on

791
01:03:32,760 --> 01:03:36,600
goods that could not be supplied
fast enough.

792
01:03:37,080 --> 01:03:41,600
But there was also the simpler
explanation, the one Sum had

793
01:03:41,600 --> 01:03:47,280
been warning about for years.
An enormous amount of new money

794
01:03:47,280 --> 01:03:50,960
had been created.
Government stimulus had moved it

795
01:03:50,960 --> 01:03:55,560
directly into households.
Consumer demand had surged.

796
01:03:56,040 --> 01:03:59,440
Productive capacity had not kept
pace.

797
01:04:00,160 --> 01:04:04,920
The conditions that had quietly
absorbed monetary expansion

798
01:04:04,920 --> 01:04:09,400
during the previous decade were
no longer holding the new money

799
01:04:09,640 --> 01:04:14,840
inside the financial system.
This time, the money had reached

800
01:04:14,840 --> 01:04:20,720
the broader economy, and the
broader economy was beginning to

801
01:04:20,720 --> 01:04:24,280
rise.
For ordinary people, the

802
01:04:24,280 --> 01:04:29,720
experience was vivid in a way
inflation statistics rarely

803
01:04:29,720 --> 01:04:34,320
managed to convey.
Grocery bills climbed visibly

804
01:04:34,320 --> 01:04:38,240
each month.
Rents rose by amounts that left

805
01:04:38,240 --> 01:04:41,040
some tenants unable to renew
their leases.

806
01:04:42,040 --> 01:04:46,400
Heating a home through a
European winter became a serious

807
01:04:46,400 --> 01:04:51,960
financial decision.
Wages also rose, but often more

808
01:04:51,960 --> 01:04:56,960
slowly than prices, leaving many
families slightly worse off in

809
01:04:56,960 --> 01:05:00,080
real terms.
There was nothing approaching

810
01:05:00,080 --> 01:05:03,800
the extreme cases we visited
earlier in the night.

811
01:05:04,720 --> 01:05:10,000
The Weimar wheelbarrows and the
Zimbabwean trillion dollar notes

812
01:05:10,560 --> 01:05:16,000
belong to a different category,
a place where institutional

813
01:05:16,000 --> 01:05:21,000
trust has collapsed and the
printing press is the only

814
01:05:21,000 --> 01:05:24,680
remaining tool.
The advanced economies of the

815
01:05:24,800 --> 01:05:30,120
early twenty 20s remained far
from that territory, but for the

816
01:05:30,120 --> 01:05:35,760
first time in a generation, the
abstract idea of inflation had

817
01:05:35,760 --> 01:05:42,120
become a daily reality across
much of the developed world, and

818
01:05:42,120 --> 01:05:48,040
central banks faced a question
they had not faced in decades.

819
01:05:48,440 --> 01:05:52,600
For nearly 15 years, central
bankers had been engaged

820
01:05:52,600 --> 01:05:57,520
primarily in supporting fragile
economies, lowering rates,

821
01:05:57,920 --> 01:06:03,120
expanding balance sheets and
providing reassurance to nervous

822
01:06:03,120 --> 01:06:06,640
markets.
The instinctive direction of

823
01:06:06,640 --> 01:06:11,080
policy had been ease and more
ease.

824
01:06:11,720 --> 01:06:15,600
Now, suddenly, the direction had
to reverse.

825
01:06:15,960 --> 01:06:21,840
The Federal Reserve, under its
chair, Jerome Powell, began the

826
01:06:21,840 --> 01:06:27,320
turn in early spring.
For a few months, officials

827
01:06:27,320 --> 01:06:32,880
hesitated, hoping the surge in
prices might prove transitory.

828
01:06:33,280 --> 01:06:37,000
By the time it became clear that
inflation was settling in rather

829
01:06:37,000 --> 01:06:40,440
than passing through, the
central bank had to move

830
01:06:40,440 --> 01:06:45,240
quickly.
Interest rates, held near 0 for

831
01:06:45,240 --> 01:06:52,600
two full years, began to climb.
The pace was the fastest in four

832
01:06:52,600 --> 01:06:56,560
decades.
Within about 18 months, the

833
01:06:56,560 --> 01:07:01,800
benchmark rate rose from near 0
to above 5 per cent.

834
01:07:02,240 --> 01:07:06,320
The European Central Bank
followed, raising rates for the

835
01:07:06,320 --> 01:07:10,920
first time in more than a decade
and continuing to raise them

836
01:07:11,120 --> 01:07:16,560
through successive meetings.
The Bank of England moved in

837
01:07:16,600 --> 01:07:21,440
parallel.
Even the Bank of Japan, the most

838
01:07:21,440 --> 01:07:25,760
reluctant of the major central
banks, eventually began to step

839
01:07:25,760 --> 01:07:32,280
away from its long experiment in
negative rates around the world.

840
01:07:32,600 --> 01:07:38,760
The cost of borrowing rose.
Mortgages became more expensive.

841
01:07:39,440 --> 01:07:44,040
Business loans tightened.
The cheap money of the previous

842
01:07:44,040 --> 01:07:47,440
decade became once again costly
money.

843
01:07:47,720 --> 01:07:52,160
The mood inside central banks
shifted along with the policy.

844
01:07:52,680 --> 01:07:55,800
Speeches began to invoke the
memory of Volcker.

845
01:07:56,320 --> 01:07:59,800
Officials emphasized that they
would do what was necessary,

846
01:07:59,800 --> 01:08:04,160
even at the cost of slowing
their economies, to bring

847
01:08:04,160 --> 01:08:08,520
inflation back toward target
credibility.

848
01:08:08,920 --> 01:08:13,840
The quiet assets central banks
had spent decades building was

849
01:08:13,840 --> 01:08:20,760
once again at stake.
The memory of the 1970s of

850
01:08:20,760 --> 01:08:26,000
inflation, embedded in
expectations and spirals fed by

851
01:08:26,000 --> 01:08:30,200
hesitation, was a memory they
all carried.

852
01:08:30,479 --> 01:08:35,800
For households and businesses,
the reversal was felt as a

853
01:08:35,800 --> 01:08:40,560
different kind of pressure.
House prices in some major

854
01:08:40,560 --> 01:08:44,760
cities, which had been carried
higher by years of low rates,

855
01:08:45,319 --> 01:08:49,600
began to soften.
Mortgage payments for those on

856
01:08:49,600 --> 01:08:55,359
variable rates climbed sharply.
Small businesses that had taken

857
01:08:55,359 --> 01:09:00,200
on debt during the cheap money
years found their interest costs

858
01:09:00,359 --> 01:09:03,800
rising.
The financial markets,

859
01:09:04,040 --> 01:09:08,600
accustomed to gentle and steady
accommodation, experienced

860
01:09:08,640 --> 01:09:14,439
periods of unusual stress.
A handful of regional banks in

861
01:09:14,439 --> 01:09:20,040
the United States failed in the
spring of 2023, partly because

862
01:09:20,240 --> 01:09:25,040
their long dated bond holdings
had lost value as rates rose.

863
01:09:25,439 --> 01:09:29,840
Yet gradually the strategy began
to bite.

864
01:09:30,600 --> 01:09:35,200
Inflation in the United States
came down from its peak towards

865
01:09:35,200 --> 01:09:40,240
something closer to 3%.
The eurozone and the United

866
01:09:40,240 --> 01:09:44,319
Kingdom followed similar paths,
though more slowly.

867
01:09:45,120 --> 01:09:49,640
By the middle of the decade,
central bankers were beginning

868
01:09:49,640 --> 01:09:54,920
to cautiously cut rates again,
no longer fighting an emergency

869
01:09:55,480 --> 01:09:59,520
but trying to navigate a slower,
more delicate adjustment.

870
01:09:59,960 --> 01:10:02,800
The Volcker memory had not
faded.

871
01:10:03,320 --> 01:10:07,240
It had quietly done its work
again.

872
01:10:08,760 --> 01:10:13,520
Let us take a quiet moment now
to look back across the journey

873
01:10:13,520 --> 01:10:18,600
we have taken and ask a question
that has been gathering beneath

874
01:10:18,600 --> 01:10:21,120
the surface of the story all
along.

875
01:10:21,560 --> 01:10:26,680
Why, across more than 3 decades,
have central banks leaned more

876
01:10:26,680 --> 01:10:29,920
and more heavily on monetary
easing?

877
01:10:30,640 --> 01:10:36,200
Why has each crisis met a larger
response than the one before?

878
01:10:36,960 --> 01:10:41,480
Why have the tools, once
reserved for moments of true

879
01:10:41,480 --> 01:10:46,320
emergency become familiar
instruments, deployed almost

880
01:10:46,320 --> 01:10:49,440
reflexively when economies
stumble?

881
01:10:49,840 --> 01:10:54,640
There is no single answer, but
there are several quieter forces

882
01:10:54,640 --> 01:11:00,160
that have shaped the pattern.
The 1st is the genuine fear of

883
01:11:00,160 --> 01:11:05,720
repeating the 1930's.
The Great Depression cast a long

884
01:11:05,720 --> 01:11:09,400
shadow over 20th century
economic thought.

885
01:11:10,320 --> 01:11:15,160
The failure of central banks to
act decisively in those years

886
01:11:15,640 --> 01:11:20,520
the bank runs, the deflation,
the mass unemployment, the

887
01:11:20,520 --> 01:11:24,480
descent into political chaos
that followed became the

888
01:11:24,480 --> 01:11:29,760
cautionary tale every modern
central banker carries inside

889
01:11:29,760 --> 01:11:32,800
them.
When a crisis arrives, the

890
01:11:32,840 --> 01:11:37,600
instinct is to act quickly and
on a scale large enough to make

891
01:11:37,600 --> 01:11:43,600
sure history does not repeat.
The second is the difficulty of

892
01:11:43,600 --> 01:11:46,840
fiscal action in modern
democracies.

893
01:11:47,680 --> 01:11:51,800
In an earlier age, governments
might have responded to

894
01:11:51,800 --> 01:11:56,320
recessions by spending public
money directly through

895
01:11:56,320 --> 01:11:59,200
infrastructure programs or
direct hiring.

896
01:11:59,800 --> 01:12:05,520
But political polarization,
concerns about public debt, and

897
01:12:05,520 --> 01:12:10,200
the slower pace of legislatures
have made fiscal responses

898
01:12:10,400 --> 01:12:13,480
harder to assemble, especially
quickly.

899
01:12:14,320 --> 01:12:19,440
Central banks, by contrast, can
act within hours.

900
01:12:20,200 --> 01:12:25,080
Monetary policy has filled a
space that fiscal policy might

901
01:12:25,080 --> 01:12:28,440
have occupied.
The third is the simple

902
01:12:28,440 --> 01:12:33,720
mathematics of low rates.
Once interest rates approach 0,

903
01:12:34,280 --> 01:12:38,320
the traditional tool of rate
cuts runs out of room.

904
01:12:39,080 --> 01:12:43,120
To do more, central banks must
reach for less conventional

905
01:12:43,120 --> 01:12:48,400
instruments like quantitative
easing or new lending programs.

906
01:12:49,280 --> 01:12:53,800
Each crisis that begins with
rates already low tends to

907
01:12:53,800 --> 01:12:58,120
require a larger and more
creative response than the one

908
01:12:58,120 --> 01:13:04,080
before, because the conventional
move is already exhausted.

909
01:13:04,480 --> 01:13:08,680
The 4th is harder to name, but
no less real.

910
01:13:09,440 --> 01:13:14,960
Each rescue, by softening one
painful adjustment, tends to

911
01:13:14,960 --> 01:13:19,040
leave the system slightly more
leveraged, slightly more

912
01:13:19,040 --> 01:13:23,640
dependent on cheap money,
slightly more fragile in the

913
01:13:23,640 --> 01:13:28,000
face of the next shock.
When the next shock arrives, the

914
01:13:28,000 --> 01:13:34,080
response must be larger, because
the system has grown larger and

915
01:13:34,080 --> 01:13:38,680
more sensitive to the conditions
the previous rescue helped

916
01:13:38,680 --> 01:13:42,440
create.
The cycle is not vicious,

917
01:13:42,440 --> 01:13:48,240
exactly, but it does grow.
None of this is the product of

918
01:13:48,280 --> 01:13:53,360
any single decision or any
single person's failure.

919
01:13:54,160 --> 01:13:59,480
It is the slow accumulation of
reasonable choices made under

920
01:13:59,480 --> 01:14:05,960
pressure, each one defensible in
its moment, each one quietly

921
01:14:05,960 --> 01:14:11,440
raising the cost of the next.
This is the world we live in, a

922
01:14:11,440 --> 01:14:16,920
world held steady by a careful
institution doing important work

923
01:14:16,920 --> 01:14:22,720
with imperfect tools, in a
system that has grown stranger

924
01:14:22,880 --> 01:14:27,280
and more dependent on its
judgments with each passing

925
01:14:27,280 --> 01:14:31,280
decade.
It is worth returning briefly to

926
01:14:31,280 --> 01:14:35,680
the two stories we visited at
the beginning of our journey.

927
01:14:36,320 --> 01:14:41,520
The Weimar wheelbarrows, the
Zimbabwean trillion dollar

928
01:14:41,520 --> 01:14:45,000
notes.
These are the images that come

929
01:14:45,000 --> 01:14:50,760
most easily to mind when people
speak of money losing its value,

930
01:14:51,400 --> 01:14:55,360
and they shape the way many of
us instinctively think about

931
01:14:55,360 --> 01:14:59,800
printing money.
If you create enough of it, the

932
01:14:59,800 --> 01:15:04,600
intuition runs, prices will
eventually explode.

933
01:15:05,000 --> 01:15:09,360
But the story we have walked
through tonight suggests a more

934
01:15:09,360 --> 01:15:14,080
careful picture.
Hyperinflation, the kind that

935
01:15:14,080 --> 01:15:19,560
turns a loaf of bread into a
billion mark transaction, is not

936
01:15:19,560 --> 01:15:23,040
the natural end point of
monetary expansion.

937
01:15:23,840 --> 01:15:29,360
It is a specific and rare
outcome that requires several

938
01:15:29,360 --> 01:15:32,120
conditions to come together at
once.

939
01:15:32,440 --> 01:15:36,800
The first condition is the
collapse of productive capacity.

940
01:15:37,520 --> 01:15:42,000
In Weimar Germany, the rural
occupation had paralyzed the

941
01:15:42,000 --> 01:15:46,960
country's industrial heartland
and the wider economy was

942
01:15:46,960 --> 01:15:50,760
already weakened by the war and
by reparations.

943
01:15:51,520 --> 01:15:56,560
In Zimbabwe, the agricultural
sector that had once fed the

944
01:15:56,560 --> 01:16:01,160
country had been disrupted and
the wider economy was

945
01:16:01,160 --> 01:16:06,280
contracting sharply.
New money cannot drive prices to

946
01:16:06,280 --> 01:16:11,280
extreme levels on its own.
It needs a shortage of goods to

947
01:16:11,280 --> 01:16:14,120
chase.
When the economy can still

948
01:16:14,120 --> 01:16:18,840
produce, new money is absorbed
by expanding output.

949
01:16:19,640 --> 01:16:24,560
When it cannot, the same money
piles onto a shrinking pile of

950
01:16:24,560 --> 01:16:28,880
bread, fuel and basic
necessities.

951
01:16:29,240 --> 01:16:34,160
The second condition is the loss
of institutional credibility.

952
01:16:35,280 --> 01:16:40,960
In both Weimar and Zimbabwe, the
central bank was not seen as an

953
01:16:40,960 --> 01:16:46,600
independent guardian of money.
It was seen, accurately, as an

954
01:16:46,600 --> 01:16:50,920
instrument of a struggling
government trying to finance its

955
01:16:50,920 --> 01:16:53,360
commitments through the printing
press.

956
01:16:53,960 --> 01:16:59,000
Once that perception sets in, no
quantity of newly issued

957
01:16:59,000 --> 01:17:04,520
currency can hold its value
because the public no longer

958
01:17:04,520 --> 01:17:08,040
believes anyone is in charge of
restraining it.

959
01:17:08,440 --> 01:17:12,960
The third condition is the
absence of alternatives.

960
01:17:13,680 --> 01:17:18,440
In a modern advanced economy,
people who lose faith in their

961
01:17:18,440 --> 01:17:22,680
currency can shift their savings
into other assets.

962
01:17:23,680 --> 01:17:27,480
They can hold dollars, EUR, gold
or property.

963
01:17:28,280 --> 01:17:33,200
But the institutions and laws
underpinning the currency itself

964
01:17:33,560 --> 01:17:37,920
remained stable.
In Weimar and Zimbabwe, the

965
01:17:37,920 --> 01:17:42,640
choices were starker and the
entire monetary system was under

966
01:17:42,640 --> 01:17:46,280
strain.
Modern advanced economies have

967
01:17:46,280 --> 01:17:48,520
not been close to these
conditions.

968
01:17:49,080 --> 01:17:53,000
Even during the most aggressive
periods of monetary expansion,

969
01:17:53,840 --> 01:17:58,520
their industries function.
Their supply chains, though

970
01:17:58,640 --> 01:18:01,560
sometimes strained, still
operate.

971
01:18:02,400 --> 01:18:05,640
Their central banks remain
widely trusted.

972
01:18:05,840 --> 01:18:09,640
Their citizens still keep most
of their savings in their

973
01:18:09,640 --> 01:18:13,800
domestic currency.
The institutional foundations

974
01:18:13,800 --> 01:18:16,680
are intact.
This does not mean the

975
01:18:16,680 --> 01:18:20,880
foundations are eternal, only
that they have not yet been

976
01:18:20,880 --> 01:18:26,080
seriously threatened.
The painful lesson of the Weimar

977
01:18:26,080 --> 01:18:32,000
and Zimbabwean stories is not
that printing money inevitably

978
01:18:32,000 --> 01:18:36,120
leads to ruin.
It is that the conditions for

979
01:18:36,120 --> 01:18:41,360
genuine monetary collapse are
specific, and that institutions,

980
01:18:41,360 --> 01:18:46,560
once broken, are extraordinarily
costly to rebuild.

981
01:18:46,920 --> 01:18:51,280
If you spend long enough
thinking about money, you

982
01:18:51,280 --> 01:18:55,160
eventually arrive at a strange
realization.

983
01:18:56,240 --> 01:19:00,080
The thing itself is almost
nothing.

984
01:19:01,080 --> 01:19:10,360
A bank note is paper and ink.
A coin is metal, a digital

985
01:19:10,360 --> 01:19:14,440
balance is an entry in a
database.

986
01:19:15,120 --> 01:19:19,320
And yet these almost nothing
things organize the lives of

987
01:19:19,320 --> 01:19:24,800
billions of people govern who
eats and who does not, who

988
01:19:24,800 --> 01:19:31,360
travels and who stays, who is
housed and who is not.

989
01:19:32,760 --> 01:19:37,320
The whole great machinery of
modern life rests on something

990
01:19:37,320 --> 01:19:40,960
we have agreed to believe in
together.

991
01:19:41,360 --> 01:19:45,600
This is what gives money its
peculiar character.

992
01:19:46,440 --> 01:19:51,000
It is not quite a physical thing
and not quite an idea.

993
01:19:51,760 --> 01:19:57,680
It is a social contract made and
remade every day by everyone who

994
01:19:57,680 --> 01:20:02,400
accepts it, holds it, spends it,
and saves it.

995
01:20:03,360 --> 01:20:08,640
The contract works because
almost everyone participates in

996
01:20:08,640 --> 01:20:14,280
it almost all the time.
When the contract weakens, the

997
01:20:14,280 --> 01:20:18,400
whole arrangement begins to
tremble when it breaks.

998
01:20:18,720 --> 01:20:23,080
The wheelbarrows appear.
The history we have travelled

999
01:20:23,080 --> 01:20:27,600
tonight reveals this character
from many angles.

1000
01:20:28,720 --> 01:20:34,600
The gold standard was an attempt
to bind money to something

1001
01:20:34,600 --> 01:20:39,840
tangible in the hope that
physical metal could anchor

1002
01:20:39,840 --> 01:20:44,160
belief.
Bretton Woods carried that hope

1003
01:20:44,160 --> 01:20:50,600
forward in modified form.
The end of dollar convertibility

1004
01:20:50,600 --> 01:20:54,800
in 1971 cut the last formal
tether.

1005
01:20:55,240 --> 01:21:00,920
And yet money continued to
function because the trust that

1006
01:21:00,920 --> 01:21:06,320
had once rested in metal now
rested in institutions.

1007
01:21:07,320 --> 01:21:12,360
The Volcker years showed that
this institutional trust, once

1008
01:21:12,360 --> 01:21:18,120
damaged by inflation, could be
rebuilt only at great cost.

1009
01:21:18,840 --> 01:21:24,320
The decade of quiet quantitative
easing showed that even

1010
01:21:24,440 --> 01:21:32,160
unprecedented monetary expansion
could coexist with stable prices

1011
01:21:32,760 --> 01:21:38,000
so long as the trust held.
There is a long human history of

1012
01:21:38,000 --> 01:21:42,560
improvising money when official
currencies fail.

1013
01:21:43,440 --> 01:21:48,920
In prisoner of war camps during
the Second World War, cigarettes

1014
01:21:48,920 --> 01:21:56,880
became currency traded for food,
services and small comforts.

1015
01:21:57,240 --> 01:22:02,240
In post war Germany, before the
new currency was introduced,

1016
01:22:02,720 --> 01:22:07,960
American cigarettes again served
as a medium of exchange.

1017
01:22:08,680 --> 01:22:14,840
In modern crises across Africa
and Latin America, mobile phone

1018
01:22:14,840 --> 01:22:20,400
airtime minutes have been traded
as money passed between

1019
01:22:20,400 --> 01:22:23,760
strangers as carefully as bank
notes.

1020
01:22:24,880 --> 01:22:31,080
The instinct to create a shared
medium of exchange seems to be

1021
01:22:31,080 --> 01:22:36,320
very deep in US.
When the official channels fail,

1022
01:22:36,800 --> 01:22:42,560
we improvised new ones.
What this suggests is that money

1023
01:22:42,560 --> 01:22:48,760
is at root less about paper or
metal or digital ledgers than

1024
01:22:48,760 --> 01:22:52,560
about a particular kind of human
cooperation.

1025
01:22:53,320 --> 01:22:59,080
We agreed to accept these tokens
because we trust that others

1026
01:22:59,080 --> 01:23:02,800
will too.
The institution behind the

1027
01:23:02,800 --> 01:23:10,000
currency simply formalizes that
trust, gives it rules, and tries

1028
01:23:10,000 --> 01:23:14,960
to protect it from the pressures
that might erode it.

1029
01:23:15,000 --> 01:23:19,880
To understand modern central
banking is to understand that

1030
01:23:19,880 --> 01:23:27,040
the institution is not, in the
end, managing paper or numbers.

1031
01:23:27,640 --> 01:23:33,760
It is managing belief, and
belief, once well established,

1032
01:23:34,440 --> 01:23:38,200
is one of the most durable
things in human life.

1033
01:23:39,080 --> 01:23:43,800
When it falters, however, it can
falter quickly.

1034
01:23:46,040 --> 01:23:52,240
And now the night has grown
deeper, and the story can slow.

1035
01:23:52,600 --> 01:23:56,600
We began with the strangeness of
money itself.

1036
01:23:57,360 --> 01:24:03,320
Paper, metal, digital entries
held in pockets and accounts and

1037
01:24:03,320 --> 01:24:09,080
wallets doing their quiet work
across billions of lives.

1038
01:24:09,480 --> 01:24:14,000
We travelled through the
wheelbarrows of Berlin, the

1039
01:24:14,000 --> 01:24:19,280
trillion dollar notes of Harare,
and arrived at the careful

1040
01:24:19,280 --> 01:24:24,320
institutions of our own century,
with their committees and

1041
01:24:24,440 --> 01:24:29,320
balance sheets and the
keystrokes that bring new money

1042
01:24:30,080 --> 01:24:34,240
into being.
We watched central banks lean

1043
01:24:34,240 --> 01:24:39,960
further into the printing press
with each crisis, and saw how

1044
01:24:39,960 --> 01:24:47,160
their intervention slowly grew
larger, more frequent and more

1045
01:24:47,160 --> 01:24:51,880
essential.
We watched, too, how the system

1046
01:24:51,880 --> 01:24:57,200
absorbed an extraordinary
expansion of money for more than

1047
01:24:57,200 --> 01:25:02,320
a decade before quietly
beginning to feel its weight.

1048
01:25:02,760 --> 01:25:08,000
Through all of it, the deeper
truth has stayed the same.

1049
01:25:08,840 --> 01:25:16,320
Money is a shared agreement held
together by institutions and by

1050
01:25:16,320 --> 01:25:21,760
trust.
It works because we believe it

1051
01:25:21,760 --> 01:25:28,480
works, and because the people
around us believe the same.

1052
01:25:28,920 --> 01:25:34,760
The central bank is the
institution that watches over

1053
01:25:34,760 --> 01:25:41,520
that belief, doing its difficult
work in quiet rooms, often

1054
01:25:41,560 --> 01:25:48,960
unnoticed, sometimes criticized,
occasionally celebrated.

1055
01:25:49,960 --> 01:25:54,520
It is not perfect.
The tools it carries are

1056
01:25:54,520 --> 01:25:58,720
imperfect.
The world it manages is more

1057
01:25:58,720 --> 01:26:02,600
complicated than its models can
fully capture.

1058
01:26:03,520 --> 01:26:09,000
But it is what stands between
ordinary life and the kind of

1059
01:26:09,000 --> 01:26:13,640
crisis we've visited in the
early hours of this journey.

1060
01:26:14,080 --> 01:26:18,360
Perhaps that is the feeling to
keep tonight.

1061
01:26:19,080 --> 01:26:25,160
Not the dates, not the technical
names, not the precise figures,

1062
01:26:25,800 --> 01:26:30,640
but the mood of it, the sense
that the steady coin in your

1063
01:26:30,640 --> 01:26:36,600
pocket, the steady price on the
menu, the steady number in your

1064
01:26:36,600 --> 01:26:42,880
account, is the product of a
long chain of human effort and

1065
01:26:42,880 --> 01:26:47,640
human trust.
The chain runs from ancient

1066
01:26:47,640 --> 01:26:53,280
marketplaces, through Royal
Mints, from the gold standard,

1067
01:26:53,280 --> 01:26:58,440
through Bretton Woods, from the
Volcker recession, through the

1068
01:26:58,440 --> 01:27:04,880
quiet decade of low rates and
all the way to the careful

1069
01:27:04,880 --> 01:27:10,880
committees meeting today in
Washington, Frankfurt and Tokyo.

1070
01:27:11,840 --> 01:27:19,560
Most of the time the chain holds
now and then, in particular

1071
01:27:19,560 --> 01:27:25,000
places and times.
It breaks, and people pay a

1072
01:27:25,000 --> 01:27:30,960
terrible price for the breaking.
The world we live in tonight is

1073
01:27:30,960 --> 01:27:34,920
not Weimar.
It is not Zimbabwe.

1074
01:27:35,720 --> 01:27:42,720
Its institutions remain trusted.
Its currencies remain accepted.

1075
01:27:43,440 --> 01:27:49,320
Its central banks remain at
their posts, doing their quiet

1076
01:27:49,320 --> 01:27:52,400
work.
The challenges of the coming

1077
01:27:52,400 --> 01:27:57,360
decades will be real.
The temptation to lean on

1078
01:27:57,360 --> 01:28:02,560
monetary expansion in the next
crisis will be real.

1079
01:28:03,280 --> 01:28:09,280
The questions of how much money
is too much and which conditions

1080
01:28:09,280 --> 01:28:15,560
might one day shift the answer
will continue to occupy serious

1081
01:28:15,560 --> 01:28:19,120
mines.
But none of that needs solving

1082
01:28:19,120 --> 01:28:22,720
tonight.
You do not need to predict the

1083
01:28:22,720 --> 01:28:26,120
next crisis or trace the next
reversal.

1084
01:28:26,600 --> 01:28:32,320
You only need to rest knowing
that beneath the calm of the

1085
01:28:32,320 --> 01:28:41,120
night, vast institutions hum on
balancing risks and stabilizing

1086
01:28:41,120 --> 01:28:46,760
prices, keeping the quiet
machinery of money in motion.

1087
01:28:47,120 --> 01:28:52,920
While you sleep, the world
slows, and so do we.

1088
01:28:53,320 --> 01:28:54,240
Good night.