Podcast Summary
Exploring the history and future of money and monetary systems: Lyn Alden's new book, 'Broken Money,' offers unique insights into the history and potential future of various monetary systems, identifying key themes and angles underrepresented in literature.
Key takeaway from this episode of The Investor's Podcast is that Lyn Alden's new book, "Broken Money," offers a unique perspective on the history and current state of money and monetary systems. The authors, Preston Pysh and Stig Brodersen, express their admiration for the book and believe it will stand out in their memories for years to come. Lyn Alden wrote the book after years of research and waiting for the right framework to emerge. She did not write it just for the sake of publishing a book but because she identified key themes and angles that were underrepresented in literature. The book is not focused on any particular monetary technology or topic but rather explores the history and potential future of various monetary systems. The title "Broken Money" signifies that there is a current problem with the global monetary system, and the book aims to explain how we arrived at this point and potential solutions. The authors believe that while those in the US and Europe may not notice the issues as much, they are still present and significant. Overall, this book provides valuable insights into the history and future of money and monetary systems, making it a must-read for anyone interested in economics and finance.
The outdated monetary system and its impact on economic instability: The current monetary system with its inefficiencies and numerous fiat currencies contributes to economic instability, particularly in developing countries. A universally accepted medium of exchange is needed to facilitate trade and reduce the need for the double coincidence of wants.
Our current monetary system, with its numerous fiat currencies and inefficiencies, is outdated and contributes to economic instability, particularly in developing countries. The speaker argues that money has changed less than other areas like technology and communication over the past 50 years, leaving many people in the world with unreliable currencies and difficulty in accumulating and transferring liquid capital. The historical use of commodity money as an abstraction for value is discussed, highlighting the need for a universally accepted medium of exchange to facilitate trade between different groups and reduce the need for the double coincidence of wants. The speaker also mentions the historical significance of commodity money as a story of technological progress, as the development of better forms of money enabled more complex trade networks and economic growth.
Solution to the problem of double coincidence of wants: Gold and silver emerged as preferred forms of money due to their scarcity, portability, and high stock to flow ratio, making them effective solutions to the problem of the double coincidence of wants.
The development of money, whether it be through deferment of favors in close-knit groups or the use of portable, scarce commodities, is a solution to the problem of the double coincidence of wants. Gold and silver emerged as preferred forms of money due to their scarcity and portability, and their continued use throughout history can be attributed to their high stock to flow ratio. However, even superior forms of money like gold and silver eventually faced issues due to the increasing encounters between civilizations with different resources and the ease of producing more abundant forms of money. Ultimately, the scarcity and identification of a commodity, combined with the difficulty of increasing its supply, make it an effective form of money.
From physical to abstract money: Throughout history, civilizations have shifted towards using more abstract and divisible forms of money as they connected with each other, leading to the emergence of banking systems and proto-credit systems, which enabled the exchange of gold for paper money and the eventual dominance of gold as the most widely accepted form of money due to its scarcity.
Throughout history, civilizations have moved towards using scarcer, liquid, and divisible forms of money as they connected with each other. Gold and silver were the most commonly used forms due to their scarcity and divisibility, but as trade and communication advanced, the need to transport these valuable metals over long distances became burdensome and dangerous. To address this issue, early banking systems and proto-credit systems, such as bills of exchange and early forms of credit, emerged. These systems allowed merchants to exchange gold for paper money, which could be easily transported and exchanged for gold in other locations. The invention of the telegraph in the 1850s and 60s further accelerated the efficiency of trade by enabling the rapid transmission of information across vast distances. As a result, gold and silver were increasingly abstracted and marginalized in favor of more divisible forms of money, such as banknotes and ledger abstractions. Gold eventually became the last commodity standing as the most widely accepted form of money due to its scarcity and the increasing efficiency of abstract forms of money.
Two primary economic theories of money: commodity and credit: Money is essentially a ledger, serving to track debts, credits, and transactions in society, whether as a physical commodity or a credit claim.
Money can be understood through two primary economic theories: the commodity theory and the credit theory. According to the commodity theory, the most salable commodity naturally emerges as money in societies for spot trading without the need for state backing. On the other hand, the credit theory posits that money is based on obligations and credit. In this theory, a claim slip representing a debt or credit can function as money. My argument is that money is essentially a ledger, and all types of money, whether commodity or credit-based, serve this function. The abstract concept of money as a ledger allows for the tracking of debts, credits, and transactions in a society. The commodity theory represents a more physical ledger, while the credit theory is a more literal ledger. Understanding these theories and their relationship to money's role as a ledger provides valuable insights into the nature of money.
The Evolution of Money from Commodities to Credit: Understanding the historical development of money systems can provide valuable insights into our modern financial landscape, revealing the strengths and weaknesses of various monetary forms and the factors influencing their adoption.
The concept of money has evolved throughout history, from physical commodities like shells to abstract forms like credit and digital currencies. In societies with high trust, credit money is commonly used, while in times of distrust or dealing with strangers, commodity money prevails. The fractional banking reserve system, which allows banks to lend out more money than they have on hand, can function well for long periods but is vulnerable to liquidity crises, acting much like a game of chess that maintains its balance until a piece is unexpectedly removed. The history of money, as outlined in Lyn Alden's book, shows that the current system is an exception rather than the rule, and understanding the underlying principles of various monetary systems can help us navigate the complexities of our modern financial landscape.
Risks of Discrepancy in Modern Financial System: The modern financial system, built on fractional reserve banking and technology, can create more claims than underlying gold or money, leading to financial crises. Central banks have historically mitigated these crises but the system is not foolproof and has led to past crises like the fall of Bretton Woods.
The modern financial system, built on fractional reserve banking and enabled by technological advancements like the telegraph, has the inherent risk of creating more claims for gold or money than there is underlying gold or money. This discrepancy can lead to significant financial crises, where defaults and deleveraging are necessary to prevent systemic collapse. Central banks have historically played a role in mitigating these crises by acting as a backstop for failing banks and adjusting the value of claims relative to the underlying commodity. However, this system, as described by Stig Brodersen, is not foolproof and has led to crises throughout history, including the fall of the Bretton Woods system. The next catalyst for a new financial order remains to be seen.
The Evolution of Money and Government Power: Governments have long held power through control of money, from debasement during the gold standard to manipulating abstracted money in the modern era, but this power comes with risks and consequences.
Throughout history, the value of money has evolved from physical gold to abstracted forms like paper money and digital ledgers. However, the ability to manipulate the value of abstracted money, particularly during times of war or economic instability, has given governments significant power to "rug pull" their citizens and even other countries. During the gold standard era, debasement was a common tactic used by kings to increase their spending without raising taxes. However, with the advent of abstracted money in the modern era, governments gained the ability to alter the value of money at will, often leading to significant economic consequences. The Bretton Woods system, which established the U.S. dollar as the global reserve currency, only lasted for a short period before the U.S. no longer had enough gold to redeem the growing number of dollar claims. The current system, where the U.S. dollar is at the heart of the global financial order, has given the U.S. significant economic and military power but also comes with the downside of the dollar receiving an extra monetary premium. Overall, the ability to manipulate the value of money has given governments significant power throughout history, but it also comes with risks and consequences.
US dollar's dominance in global trade brings geopolitical advantages but costs: The US dollar's dominance in global trade provides geopolitical advantages, yet it leads to an uncompetitive industrial base, negative net international investment position, and focus on services, impacting the heartland while benefiting Washington and New York.
The dominance of the US dollar in global trade brings significant geopolitical advantages, such as the ability to issue debt in our own currency and sanction other countries. However, this system comes with a cost. The US industrial base has become increasingly uncompetitive due to the structural trade deficit needed to maintain the dollar's status as the global currency. This has led to a negative net international investment position, a stagnating industrial base, and a focus on services rather than manufacturing. The irony is that while the US maintains geopolitical power, our infrastructure and industrial base suffer, making it harder for those in "flyover country" to produce physical goods. The US enjoys benefits in Washington and New York but faces challenges in the heartland. The high yield cash account offered by Public.com, at 5.1% APY, could be a solution for earning interest on cash while dealing with these economic complexities.
The strength of a currency depends on a country's economic size, rule of law, and military power: A strong economy, rule of law, and military power contribute to a currency's acceptance and success.
The strength of a currency, such as the US dollar, is tied to a country's economic size, rule of law, and ability to defend itself. The historical example of the American Civil War illustrates this concept, as both the Union and Confederate States issued fiat currency to finance their wars. The credibility and reputation of these currencies were crucial to their acceptance and success. The telegraph system played a role in the centralization of the US banking system during this time, making communication and centralization easier. The military is important in maintaining a currency's strength, but there is also a feedback loop – a strong economy is necessary for a strong military, and robust monetary institutions are crucial for a strong economy. The current global monetary system, including the eurodollar and petrodollar systems, highlights the importance of these factors. While military strength is a significant factor in currency acceptance, it is not the only one. Other factors, such as economic size, rule of law, and openness, also play a role.
The gold standard's effectiveness relied on technology and geopolitical order: The gold standard's success hinged on quick communication and peace, but it couldn't keep up with the growing demand for gold during crises.
The gold standard, which was the global monetary order from the late 1800s until World War 1, relied on a combination of technology and geopolitical order for its effectiveness. The telegraph allowed central banks to communicate quickly, and the end of major wars created a period of peace and cooperation. However, the gold standard faced issues as the number of claims to gold exceeded the actual gold supply. During World War 1, the United Kingdom, as the dominant global power, entered the war to prevent a rising power, Germany, from gaining dominance. To finance the war, the UK issued war bonds, which were oversubscribed, but only a third of the capital was actually raised. This highlights the challenges of financing large-scale conflicts through debt, especially when the public may not fully understand the reasons for the war or the potential benefits. The gold standard ultimately failed due to the disconnect between the amount of claims to gold and the actual gold supply, which became unsustainable during times of crisis. Understanding this historical context can provide insights into the limitations of relying on a single commodity as the basis for a monetary system.
UK's WW1 financing method and its inflationary impact: The UK government's unconventional financing method during WW1 led to significant inflation, devaluing the currency for both domestic and foreign holders, and recognized as an 'undetectable tax' and powerful tool by economist Keynes.
During World War 1, the UK government faced financial difficulties in financing the war through debt and opted for a less transparent method by asking the Bank of England to create credit and monetize remaining war bonds. This led to a significant increase in the money supply and subsequent price doubling, resulting in a devaluation of the UK currency for both domestic and foreign holders. Keynes, an influential economist, recognized the inflationary process as an undetectable tax and a powerful tool for extracting value and redirecting it towards desired goals. This method can be seen as an early implementation of Lenin's communist manifesto tenet of centralizing credit and banking into a national monopoly to manipulate the economy and redistribute value.
US protecting dollar's dominance through geopolitical means: Historically, the US has used military and economic power to defend its dollar's dominance, intervening in countries that threaten it with alternative currencies.
The relationship between currency and geopolitics can be complex and contentious. The United States, as a global superpower, has historically used its economic and military might to protect and promote its currency, the US dollar, in the global market. In the late 1990s, European countries, including Iraq, began selling oil in euros, challenging the dollar's dominance. This shift was seen as a threat to US interests, leading to military interventions or destabilization of countries that dared to trade oil in alternative currencies. Ron Paul, a former Congressman, famously warned about this pattern of US intervention in the name of protecting the dollar network effect. This historical context sheds light on the geopolitical implications of currency systems and their potential role in shaping international relations and conflicts.
Developed countries control financial stability of developing nations: Developed countries, particularly the US, have power to push inflation and volatility onto developing nations through their borrowing in dollars, creating a negative feedback loop and making it hard for them to accumulate capital.
The modern monetary system, with the U.S. dollar as its foundation, creates a power dynamic where developed countries, particularly the United States, have the ability to push inflation and volatility onto developing nations. This is due to the fact that developing countries often have to borrow in dollars to access foreign capital, leaving them with debt in a currency they cannot print. This creates a negative feedback loop, making their currencies less stable and making it harder for them to accumulate capital. Developed countries, on the other hand, have the ability to devalue other countries' currencies or harden their debts, giving them significant control over the financial stability of developing nations. This system, which was established under the Bretton Woods system, has made it extremely difficult for countries to break free from it, leaving them at the mercy of the monetary policies of developed countries.
From gold to liabilities: The shift in the foundation of the financial system: The financial system has transitioned from being based on unencumbered assets like gold to a system of interconnected liabilities, lacking a solid foundation.
The global financial system, particularly the US system since 1971, has shifted from being based on unencumbered assets like gold to a system of liabilities all the way down. Gold, as an unencumbered asset, used to serve as the foundation of the financial system. However, since its removal, we have a circular system of liabilities where each asset is someone else's liability. The US dollar, for instance, is a liability of the Federal Reserve, which holds assets like Treasuries and mortgage-backed securities, but these assets are liabilities to their respective owners. The federal government, which issues these liabilities, primarily supports them with tax authority. This system lacks a solid foundation of unencumbered assets, leading to a "turtles all the way down" scenario. The book "Broken Money" sheds light on this intriguing concept, offering a fresh perspective on our financial system's history and current state.
Understanding the historical intersection of money and technology: Exploring how new technologies have shaped the evolution of money and vice versa, with valuable insights into historical context and future developments.
Lyn Alden's book on money and technology offers a well-organized exploration of the historical and ongoing intersection between these two domains. The book provides valuable insights into how new technologies have shaped the evolution of money and vice versa. This process is not random, as certain technologies build upon each other and emerge in a particular order. For instance, the development of digital currencies relies on the foundational technology of sending information, which was established before the advent of telegraphs and Morse code. By understanding this historical context, we can better grasp the current state of monetary systems and anticipate future developments. Overall, the book provides a thought-provoking perspective on the interconnectedness of money and technology, and how they shape our world.
Understanding Macroeconomics and Technology in Investing: Learn macroeconomics, embrace technology, have a long-term perspective, consider passive investing, stay informed, and seek professional advice for financial independence.
The financial industry is evolving, moving from a traditional model to a more modern, tech-driven approach. Lyn Alden discussed the importance of understanding the macroeconomic landscape and the role of technology in investing. She emphasized the significance of having a long-term perspective and the benefits of passive investing. The conversation also touched on the importance of staying informed and being proactive in managing one's finances. The speakers encouraged listeners to educate themselves and seek professional advice to achieve financial independence. Stay tuned for the next part of the series, where they will delve deeper into these topics. Don't forget to subscribe to Millennial Investing by The Investors Podcast Network for more insights and educational resources.
