On The Brink with Castle Island - Lawrence White on Free Banking in the Age of Crypto (EP.60)

Episode Date: March 30, 2020

Larry White, economics professor at George Mason University and senior fellow at the Cato Institute's Center for Monetary and Financial Alternatives, joins the show to discuss free banking, the history of dollarization, and the prospects for a crypto-native banking system.   In this episode: - Why CBDCs might not be a good idea - The legacy of dollarization in Ecuador - How the Scottish free banking system worked - What would have to change for free banking to re-emerge today - The prospects for Bitcoin banks issuing notes – and one problem with the idea - The prospects for restoring a cash-like standard of privacy and autonomy in a digital context - The prospects for crypto-dollarization

Hello, welcome back to On the Brink with Castle Island. I'm Nick Carter, and I hope you are staying safe and healthy. I am so excited to introduce this guest. When I set out to create a miniseries on how public blockchains could facilitate and even accelerate dollarization, I had a few guests that were absolutely top of mind. Lawrence White was one of them. So Lawrence is a professor of economics at George Mason University. He's a senior fellow at the Cato Institute Center for Monetary and Financial Alternatives,

and he has in the past been a visiting scholar at the Federal Reserve Bank of Atlanta. So I came across his work when I was researching prior dollarization events, and I have to say that his writing touches on so many concepts relevant to the cryptocurrency industry. Whether we're talking critiques of the Federal Reserve, or a history of market-driven organic dollarization events, or a defense of non-centrally issued money, he's written about it. In fact, I read so much of his work leading up to this episode that I compiled a reading list of my favorites in the show.

show notes. So if you're not familiar with his writing and you want to add some historical context to your understanding of Bitcoin, I strongly suggest giving it a look. So I consider Larry to be one of the most important contemporary economists when it comes to critiques of our current monetary system, alongside George Selgin and Steve Hankey. So this is the fourth episode in our mini series on crypto dollarization. Prior episodes have focused on the entrepreneurs building digital monetary systems backed respectively by gold, dollars, and Bitcoin. So I think Larry's voice is critical in lending academic support to the idea that not only can dollarization accrue strong welfare gains to citizens in countries with weak currencies, but it can also have a disciplinary

effect on central banks even without an actual dollarization event. So Larry's also known for popularizing the idea of free banking with his case study on the monetary history of Scotland. So this concept involves banks competitively issuing notes against typically gold reserves. They have good reasons not to overissue, which we cover in the episode. So free banking systems have proven to be stable and effective non-state monetary systems in the past, and I'm optimistic that they're going to reemerge in the near future. We also discuss how this concept could be extended to Bitcoin banks, which Halfini talked about, and what needs to change to render them viable.

I can't tell you how much I enjoyed making this episode. I'm so thankful to Larry for indulging me and my questions, and I think you're really going to love it too. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis.

The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. Hello and welcome back to On the Brink. This is Nick Carter.

I'm here in Fairfax, Virginia with Larry White, very well-known monetary economist, champion of monetary alternatives and dollarization. Thank you so much for appearing to show. I'm very excited to have you on. My pleasure. Should be fun. So you were in the news recently, wrote one half of an op-ed in the WSJ arguing against central bank digital currencies.

You seem to be dipping your toes into this debate a little bit. Can you just briefly tell us why you think CBDCs or maybe not the best idea? Well, when people talk about central bank digital currency, first, it's usually a misnomer. That is, they're not really talking about currency. And so it's not just a digital version of what the Fed already does, which is print paper currency or issue paper currency. Treasury actually prints it. So it's really the leading model. There are some people who talk about doing it on a distributed ledger.

But the leading, that's a minority. The leading model is to allow ordinary people and businesses to have accounts on the books of the Federal Reserve System, which is something that only commercial banks have now. So the Fed is the banker's bank, as they say, banks pay each other, settle up IOUs between banks by transferring ledger entries on the Federal Reserve's ledger, the Federal Reserve's balance sheet. So the proposal is to let ordinary businesses and individuals, households have accounts with the Fed. And I don't think the people advocating that have thought through what that means. It means the Federal Reserve, which is only operating a wholesale clearinghouse now,

is going to get into retail banking, retail payment services in a very big way. So they haven't thought about the fact that that means literally hundreds of thousands of tellers will be necessary to provide consumer service if all the accounts in banks migrated to the Federal Reserve. So it seems to me that's a recipe for massive waste because there's no reason to think that the Fed is any good at retail service. They've never done it. And in general, government agencies are not good at retail service.

What people call public options where governments get into retail lines of business have typically been disappointing and wasteful in other industries. I don't see any reason to think retail banking would be an exception. So think of the DMV experience and then the post office, the DMV. That's what your retail bank is now going to be like. At worst, yes. And then there's a second concern, which is privacy. Once people's accounts are being held by an agency of the federal government, there'll be even less protection of their privacy than there is now, which is not very much, admittedly. And what's interesting is, you know, I guess banking, I don't know if it's better for it to be controlled by, you know, unaccountable corporations or an unaccountable government. You know, one recalls episodes like the choke point operation in 2013 where the DOJ pressured banks to essentially de-platform businesses that they deemed.

in salubrious. Yeah, that was a terrible thing. There has been some pushback. And the fact that these were privately owned institutions that the DOJ and the FDIC were pressuring kind of gave them a legal reason, a legal ability and a motive to resist. Now, it's hard for them to resist the FDIC, which can make life difficult for them. But having it inside the federal government means there would be no pushback at all. Right. No ability to, so the government would have full discretion to de-platform or interfere with virtually any business. Right. So it's not that the Federal Reserve officials are themselves all that interested in invading people's privacy. And in fact, the chairman, Jerome Powell, has said he doesn't want access to everybody's bank account information.

But still, they would be pressured by the Department of Justice, the FBI, the ICE, the drug enforcement administration and so on, and they've got no incentive to resist. And they've, whereas when it's in private hands, and I think there is some corporate responsibility as long as we have competition among corporations, if you don't like the service your bank is giving you, you can switch to another bank, and they're competing for your business. And that's really, I think, if I had to condense your corporas into one, concept it would be private competition yields greater outcomes than governments. Yeah, I mean, this is a standard lesson of economics. Competition is good for consumers.

I'm just applying it to money where for some reason a lot of economists don't go. So do you take exception to the framing of CBDCs as something that we have to do in the U.S., perhaps in reaction to, you know, China having a nationalized digital currency initiative because that seems to be the way it's framed these days where, you know, we need to keep up with these other essentially authoritarian states. Yeah, it's been interesting to watch the reaction of Federal Reserve officials for, in particular, a member of the Board of Governors named Lail Brainerd. Two years ago, she was saying, we don't need to be involved in this. We have a perfectly fine payment system. And then Libra was announced, and suddenly she became very concerned that the dollar, the dollar,

was going to lose its dominant position in the world economy to some private startup or to some other country's digital currency. And we need to get ahead of the curve. So there seems to be this concern that central banks will become obsolete and they can't let that happen. So they've got to stay on the cutting edge. And this is, you know, we have to do something and this is something. So let's do this.

The Libra situation is interesting because now it's emerged that actually is. it looks like it's just going to be dollars in the Libra reserve. Yeah, it was never clear why Libra wanted a multi-currency unit of account, except that maybe it's a way to get around being regulated by any one of the national central banks. But why a customer would want currency that fluctuated against the expenditures he was actually making in his home country currency, It's not clear why they would want to have this extra layer of complication of holding assets in a basket of different currencies and denominating their accounts in this basket rather than in the currency that people would naturally want to use. And people, I think even non-U.S. people are accustomed to the dollar. Right. And people in Europe are accustomed to the euro.

Now, the big selling point of having a more stable unit of account, a currency unit that doesn't fluctuate in its purchasing power so much, would be in countries that have high inflation. But if I'm in a high inflation country, I'd say Costa Rica, I would rather have something denominated in dollars than something denominated in a basket of dollars, euros, yen, Singapore dollars, and whatever. Especially because dollars, you know, they get a lot of stick from people in the crypto industry, but dollars tend to be the least inflationary, right, of all the major soccer. Well, Swiss francs less inflationary than the dollar, but dollar's not one of the worst. That's true. So on this topic of dollarization, you coined this term popular dollarization. Right.

So from the bottom up. Bottom up as opposed to top down. So people sometimes talk about dollarization as this homogenous thing. but it actually happens in a couple different ways. Yeah, so there's what's normally called official dollarization where the government adopts the dollar, or if it's the euro, you could call it Euroization, adopts this foreign currency as their official unit

for collecting taxes and paying out public funds and gives up on having their own domestic currency. And so the longest standing example of that is Panama, which has used the U.S. dollar, since the canal was built, so more than 100 years ago. But there's another phenomenon, which is where in a high inflation country, people put themselves on the dollar. They start keeping their savings in dollars because the local currency is so volatile.

They start posting prices in dollars because if you posted it in a high inflation currency, you'd have to change the price tag every day. And then they start accepting dollars in payments because, That's what they want to put aside in their savings. So from the bottom up, from people wanting to use a better currency, you get the de facto displacement of a bad currency by dollars or euros, whatever's predominant in that area. And then in some cases the government fights it. and if inflation isn't too high, they can sometimes suppress it. This fight is going on in Venezuela right now, as you know.

But when you get to hyperinflation, the demand for the hyperinflating currency just disappears and it becomes kind of hopeless to try to preserve it. And so the case of Ecuador, which I've studied and which I've gone to Ecuador to talk to people about, is one where the public put themselves on the dollar standard. nobody wanted the sucre, which was the local unit, and eventually the government just tossed in the towel because nobody wanted to deal in sucreys. They had trouble collecting taxes in a hyperinflating currency. And so they said, we're putting ourselves on the dollar standard. And so it became official, but it started out as a popular dollarization. And that's one of my favorite case studies, probably yours as well.

You wrote this great paper about it, where you say, what was something like the dollar wasn't chosen, by the state. It was chosen by the people. That's right. The state resisted it for a while. Now, they've had dollarization now for 20 years in Ecuador, and it's interesting because they've had a series of left-wing governments. Rafael Correa was president for a long time. And he always spoke against dollarization. He proclaimed that he was going to improve things, but he never touched it because it's so popular and because it works so well, he didn't dare touch it. So he's, so it's so popular. So he it has lasted.

And it is interesting that in dollarized countries, the dollar is treated as this menace sometimes and something to be avoided. But ultimately the welfare benefits of having low inflation, as you say, importing the property rights from the U.S. and effectively rule of law, those are quite popular. It's always having looked into this a little bit, I'm actually shocked that there are so few cases of dollarization. Have you felt that there were kind of too few? Well, it looked like there was going to be a wave of dollarizations. Ecuador was 2000 and then El Salvador the next year. That was an interesting case because they weren't having a hyperinflation,

but the government said nobody trusts, our currency is not trusted as much as the US dollars so that when we go to borrow in our own currency, we have to pay higher interest rates. So it turns out we're borrowing in dollars anyway, but when we issue bonds, people put a high default risk on them because our currency, our economy, sorry, is not in dollars. So we're earning in the local currency and we have obligations to pay in US dollars and people are afraid that we won't be able to come up with the US dollars. So they put themselves on the government shows, that was a top down case. The government chose to dollarize. U.S. dollars in the economy at that point were only like 20% of the economy, not 95% the way it was in Ecuador. But they have also stuck

with it. But anyway, it looked like other countries might get on board. I went to a conference in Costa Rica, which I mentioned, where it was to push for dollarization. Costa Rica at the time was having chronic inflation between 10 and 15% a year. But it didn't happen. And I think a lot of a large part of the reason it didn't happen was the government's cleaned up their act. That is, the central banks lowered the inflation rate. They realized that they were in danger of losing their job. So it has a dollarization has a disciplinary effect on countries that are potential dollarizers.

Even if they don't. The mere specter of dollarization is these wise. And this is a point that an economist named Randy Krosner has made, too, that competition among currencies has become easier with information age technology. It's easier for people to dollarize themselves or Euro-wise themselves, and that's served to discipline central banks to some extent. I was in Costa Rica not too long ago, and I found it very curious. you'd buy something with dollars and you get the local currency back and change. Right, I had that experience too. So it was like the inverse of Gresham's law, almost, right?

People sometimes call it Theor's Law. But I guess the idea is that they're trying to import as many dollars as possible from tourism. So in the cases where dollarization has not had the benefits, you know, I guess Zimbabwe would be one case where you could say dollarization wasn't an unquestioned success. what would you attribute that to? Yeah, so Zimbabwe is a case that had a hyperinflation and people dollarized themselves and the government went along with it, but just for a few years. And then they reintroduced the Zimbabwe dollar and used fairly heavy legal sanctions to push the use of U.S. dollars underground.

And not just U.S. dollars, South African Rands were also being used. But yes, if the government is prepared to be brutal enough, they can suppress at least overt, above-ground use of dollars. And in Zimbabwe, they use the banking system as a tool to effectively confiscate dollar deposits from savers, right? Yeah. And so if people want to use sort of modern payment methods, you know, deposit transfer methods, electronic methods, and the government has control over the banks, then that's a problem. Dollarization in the form of just handing Federal Reserve notes over hand-to-hand is a kind of crude way of making payments. So it's limiting.

That's the most kind of robust form of dollarization, right? It's the hardest to resist. Yeah. Yeah. So another case that's sometimes thought of as dollarization. was Argentina. It wasn't dollarization. It wasn't even a currency board, which is what it claimed to be. But in Argentina, they allowed U.S. dollar deposits side by side with Argentine peso deposits. In commercial banks. In commercial banks. So you walk down the street in Buenos Aires and you'd see

two sets of interest rates in the window of the bank, one in dollars and one in pesos. They were always lower in dollars because there was always a devaluation risk with pesos. Right. But it seemed like it was a way for the government to tie their hands to say we're not going to, we're going to stick with the fixed exchange rate, which is what they had between pesos and dollars at one to one. Until the day came when they decided they didn't want to do that anymore, and they not only devalued the peso, they seized all the dollar accounts and forced them to convert into pesos. and then before people could take the pesos out, they devalued the peso. So people who had dollar-denominated accounts were not spared, they lost like two-thirds of the value in their accounts. It was an incredible, massive confiscation of wealth. This happened almost instantaneously?

Yes. It's like on a weekend. And it's not like it would have been plausible to withdraw pesos in cash either. It was a surprise. That's really interesting. So I think we live in an interesting time now because dollarization, popular is occurring in Venezuela as we speak. Right. I think, in fact, so I interviewed an entrepreneur who runs a Bitcoin business down there.

His name is Alejandro Machado. And he said that the big catalyst for dollarization from a payment's perspective was this power cut that happened in Caracas. Because prior to that, everyone was still using these digital payment systems, which were denominated in the Bolivar. And then when the power cut occurred, normally the power cuts had been in the periphery of the country. When it occurred in the core of the country, at that point, there was nothing else to use, aside from the dollars that everybody had, most people had a stash of dollars at that point. And so those extreme circumstances led to this, to the

acceptability of using dollars in commerce, even though it was somewhat criminalized. And then at that point the government decriminalized it. And what he told me was that, interestingly, Maduro is sort of pro-dollarization at this point because it's a palliative measure in terms of, you know, making people less upset kind of thing. So one wonders what the outcome is going to be there. Well, it would help stabilize the economic situation. It would give people a much better current than they've got in the Bolivar. I had a Venezuelan student in my class a couple of years ago, and when I said I was expecting dollarization of Venezuela as the inflation rate went up,

he said, well, I haven't seen it yet, but that was two years ago. I think situation has changed. There was a very interesting story, sort of an anecdotal account from somebody, I forget his name, explaining how he was. getting by in the midst of this economic crisis by using Bitcoin. So he was doing business online. I guess he was a consultant writing reports for people and they would pay him in bit clients in other countries and they would pay him in Bitcoin and then there was a local exchange where he could trade Bitcoins for Bolivars when he wanted to go buy groceries.

But he said without that I wouldn't have any way to earn income because people are not allowed to ship me US dollars and nobody outside the country has bolivars to send me. That is something that I've noticed. You know, a lot of, so this exchange you refer to local bitcoins, you can look at the trade information online and you can see that Venezuela is one of the most popular places for trading bitcoins on a peer-to-peer basis. And then people thought, well, are Venezuelans buying bitcoins to use them as a savings device?

And as it turns out, the answer is, as you say, that they use Bitcoin. is a bridge currency to get dollars into the country. So it may be, it's not the full narrative that Bitcoiners would have liked in terms of a hyper-bitquinization event occurring. But it does still nevertheless show the utility of something which is a digital equivalent of cash, which you can use to skirt those capital controls

and take true ownership over your wealth. That's right. It does illustrate that in some circumstances it's harder to censor than other kinds of payments. I think unquestionably. So on the topic of Bitcoin, so you are not to put words in your mouth, but you're fairly warm on Bitcoin, I would say, or at least you've spoken positively of it in the past. Yeah, let a hundred flowers bloom.

And I think that makes sense, you know, you're generally in favor of monetary alternatives, and that's certainly what Bitcoin is. The way to find out the best money is to let it emerge from the ground up, let people choose. And so I guess in that sense, it must have been quite refreshing to see a free market for money emerge because, you know, money is typically something that's monopolized by governments. So maybe it was exciting to see Bitcoin and then subsequently other monetary experiments catalyzed by the creation of Bitcoin.

Was that your attitude when you first found out about it? Yeah, so how many years ago was it now? 35 years or so ago, I wrote my district. on free banking, that is competition among banks issuing banknotes and deposits on a minimally regulated basis. And the emergence of competition among currencies has made that research relevant in a way I didn't anticipate when I was doing it. There was an earlier false dawn. There was, you may have heard of the Mondex system, which was a kind of digital bank. banknote, there was basically a stored value system where the values on a card and you could transfer it peer to peer without it going through the clearing system. So it was very much a digital currency. But it never, it was tested a little bit in the U.S., but it was never rolled out in any big way. So that was a disappointment. But then Bitcoin emerged, which is different in that it's its own unit. It's not in dollar.

It's in Bitcoin. And I was first alerted to it by one of my students who was into cryptography. And one of my graduate students, when he got his PhD, kind of as a joke because it was only worth about $10, gave me two Bitcoins. Really? So that was a while back. Did you hang on to them? I did hang on to them. And then when I tried to sell them, it turned out the paper wallets he gave me were fake.

He gave you fake paper wallets? I mean, it had a QR code printed on it, but it didn't go anywhere. So that was a disappointment, too, because at that point it was worth a lot of money or would have been worth a lot of money. Or would have been worth $40,000. Right. Well, maybe we could figure out how to extract the private keys from those because I don't want those two Bitcoins to be lost. I mean, so what, he told you that there were two Bitcoins on there and they're just wondering. He bought them from somebody who told him.

Ah, that's strange because, you know, the thing about Bitcoin is that you can actually verify that you have it relatively cheaply. That's like the whole... We were so innocent back then. I guess those were the early days, right? That's a shame. We have an open dime here, so Bitcoiners will know what that is. But you can just plug the USB in and check the balance. So on any block explorer.

that's the nice thing about Bitcoin is that it's cheap to verify. You know, that's what Bitcoiners would, that would be one of the main ways that Bitcoiners would compare it to gold. You know, I think there's this thesis, I certainly have this hypothesis that one of the problems with gold is that it's very difficult to get your gold out of a bank vault. It's hard to take final physical possession of that gold, which means that your incentive to hold those banks in check under a gold standard or if they're holding species, and issuing notes again, did, it's difficult for you to exercise that. Especially if it's in London and you're in the US. Exactly. The LBMA, it's a walled garden.

Every link in that supply chain is permissioned, and it's very expensive to get bullying out of there and into it. So to me, this is like an underappreciated virtue of cryptocurrency is that it's very cheap comparatively to verify that you have, to verify that someone else has it, and then also to take physical ownership. So there definitely is a Bitcoin custodial industry that exists. About 20% of all the bitcoins are held with depository institutions.

But on the bright side, 80% are not, you know? So when you say custodial institutions, you mean exchanges mostly? Exchanges and explicit custodians. As we know, the exchanges operate like full reserve banks, or they at least represent that they are full reserve. sometimes they're not. Right. So actually on the topic of free banking,

so I actually read your dissertation as homework for this. I didn't understand the math part, but the words part was good. So I think free banking, you know, I discovered it, the concept coming from Bitcoin, empirically just looking at the way to exchanges work, understanding that they're acting as banks and that it's potentially a way to achieve scalability.

on Bitcoin if they were to issue notes, IOUs, against some Bitcoin they had in reserve. And I realized that this, I had kind of stumbled on this concept of free banking, which you described all those years ago. But I think it's a concept that people aren't familiar with, really, at all these days. And when you talk about free banking, people will say, oh, that's what we had in pre-Civil War era in the U.S. But from what I understand, you wouldn't consider that a full free banking system, right? Right. So, unfortunately, when they passed a different set of bank regulations in the U.S.

before the Civil War, they called it free banking. They called them free banking laws. And they called them that because they did open entry into banking. The previous status quo inherited from the English legal precedence was that state governments had the right to exclude you from open. a bank unless you got their explicit permission in the form of a bank charter. So you had to go to the state legislature to get a bank charter. And the states could either be rather liberal in granting charters and you'd have more competitive

banking and that was the case in New England. But in other states like New York, they would give you a little local monopoly. You get to be the only bank in this county. And so this was a, the charter had a charter value. And naturally to get these charters, there was competition in the form of bribing members of the state legislature. And these scandals and the limitation of bank services that was entailed by giving out little monopolies led to a popular reform movement called free banking. What they did was allow anybody to get a bank charter who filled out the forms. And they were regulatory requirements.

They had to have a minimum capital, and they had to give the state comptroller of the currency, a state official, approved assets to serve as collateral for the banknotes they issued. So the banknote issuers had a first claim against the assets of the bank, and these assets were held by the state officials. And the states figured out that they could use this as a way of borrowing from the banks. So compel the banks that wanted to issue notes to hold state government bonds, to buy state government bonds and then give them to the state to hold as a collateral. So that's what they called free banking. And you can see it's not free in important respects. It also didn't come with freedom to branch. It was limited.

The branching rights varied from state to state, but it wasn't free branching. So there's a set of necessary conditions. which are required for you to consider a system to be free banking? Well, so there isn't any sort of bright line as to when your regulations are minimal enough to call it free banking, but the ideal is no more state involvement than is necessary to enforce contracts. So no restrictions on the kind of contracts you can write.

So no restrictions on branching, no restrictions on capital, no restrictions on reserves, all that is a matter for the bank and their customers to work out on a contractual basis. And I guess some people would say, well, you know, it's good to have a state mandated reserve ratio. But I guess in your view, there's some sort of perverse outcomes there. In particular with reserve ratio, yeah. And we saw this in the U.S. experience. When the law was very strict and said a bank has to have 25% reserves, you'd find banks unable to use.

use that last 25% of reserves. You can't pay them out without violating the law. So they weren't really making the bank any more liquid. They were just tying up assets. And you actually saw banks suspend payments. That is, they would stop paying out silver for banknotes when they reached 25%. So the actual banking experience for consumers was worse because of those limitations. That's right. It just froze the reserves and was a sort of pointless burden on the bank holding resorts. that weren't paying at any return and that it couldn't use when the occasion arose to need more reserves. And so then by contrast, the system, which is held up as maybe the most successful historical example, would be the Scottish system from the early 1700s to the mid-1800s.

Right. And so that was kind of the centerpiece of my dissertation that I mentioned. And so I kind of stumbled upon the fact that there was free banking in Scotland in the sense of minimally regulated banking. And it turned out nobody else knew about it. Well, it's a small country. It's a small country. It was a long time ago. But it does provide a more, a better example, I mean, closer to what I would consider laissez-faire banking and a better documented example than others. Although it turns out it wasn't unique.

I mean, when people started looking into it, a student of mine named Kurt Schuller discovered that there were about 60 or more cases around the world where there was free entry, reasonably free entry into banking and note issue. So there are lots of examples. With Scotland just being one of the best documented in the historical record. And longest lived. Just so we can define it for people. Well, at least the way it worked in Scotland was banks held specie in reserve, which is gold coins, right?

Right. So this is a gold standard. It doesn't have to be gold, strictly speaking. It could be silver. Gold was the best commodity money. But yes, it was a commodity money. So the banks are not issuing their own currencies in that sense. They're issuing claims to a standard currency.

And in Scotland, the banks were not full reserve. they had a relatively small fraction of deposits. They learned over time how much they needed to hold to actually meet all the redemption demands they faced. And they didn't hold more than that. And they held deposits with some of the major banks in London that paid them a little interest, but that they could draw on to get more gold if they needed it on short notice. Okay, so there was some kind of liquidity back. stops there. Oh, yeah. So the banks were, you know, held legally responsible for meeting the

contractual obligations they had put themselves under. So. And this is kind of the theory of free banking is that as private entities, banks are, are beholden to depositors in a direct legal way, as opposed to if it's the government, it's much harder to to hold them responsible. for violating or for not redeeming the liabilities that they issue, right? Yeah. So George Selgin and I have a paper explaining why the issue of specie denominated currency is more credible when it's done by private firms and when it's done by the government because the government, the central bank, can violate its contracts with no repercussions.

Nobody holds it legally accountable. It has sovereign immunity. And then secondly, there's a reputational result of that, which is they don't have to behave prudently out of fear that they'll lose customers because they've got a monopoly. They can force you to be a customer. If you want to hold paper and bank notes, yes, you have to be their customer because they've driven everybody else out of business through legal methods. And so what were, what was the, where did the reserve ratio equilibrate?

in Scotland, or what did it change? So it fell over time as it became cheaper, as railroads were developed, it became cheaper for banks to replace their reserves on short notice. But reserve ratios in the neighborhood of 2% were common. That's shocking to me. If I had to guess, I would have said it 50% or something. Yeah, so that's coin reserves against all the bank's liabilities. So against note liabilities, it would be, since note liabilities are about half their liabilities,

it might be 4%. But people very seldom wanted coin because they conducted most transactions in banknotes. And the only reason you would want coin would be if you were doing a trade with somebody outside of Scotland where they wouldn't take Scottish banknotes. And the outcomes of this system were very good for consumers. So there were very few bank failures, right? There were very few, there were no financial panics in this area in Scotland. Well, there was one financial panic, which was the failure of a bank called the Air Bank.

And Adam Smith actually writes about it in the Wealth of Nations because it happened just a few years before. But the important thing about it is, so the Air Bank failed because it was badly run. So free banking doesn't mean that nobody who's unqualified will ever start a bank. But the important thing is it didn't have spillover effects to the entire system. Other banks were not lending a lot of money to the air bank. There were a few small banks that failed because they had exposure to the air bank. But the other large banks didn't do that. They didn't have any reason to do that.

It wasn't prudent to do that. So it had major consequences for the shareholders because the banks in Scotland, worth mentioning, had unlimited liability. So the shareholders had to pay the note holders back until the shareholders went bankrupt. And so the shareholders actually, they were personally liable. They were personally liable. So I think it was Adam Smith who estimated that two-thirds of the land in Ayrshire had to change hands before the obligations were all paid, but they were all paid. There's a recent book going into more detail on the Airbank case by an account. named economic historian named Tyler Goodspeed called legislating instability, but it's about

the air bank crisis and how some of the regulation, the one regulation that was important in Scotland was a limitation on against issuing notes below one pound, which was a fairly sizable sum in those days, how that actually weakened the banking system and made it more prone to the airbank crisis. But the system was robust to the crisis. Right. That's the important lesson. And I guess that's the idea is that since there's no ultimate state guarantee, there's no FDIC, the moral hazard is less, and the private entities behave better. Right.

And because there's no government backstop, because there's no sticker in the window saying your deposit is guaranteed by the government, banks hold held much deeper capital. ratios. So banks would hold 20% capital. Instead of today, they hold as little as they can get by with because they don't need it to reassure their depositors. Before deposit insurance, banks needed capital to reassure their depositors, and that meant they were less likely to fail. And so that's really the ultimate issue here is that banks in the U.S. in the U.S. are, you know, they have this backstop, there is this reserve, the deposit insurance. Yeah. And so they're not, entirely exposed to the free market outcomes. Yeah, so there's a common assumption, I guess you could call it, among economists that

deposit insurance clearly stabilizes as banking systems. But if you look around the world, as countries have adopted deposit insurance, they've created moral hazard and they've caused more instability such that in some countries, it's caused greater instability in the banking system, not less. I mean, and it's funny because, you know, this moral hazard was felt as recently as 2009 here. So it's not like this is a particularly distant concept. In Scotland, so the system ended in 1844, what was the catalyst there? So the Bank of England had been criticized for running the monetary system badly.

and Parliament placed a restriction on it called the, well, it looked like a restriction, the Bank Charter Act of 1844. But the advocates for the Bank of England had argued that one reason they weren't able to regulate the monetary system more effectively was that there are all these other banks in the countryside that were interrupting, interfering with their control. And so Parliament said all these other banks have to either back their deposits above a certain level 100% with gold or they have to give up their note issue and let the Bank of England absorb it and so over the next about 60 years the Bank of England went from having two-thirds

of this note circulation to having 100% of the note circulation in England and then Scotland had separate bank regulations even though it was part of the United Kingdom the separate legal system that Scotland had before the union persisted. And so Parliament had to pass a separate act regarding Scotland and Ireland, which was in the same situation of Scotland. And what it said basically was no new banks can be started that issue banknotes.

Only the existing banks can issue bank notes. And they can only issue them up to the limit of what they issued last year. That is in 1840. because this act was passed in 1845, unless they back any additional notes 100%, which was very expensive. So from that point on, the number of Scottish banks could only go down through consolidations and mergers, mostly, a few failures. But the curious thing is if you go to Scotland today, there are still three banks hanging on who still have the right of note issue and still issue their own bank notes. RBS, the Bank of Scotland.

and Clydesdale. Correct. That's right. Well, I'm cheating because I went to school in Edinburgh. And in Northern Ireland, there are still four banks that issue their own notes. It's kind of a strange artifact of history. But you could say it's a sterling-eised economy.

Right. So they have local notes, but they're denominated in pound sterling. Yeah, I used to walk. I used to live behind George Street, so I would walk past all the corpses of the old banks when I would go to business well. The RBS is especially sad these days. Yeah.

So it is sad because free banking is effectively not present in the world today. What do you think would have to change maybe politically for it to become, for it to reemerge? Well, so the emphasis on note issue, I think, is no longer so important. Currency is not so important compared to other means of payment as it used to be. But we do have something in the form of relatively unregulated banking today, and that's offshore banking. So many jurisdictions, they're not always sovereign nations, sometimes they're protectorates or something like that. So Jersey and Guernsey, the Cayman Islands, are happy to allow relatively unregulated banking as long as it's doesn't have any contact with the local residents. So it's offshore banking. You can deal with

foreigners. And so we have these free banking, well, banking havens, offshore banking havens, where you don't have deposit insurance, you don't have capital requirements, it's pretty free entry. So they're just beholden to market forces. They're just beholden to market forces. And guess what? They behave very prudently. They don't invest in 30-year fixed. rate mortgages. They match the maturity of their assets and liabilities pretty closely. So they're funded by short-term certificates of deposit and they make loans in the form of floating rate loans. And they syndicate the loans out so that they're not holding a big share of any particular exposure. And they weathered the global financial crisis quite well in 2009.

That might be the first time I've heard of offshore banking spoken of in such glowing terms. Well, it's good for consumers because in the absence of these restrictions, they can pay a little more on deposits and they can charge a little less on loans. They operate on smaller spreads than onshore banks that have to bear a heavier regulatory burden. So that actually kind of brings us to the stable coin discussion because we have an interesting set of stable coins that exist now, which the objective is to take sovereign currency and to render it into a digitally native form. format, right? So even more high-powered than making it a digital transaction in the U.S. banking system, in the case of stable coins, you can sort of really truly own that claim. So it's very much like a physical cash standard. It's just that it's very transmissible as well. And stable coins emerged in a virtually unregulated way, with the largest one being Tether. Tether

is worth over $5 billion, I believe. So, I mean, it's still small. in the grand scheme of things, but it's big in the context of crypto. So I'm not quite sure what you're saying about ownership. Are you saying that if I own one tether, it's not a claim on the tether? Well, no, it's still a claim on a dollar in a bank account. Okay. And then, so then the question is, what's the credibility and the solvency of that institution? So they tether itself.

I know tether has had credibility issues. Certainly, it did. Whether they really had those deposits in those Taiwanese banks? Yeah, so there was Taiwan, there was the Bahamas, there was one in Puerto Rico, I think. in Puerto Rico, I think. Well, because of the U.S. regulatory authorities, they were having trouble finding a jurisdiction that would hold their deposits. That's right.

And so they had a bit of a crisis, BitFinex, which is sort of commingled with Tether. They were hacked. They lost some money. Those losses were sort of socialized. And so then Tether ended up being backed at 74 cents on the dollar. And so this is the really funny thing. So crypto people were like, well, how is this thing still trading in a dollar? And the answer is because it's redeemable for a dollar.

They really did redeem everybody who wanted to redeem. Ultimately, there were frictions while they were moving the money between the various bank accounts. But to me, this is potentially, I mean, Tether's quite an insolubrious case. But there are other stable coin issuers out there that also do this system. And there's also some stablecoin issuers that are issuing IOUs against gold. Right. Glint has been in the news this week. And you have something called DGLD, Paxos, I believe, has a goldback coin.

So this is very interesting to me as an economist because I don't think I know how to design the most credible system for giving people claims to dollars that are electronically transferable. But there are entrepreneurs out there and different systems competing. And that's what we need to have to discover, which is the best way to do it. And I think it took the emergence of crypto as kind of an exogenous shock to make entrepreneurs realize that they could compete with the government once again. And, you know, the important thing about crypto being that the settlement networks are these blockchains, which are not controlled by the government. And where to have the ability to access the system, all you need is an internet connection. So in some sense, it's a highly volatile incubation environment for monetary alternatives.

So I always thought that economists should be very excited by this. But actually most of them... I'm raising my hand. You're one of the few. Most of your peers disparage it, unfortunately. Yes, it's a very curious attitude. I mean, some people take the attitude, well, we know what free market money is. It's the gold standard.

And so if Bitcoin isn't old, then there's something wrong with it or it can't be money. We can tell our, we can deduce in our armchairs that it can't be money. And that seems to be sort of crazy. I mean, look out the window. It is serving as a medium of exchange. It's not even though it's small. Yeah, it's not a commonly accepted medium of exchange outside of certain niche markets. But you can't just rule it out because.

it doesn't fit the model of the gold standard. Do you feel that people overindex on these teleological arguments of what money should be and they ignore the reality of cryptocurrency being a new but growing kind of monetary setting? I wouldn't have used the word overindex, but yes, I think that's a fair way to put it. They're having trouble wrapping their head around it, and somehow they think that they're smarter than the market. So in the context of Bitcoin, I've also thought the Bitcoin banking would be very important for Bitcoin specifically, because Bitcoin has these physical limitations on how much throughput it can have in terms of transactions. The congestion problem, yeah. Yeah, so I wouldn't even

describe it as a problem. I would just say that's just the nature of the beast. If you have a ledger, which is replicated to every node in the network, there are obvious limits on how big that can be because there are just physical computer science limitations. So then the question is, well, do we create a hierarchy of nodes. We have super nodes, and the super nodes exist. They're called exchanges. People use them as depository institutions. In some cases, you can spend from them. You can make transactions on the internal ledger of the exchange, right, which don't settle to the chain. So you defer a settlement by doing this. In banking, that's called an on us transaction. I didn't know that, but see, there we go. So we have Matt Levine, the Bloomberg commentator, likes to make fun of crypto people by saying

we're re-divising the whole history of finance from scratch. But I think it's great. How is that a criticism? No, yeah, just in an accelerated way. So to me, there already exists the equivalent of Bitcoin banks, but crucially they're all ostensibly full reserve. In some cases, there have been fractional reserves and failures. Do you think a system could work where banks or exchanges issued notes against their Bitcoin

held in reserve, even on a foreign? fractional basis. So if it was transparent to their customers that they had assets backing their liabilities, then sure. Now the question is what Bitcoin denominated assets can they buy other than Bitcoin? Well, what motivated the conjunction of payments and intermediation in banks, that is borrowing and lending, was the discovery that when people wanted payment services, they're not going to come to the bank to redeem them for coin every day. So you could lend out most of the coin

and still meet all your redemption obligations and meanwhile, earn some interest on your assets instead of just having coins in the vault. So for Bitcoin to replicate that, it would require people willing to borrow money denominated in Bitcoin. You'd need to have Bitcoin loans. And pay back in Bitcoin, which doesn't really work if it's hyper deflationary. Or just very volatile.

It makes it very risky to borrow it denominated in Bitcoin. So that's the impediment to Bitcoin banking. That's how I see the impediment. So back to the chicken and egg problem of you're not going to get a reduction in the volatility of the relative price of Bitcoin until you get more monetary use of it. And you're not going to get more monetary use of it as long as it's so volatile. So it's not enough just to have Bitcoin in your vaults and to prove to depositors that you have that Bitcoin. You need to be able to put it to use. Well, so you need to pay interest to your depositors or they have no incentive to hold claims to Bitcoin rather than Bitcoin itself,

given that it's just as easy to spend Bitcoin as it is to spend a deposit. You either have to provide some transactional advantage or you have to pay interest because those are the two big advantages banks offered to people over transacting in coins. more portable and more spendable. So I guess the big issue here is Bitcoin's quote unquote monetary policy, which is disinflationary and effectively capped in the long term, and the difficulty adjustment means that there's absolutely no supply elasticity. That's right. Which is you've pointed this out in the past about how silver and gold have elasticity

of supply. Yeah. So I'm writing a book right now, and that's the main theme of it, that. Bitcoin and gold have very different supply mechanisms. As you say, the supply of Bitcoin is completely unresponsive to the price of Bitcoin. In the short run, the volume of gold above ground is not very responsive, but in the long run, it's very responsive. So higher purchasing power of gold will induce more gold mining, and that'll bring more gold to the surface.

And in the long run, the exchange value of gold, the purchasing power of gold has got to be equal to the marginal cost of mining gold. And if that doesn't change much, then purchasing power of gold is going to be very stable over long horizons, which is what we've seen historically. And in fact, the supply response is held up as a virtue because it moderates the volatility. Exactly, yeah. So if you want to be able to predict what your monetary unit is going to be worth in 20, 30 years, that's a virtue. And the reason you want that is if you're going to make loans, either borrow money or lend money, you'd like to be able to predict the value of what's being paid back in 20 years.

You know, what's interesting is Bitcoiners hold the supply inelasticity as one of the greatest virtues of the currency because all demand increases are manifested in changes in the exchange rate as opposed to expansion to the monetary base. Right. But of course, all supply decreases are manifested in drops in the price. That's an interesting and counterintruth point that I don't think many Bitcoin is... Now, if you're not using it as a medium of exchange, if you're just holding it as an investment, the experience has been very positive over the last 11 years. But if you want to keep your rent money, you don't want it in something that can gain and lose 10% in a week. So do you, now that we have the, I like to say, Satoshi's invention of Bitcoin opened the Overton window for saying entrepreneurs can now compete with governments once again, thanks as a technological chain.

Yeah. We can mint our own private monies with algorithmic monetary policies. There were some sort of forerunners before Bitcoin. There was e-gold, quashed by the federal government. You happen to be this series that I'm doing, I just interviewed Douglas Jackson. And I thought that was interesting story. He really does not like cryptocurrency. Well, that's interesting.

Yeah. But it was quashed, and he had to wear an ankle bracelet for a while. He was fortunate not to be sent to jail. The Liberty Reserve founders went to jail for 20 years. So the government has historically taken a very dim view of competition. And then there was the case of the Liberty Dollar, which was a silverbacked. It was a silver coin and banknotes redeemable for the coin. And the federal government went out of its way to find an obscure statute from the Civil War,

which banned private coinage and said this is violating this statute. And Bernard von Nothaus, who was the entrepreneur in this case, was convicted in federal court and was released for time served. So he didn't have to go to jail either, fortunately. But they were taking it. It seemed like the federal government was taking this very seriously as a threat to the dominance of the U.S. dollar, the Liberty Dollar and the,

Egold system. Well, there's a reason that Satoshi stayed anonymous. Exactly. So the great success of cryptocurrencies is that they've avoided being quashed up till now. Well, most of them are not as truly decentralized as Bitcoin is. So if the government wanted, they probably could identify loki of control over these things. But I think there's a sort of learned helplessness on the part of the government where they look at this torrent of cryptocurrencies and they feel that they can't actually write.

regulate them because there's so many and they're so global and obviously the architecture of these things is quite resistant to capture. But that doesn't stop the NYUG going after Tether, for instance. It's kind of like Uber in that Uber decided to, it was better to ask for forgiveness than permission. And they just opened in defiance of the taxi medallion rules in cities that had those rules. And then when they became popular, it became harder to quash it, although some cities have. Well, that's the thing. There are now probably over 10 million Bitcoin holders in the U.S.

And probably 100 million maybe worldwide. That's an aggressive estimate, maybe 50 million worldwide. So to certain threshold, if you want to destroy these systems, you have to take extremely authoritarian measures like obliterating property rights. So they have taken the first step, of course, which is imposing no-your-customer-customer rules on the exchanges. and declaring anything they want a money service business. Yeah, and there's plenty of startups in our portfolio that have to go to all 50 states to get these money transmitter licenses, and they have to register with FinCEN. And now there's the more draconian expectation that you have to surveil your customers, even multiple hops back in the transactional graph.

Wow. Which is, if you think about how cash works, there's no expectation that you, when I deposit, at cash at the bank. They don't ask me what the prior eight transactions would that banknote were. So that to me is actually a regression. That's an erosion of privacy. Yeah. So when banknotes first started, they were actually signed over from person to person like a check. But eliminating that was a great step forward. There was metadata. And then cash had this, it eventually obtained this nice property of being private. Now, I wonder if we will ever get a restoration of a cash like standard of

privacy and autonomy, because the more that payments become virtualized and digital, the more metadata is associated with them. And no government has ever encountered some data that they didn't want to have, right? On occasion, that's right. So I'm nervous about this because it seems to me that even cryptocurrency, there's like the ability to surveil it to some degree. And then obviously with, you know, central media digital currencies, there would be surveillance involved. So my question is there a plausible path here to restore a cash-like standard for digital transactions? Well, to the extent that people using Bitcoin can use privacy methods to obscure the provenance of their Bitcoin, and you probably know more about the technology here, but I'm told that there are ways to

coin join and things like that. You have the most complete understanding of Bitcoin of probably any economists I remember. That's a sad commentary on the profession. Yeah, it's been a little bit neglected. But then there are coins specifically designed to provide privacy. So actually, this evening I'm going to talk to somebody from the Monaro podcast. Oh, really? Is that right? So you're on the podcast circuit. Yeah, I guess so. Well, he wanted to talk about the Wall Street Journal piece that appeared on Monday.

Now, in the stable coin context, there's actually a reasonable. amount of privacy for some of these. So the edges of the network are surveilled. So you have KYCAML requirements for issuing and redeeming these things. But then the internals are effectively not not surveilled. So I think that's actually quite good. People will say, well, it's just a matter of time before FinCEN brings the hammer down on these issuers of stable coins. Well, in a sense, that's what they brought the hammer down on E-Gold for, for internal transactions that were not being surveilled. It seems like the same situation. Maybe something is different now. Maybe the fact that cryptocurrency exists and is so popular, maybe that will convince regulators that, or maybe even Congress

will take notice of that. Maybe, you know, I think that's the way that society evolves a little bit is popular pressure. To me, we've seen this since the 70s, a massive erosion of transactional privacy. And then these $10,000 limits in terms of you have to disclose what you did with your cash when you deposit it. Thanks to inflation, that actually, that is a less and less quantity. So just the very fact of inflation erodes our privacy, because it means you have to disclose at smaller thresholds. Are we at the cusp here of potentially reclaiming some of our transactional rights to privacy? Well, I hope so. I mean, I hope there's a, but it's going to take some kind of popular resistance to convince Congress to rein in the plenary powers of FinCEN. I mean, the phrase

financial privacy had a very bad reputation. It was just maybe still does. People associated with tax evaders and credit card scammers and whatnot. But this is one of the issues at the center of the debate over central bank digital currency. When I see people saying, well, you don't have to worry about your privacy. We'll balance your privacy against the requirements of the Bank Secrecy Act, which is designed to invade your privacy. Yeah, did you say the Bank Anti-Secrecy Act? Exactly. Well, because we get this reducto out absurdum of what a transactional digital system will really look like in China, where every single purchase made, even recently they've been looking, who's been buying, you know, drugs from pharmacies to determine whether they were potentially

infected with the virus, the government is never going to take this amazing bounty of metadata and jettison it. They're going to use it. And maybe they'll use it for purposes which are ostensibly good. But, you know, more likely they'll use it for a vector of control. So there are advocates of central bank digital currency who I think are quite sincere in saying we want to protect privacy. But no matter what paper safeguards you put on accounts on the books of the Federal Reserve system, they're just paper. They're not going to stop the Fed from sharing data with the FBI or IRS or other federal agencies that want it. The other thing that people like about CBDC is the ability to impose negative interest rates

with no resistance whatsoever from the populace. Yeah. Now, it turns out the economists who advocate central bank digital currency, that's one of their main motivators. The people on the tech side, they never heard. of that. That's not what they're about. They're about speedy payments. But yes, among economists, it's part of a program to eliminate cash because cash enables people to avoid negative interest rates. You want to give the Fed the, I would say impose, but they say the ability to conduct monetary policy without the zero lower bound. And who can be against giving the Fed more power to conduct monetary policy? Although the history of negative interest rates is not a history of success.

Well, that's true. I mean, it's a desperate measure in desperate circumstances. But they complain that there's a limit to how negative interest rates can be when people have the option to reject negative yielding bonds and just hold cash, which at least pays zero. And the temerity of rejecting a tax on your savings. So we need to eliminate cash so that everybody's in an electronic account and we can adjust arbitrarily the interest rate on that account and turn it negative if we want to. and then you're taxing the bank accounts, exactly. One thing I like to think of is we're in completely unprecedented monetary territory for the developed nations where in the U.S. negative interest or interest rates are negative in real terms right now. Sure.

We've really never seen this before. And in Japan and Europe, it's even worse. So we have two reactions to this. Some people say, well, let's lean into this phenomenon and create modern monetary theory, you know, by which the government can pay for anything, which is for sale in their currency. That's Stephanie Kelton, right to say that. And then the other reaction is to say, well, let's get the government out of money entirely

and we'll create algorithmic monetary policies like Bitcoin. So I see these almost as reactions to the same thing, but just we are being forced apart because we're in such a strange situation from monetary perspective today. Yeah, from my own history as an academic writing about alternative monetary regimes, it's good that people are starting to say, let's think about alternative monetary regimes to the one we've got now. Maybe something else would be more robust. Maybe something else would give us better performance. A lot of the alternatives that people float, especially the modern monetary theory people are not important. improvements from my point of view. I mean, wishful thinking that we can print money to pay for things without any cost being borne somewhere else. Well, I think maybe the U.S. has the privilege of

being able to print a very large quantity of money because everyone else globally seems to like dollars and want dollars, but I don't think you could globalize or universalize this notion of MMT. Right. So to the extent, something like half of the Federal Reserve notes are held abroad. And if we count dollar-denominated deposits abroad, maybe half of them are outside the U.S. So that means half the inflation tax would be born outside the country. But there's still an inflation tax being born inside the country. And if you press on that tax too much, the foreigners are going to find a more reliable currency. What do you make of this theory that inflation in the U.S. is reflected in asset prices?

Is that convincing to you? I think the housing bubble was a version of that or an aspect of that, that the Fed ignored the rising prices of houses because the price of houses is not in the price index that they were looking at. And yet, it's where the loose credit they were creating in 2002, 2004, 5, 6 was going. Isn't that what we had in equities? like the Fed is not counting equity markets in its inflation measures. That's right. It's a very old idea now that a proper measure of inflation should be looking at asset prices, but it's never been operationalized.

And so the Fed just ignores asset prices rather than realizing that they provide some feedback on when the Fed is creating too much money. So on return to a prior topic, I know we're almost out of time here, but I want to get your thoughts on this theory that the creation of dollar liabilities on chain, so to speak, on blockchains would accelerate dollarization events. Do you think that this is plausible? Because what it gives you is the ability to hold something like a dollar totally outside the banking system.

And the only thing you're dependent on is essentially an offshore bank, and you're dependent on their ability to service and redeem those liabilities. Yeah. So I think that is interesting. If we look at Venezuela, they well, they have a problem getting access to the internet. If you take a country like, I don't know, Costa Rica, where in order to avoid 10% inflation in the cologne, people want to hold dollars, how can they hold dollars or dollar denominated assets?

Well, it's hard for them to hold a bank account denominated in dollars because those don't exist. in Costa Rica. And you can have a bank account in the U.S., but there are many hoops you have to jump through to do that. Some upper middle class Venezuelans do that. Oh, sure. And upper middle class Argentinians all have bank accounts in Uruguay, denominated in U.S. dollars. But for ordinary people, it's hold Federal Reserve notes, but that is limited. It's dangerous to hold big stock of dollars that subject to theft. But a stable coin denominated in U.S. dollars offers a way to own dollars, which is not exposed to the inconvenience of either currency or having an offshore bank account. Aside from Costa Rica, are there countries which you feel are on the

precipice of dollarization? Well, look at the countries with the highest inflation. So, Venezuela, Iran. Is there a requirement for there to be lots of dollars available in these countries for dollarization to be more successful? Well, dollars will find their way to where people want to hold them. That's one of the virtues of the crypto infrastructure, which is created. Now we have local exchanges in every country. So this is another part of my hypothesis that that has made dollars more available in these places.

I guess entrepreneurs will always service that. demand. I remember when they redesigned the $100 bill with the new anti-counterfeiting security features. The first photograph I saw of somebody holding a dollar bill was taken in Moscow, somebody holding up the new U.S. dollar to check whether it had the threads in it and so on. So Federal Reserve notes are all over the world. One thing I've noticed is that the most popular bank note or Federal Reserve note, as you say, is the $100 bill now. My bank's ATM has just started spitting out $100 bills. And that's actually a recent phenomenon. It used to be the $1, and now it's the $100. To me, that signals that people are using physical currency as a savings device.

Yes. Now, too, there are people who are concerned that criminals use $100 bills, and therefore they want to ban the $100 bill. So there's a war on cash going on. The economist Ken Rogoff is one of the leaders of this. He has a book entitled The Currie. of cash. So his assumption or his guess is that most of the $100 bills are held by criminals. But we actually don't know because we don't know exactly where all the $100 bills are held. They take surveys of people in the United States and ask them, how many $100 bills do you hold? Do you have on you right now? And I don't know why you would expect an honest answer to that question. Right. People who are keeping their savings.

and $100 bills don't trust you. Therefore, they're not going to tell you. They wouldn't tell you. The thing is about criminality is it's sort of in the eye of the beholder. So in the U.S., we say, oh, people that hold cash, you know, a lot of those are dangerous criminals. But guess what in Venezuela, they say that about regular folks, right, if you're holding cash. So I think this argument about criminality is not very persuasive to me because it's totally the discretion of the local government to declare something at a criminal. act or not well it i had a debate with ken rogoff which you can find online uh and i made the point that most uh criminality uh is not it doesn't involve cash the crimes the so-called crimes that

involve cash are victimless crimes where people are selling goods and services right selling drugs selling sexual services selling other things between consenting adults that have been declared illegal. But these are welfare improving transactions from the point of view of the people engaged in them so that if you stamp out the $100 bill just in order to make it more difficult for people to buy pot, you're not increasing the well-being of people in the economy as they themselves view it. So it's an anti-consumer measure. Yeah.

And so, yes, $100 bills are used by criminals, but they are also used by lots and lots and lots of non-criminals, or people engage in activities that shouldn't be criminal that are welfare-improving activities. Something that seems perverse about our surveillance infrastructure is the fact that the various government agencies seem intent on prosecuting crimes through the convenient medium of finance, as opposed to really doing their homework and prosecuting the crimes themselves,

you know, with sanctions enforcement being the biggest. That's an alternative to military action. Well, so it's a matter of convenience. I read a statistic. I don't know if it's still true. I don't know what the price of cocaine is, but they used to say it was easier to track the dollar bills being shipped south of the border to pay for cocaine

than it was to track the cocaine because the dollar bills were bulkier than the equivalent value in cocaine. Well, Larry, this has been fascinating, and I thank you for your thoughts. Is there somewhere? People can follow your work. Where would you direct people to follow you? Well, I blog at a site called Altm.

Alt-hifenM.org, which is run by the Cato Institute Center for Monetary and Financial Alternatives. And you're on Twitter as well. I am on Twitter. So you get little tidbits there. Lawrence H. White 1. Well, thank you so much. This has been absolutely fascinating. I think our listeners are going to love it.

So thank you again. My pleasure.