We Study Billionaires - The Investor’s Podcast Network - TIP574: Broken Money 1/2 w/ Lyn Alden

Starting point is 00:00:00 You're listening to TIP. Preston and I are joined by fan-favorite Lynn Alden on today's episode. Preston and I have read hundreds of books since we started TAPE in 2014, but few books stand out like Lynn's new book, Broken Money. In this episode, we're exploring the history of money and how we got to where we are today. We're analyzing why the current monetary system is broken and is surprising, wide-ranging implications from everything from our daily lives to geopolitical tensions. This is already one of my favorite episodes we ever recorded.

Starting point is 00:00:32 So without further ado, here's our conversation with the always insightful Lynn Alden. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors Podcast. I'm your host, Jake Broderson, and I'm in good company here today. I'm here alongside my co-host, Preston Piss, and then Lynn Alden. How are you today, Lynn and Preston? I'm well, thank you.

Starting point is 00:01:15 I'm really well. I'm excited to plow through this. I should say that the episode you're listening to now, it's the first part of a two-part series. So this episode goes out Saturday night, September 2nd, and it will focus on money, banking, rise and follow the global monetary orders. And then the second part, which Preston will host, that will be released on two. Tuesday night, September 5, and we'll focus more on Bitcoin and native internet money. And so, yeah, I'll be the main host here for the first episode and then Preston will run the

Starting point is 00:01:47 second one. And luckily, Lynn, will be with us for both of those episodes. And Lynn, can I just say that this is an amazing book? I'm holding this up to the camera here, my printed version. Like you and like Preston, you know, I read a lot and I'd say it can sometimes be a bit of a blur, you know, like this book and that book. I don't know. Let's say I did like, I don't know, 35, 40 books, something like that so far this year. But I'm pretty sure whenever I look back in like five years, 10 years, this is the book I'll remember from 2023. It's such a good way to put it. It's such a good way to put it. And Lynn, I know we're just like gushing over your book and you're just like, look at that. It's like we're crazy. But seriously, it is a memorable

Starting point is 00:02:28 book. I remember to six point, so many people would be like, well, where did you read that? And I'm just kind of like, I don't know. In fact, I probably read that in multiple books, what I just said. And this book really is a standout. It is going to stand out in my memory for many different reasons. But anyway, we'll stop gushing. Well, I appreciate that. And one thing I'll add is that, you know, I often think about writing a book.

Starting point is 00:02:52 And I've written some, like, PDF books before about equity investing and stuff. And this is the first time I decided to write like a, you know, a flat out published. book. And the reason I waited a while was because I didn't want to write a book for the sake of writing a book. Just over the course of years of writing and researching, eventually a couple key pieces or themes or structures fell into my head. And the book kind of organized itself. And once that framework existed, I was like, okay, well, now I have to write it. And now there's actually a book there. I'm not going to force a book to exist. And instead, the book foundation kind of, you know, as I kind of just a couple key themes that I thought were under described in literature and not

Starting point is 00:03:34 covered enough and that I had a unique angle. And so I appreciate that you guys think it stands out or at least is like memorable in a certain way because that delay of actually, you know, not writing a book until an actual book exists, I think is a way to go. So Lynn, I want to set the premise for today's episode and I want to borrow a paragraph from your absolutely wonderful book. this is not a gold book, not a banking book, not a Bitcoin book, and not a political book. Instead, it's an exploration of monetary technologies in the merit forms in the past, present and future, and touches on all these topics and more so that we might better understand where we came from and what path we may take going forward. So this is just so well written. So with that said,

Starting point is 00:04:20 why did you call your book Broken Money? I think because even though the book covers a very long span of history and then into the future. The emphasis is on the present. So it's not just an academic book that says, okay, here's the layout of history. It says, we have a current problem and how did we get to that problem? And then how could we potentially fix that problem? And then, of course, it defines the problem and goes into details around the problem. And the way I would describe it, essentially, is that money is broken in a global scale. And those of us in the United States and Europe might not notice it as much, although I think we still notice it. But throughout the developing world, it's always been a lot more obvious. And, you know, at one sense, you know, the past 50 years or

Starting point is 00:05:05 so, humanity has flourish in a lot of ways. We have way more technology, way more energy. Standard of living has haven't been improving. And so when you look at all of our major systems, I generally would argue that money has been the slowest change, that it's still one of the bottlenecks that's a lot less efficient than some of the other improvements we've made. I mean, Money is more similar to how it was 50 years ago than how we interact with technology, how we communicate, how much energy we have, especially in the developing world, that kind of stuff. And I think one thing that summarizes the problem is that there are about 160 different

Starting point is 00:05:38 fiat currencies in the world, each with a local monopoly over their own jurisdiction and then virtually no acceptance outside of their own jurisdiction, unless you're the dollar or maybe the euro. And so you have all these different kind of bubbles, these little isolated areas. And if you have to be born in the top 20, it's workable enough. Your money devalue slowly, but you have plenty of investment options. Your money's easy to exchange, it's liquid. But if you're born in the long tail of other currencies, you have this currency that's, you know, there's been multiple dozens of hyperinflations within our lifetime. So just since the 1980s, there's been

Starting point is 00:06:12 multiple hyperinflations, dozens. There's been many other triple digit inflations. There's been constant double digit inflations. Many countries don't have rule of law and have authoritarian and tendency so money can just be arbitrarily frozen with no real recourse. And so really where you're born affects how easy it is to accumulate liquid capital, which is a foundation of growth. And it also impacts your ability to transact with other participants in the world, right? Because instead of just sending money to someone for their good or service, if we're in different countries, not only do we interact, we have to go through this big banking apparatus around ourselves. I have to convert my currency to your currency, buy your good, and get it back here.

Starting point is 00:06:56 And it's just this whole series of bottlenecks and inefficiencies. It hasn't, you know, it's only marginally improved, really, with the past 50 years, the way this works. And so I think that essentially for multiple ways, some obvious and some subtle, our monetary system is outdated and problematic. and it's at a big kind of piece of the puzzle for why we see growing populism in the developed world. I think it explains a lot, not all, but a lot of the problems that we see in developing countries, why they have such big booms and bus cycles and why it's so hard for them to develop. You know, another factor is that if you look at the MSCI, you know, like, you know, develop markets versus emerging markets.

Starting point is 00:07:33 In the past 50 years, the percentage of developing countries that have developed is strikingly low. A handful in Asia have arguably done it. But outside of that, there's very few examples of a country going from developing to developed. And I would argue that the way the money system has been structured plays a significant role in that because it makes it hard for the middle class in those countries to accumulate liquid capital and kind of keeps them tethered in the system. One of the things we can see whenever we look back in history, and you're right eloquently about that and the financial history of money. And, you know, humans and small, kinships and friendship groups don't need money. But whenever we start trading with other groups,

Starting point is 00:08:17 all of a sudden, we don't trust them, we don't know them, we need money. And traditional, we've done that with commodity money. Could you please elaborate on what is commodity money? And why is commodity money really a story about technological progress? Sure. Yeah, the book starts out, basically going back to the earliest known history. So, you know, what did hunter gatherers uses money? What did the earliest civilization with writing uses money and those types of questions? And so it touches on various studies by anthropologists and different research into how people handle this.

Starting point is 00:08:52 And I think the foundational problem is the double coincidence of wants, meaning that, you know, if I want to trade with you and, you know, I might have a surplus of something and a deficiency of something else and you have a surplus of something else and a deficiency of something, in order for us to trade successfully, my surplus has to match your deficiency at the same time. And there's more combinations that fail than succeed. And certain types of goods are even hard to just carry for long periods of time. I mean, if all I do is make apples and you build homes, how do I accumulate enough apples to exchange for the home? Right. So the problem becomes that we need an abstraction to translate my value to your value and lubricate this trade. And there

Starting point is 00:09:35 are two main ways to do it. We can either defer it over time. So that's the first one. And that's why small groups don't really need money because they know each other and therefore they can defer it over time. And we see this from studying hunter gatherers and we also see it in our own lives. Like I used the example that, you know, when I was an engineer, a bunch of us would go out to lunch all the time together. We kind of loosely kept track of who drove, you know? And so it's like, well, you drove last time. You drove this, you drive this time. And it's like, hey, I drove three times last week, okay, he doesn't have to drive, you know, the next week. And that kind of ledger, that mental ledger that we're keeping track of is the same way that, you know, in a family, you keep track of chores.

Starting point is 00:10:15 In a group of 60 people, you can keep track of roughly what's going on. So when you know each other, you can defer things over time. And a one of the subsets of that is gifts. So let's say you're deficient in something. And I'm, I'm in pretty good shape. I've lucky or something, you know, I don't really have any needs right now, but you have a need. I could help you. I could give you some of my surplus to help you through your need because I'm now basically banking some insurance in our group so that I know in the future there's a good chance that all needs something. And if you or Preston or others are, you know, someone I've maybe helped in the past in this kind of hypothetical kin example, then you'd go to help me later, right? And so basically,

Starting point is 00:10:56 that's the one way to solve the double quintess of wants is by deferment over time. It's a type of credit, really. The problem is that only works with people you know well or have some sort of legal structure in place in more advanced societies. So the other way to do it is with spot trading, but you need something that's more universally desired. So not everybody needs spears. They're big and bulky. If you have a spear, maybe a backup spear, you don't need eight more spears. You're not going to save your wealth in spears or giant bulky furs or things that rot or things like that. And so what we generally see in societies that objects that are small, scarce, portable, long-lasting, divisible, they tend to recurrently pop up as ways to lubricate trade.

Starting point is 00:11:42 And so at Hunter-Gather Society, it's often shells or teeth, but shells are shell-like objects where they would put some of their surplus time and energy when they have a period of abundance into making various ornamentations. So shell bead bracelets, for example, takes a ton of work, it's intrinsically enjoyable for people wearing it and seeing it. It's a way of displaying your status and your past period of abundance. But then it's also a, you know, you can store a lot of value in a small way that you don't have to carry. And should you ever need something more utilitarian in the future, you don't have this, this rare object that you can potentially trade, even to a stranger for it, or to other members of your group that are maybe not as close,

Starting point is 00:12:27 and it represents final savings. They don't have to remember that, you know, there's a favor there. It's a way of final settling, even among people you might know. And so that's what the evidence shows. And I point to a lot of literature showing that, you know, Hunter Gatherers and then early civilizations, commodity money would develop. And, you know, it started with shells and it would other things. It could be cocoa beans. It could be grains.

Starting point is 00:12:51 It could be silver, eventually gold. You know, we moved up the technological ladder. But, you know, they are a way to solve the double coincidence of wants when you can't rely on time. You can't rely on time and trust. So, Lynn, thank you for seeing up my next question here. As humans group encountered each other over time, the number of commodity money dwindled down just to a few. And every time a commodity money encountered gold and silver in the competition for money, gold and silver won out. Now, I guess there are two questions. I would like to ask you to that. Why was that so? But

Starting point is 00:13:27 why would even superior money like gold and silver eventually, right? into issues. So basically it's going up the technological ladder. When people and early civilizations are in different parts of world, obviously they have different environments around them. So you might have cocoa, you might have grain, you might, you know, different types of things. And so they'd use different types of money.

Starting point is 00:13:48 But as civilizations would encounter each other, you know, if an industrial society encounters a non-industrial society, they can quickly make a lot more of the non-industrialized money, whereas the reverse is not true. And then if two pseudo-industrialized countries come to place, it's easier to make more copper, for example, and it is to make more gold. And so over time, the scarcest commodities, one. And in this sense, the scarcest doesn't mean it's super rare. It's not like meteorites or rhodium or something.

Starting point is 00:14:17 It's something that's still sufficiently liquid and fungible and people identify it and they have it and they know what it is. But it's very hard to increase the supply on a percentage basis. And so basically, for lack of a better word, is just stock to find a lot of the way. flow ratio. How much exists? What is the stock of the total amount of that commodity in that region versus how much is produced per year or how much could be produced per year, even if you tried really hard? So, you know, if you're using tobacco as money, which some places did, it's pretty easy to make a lot more tobacco. If tobacco is being overvalued because so many

Starting point is 00:14:50 people are holding it and giving it a monetary premium, it's easy to go out and plant a ton more tobacco. Whereas if gold is heavily used, it's really, really, really hard to go out and meaningfully increase the amount of gold in the system on a rapid basis. And so the short answer is that as civilizations found each other, they moved up the ladder to the scarcest monies that were still liquid and fungible and divisible and recombinable. And so that ended up being gold and silver. Now, eventually, they even ran into problems when we started to abstract money. So, even though they are divisible and recombinable and authentifiable, they're not easily doing so. So, especially if you're moving large amounts of gold, you know, along the Silk Road or something like that, that's very dangerous.

Starting point is 00:15:37 It's very burdensome. And so in many ways, we started to develop these proto-banking systems, you know, even before, you know, modern banking of, you know, like Italy, before then, you know, you'd have like Islamic traders along the Silk Road, you know, a thousand years ago. And it's like, okay, how do we transport value safely and efficiency over long distances? And well, the answer was abstraction. So, you know, instead of bringing gold long distance, there's networks of people that know each other, merchants. And I could go to one city exchange gold for a piece of paper that's just like authentifiable. And when I, you know, my caravan travels along the Silk Road and I wind up in another city

Starting point is 00:16:17 that recognizes that other merchant, I can then exchange that paper for gold. And that merchant knows that he now owes the other merchant at some future time. And so you have early rudimentary credit, early rudimentary bills of exchange in order to grease the efficiency of trade. And that really got a big jump when the telegraph was invented and then deployed. So throughout the 1850s and 60s, it started to be meaningfully deployed across Europe. And then 1866, you connected across Atlantic. And so now you could send information, you know,

Starting point is 00:16:53 rough for the speed of light. Whereas all throughout history before then, there's virtually no way to send information more quickly than humans could move around, other than like fire signals in the distance or, you know, but there's very few ways to send information quickly. But once we had the telegraph, we could send information around the world very quickly, and then by extension, we could send transactions around the world very quickly. You know, we can communicate over Morse Coe between New York and London,

Starting point is 00:17:22 virtually in real time and say, okay, this bank, X, Y, Z owes other bank, ABC, money, we're doing this transaction. And that gold settlement can happen weeks or months or never later. And the problem was that that gap grew very, very significantly. And so gold and silver had to be increasingly abstracted in order to keep up. And so gold and silver were increasingly marginalized. And silver was marginalized first because, Because the reason gold and silver were often used together in a bi-metallic standard was because

Starting point is 00:17:58 gold is not as divisible. Even a tiny gold coin is often worth more than labor would make in a day or a week of work. And so they said, okay, well, silver is money for like normal people and gold is money for like kings, merchants, large settlements, that kind of stuff. But once you were no longer directly interacting with the metals for the most part, you were using banknotes and abstractions. These things made them more divisible. And then silver became less important because the key limitation of divisibility was solved by this banknote abstraction or this ledger abstraction. And so gold started to push out silver and kind of be the last commodity standing. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:22:54 and you outline these two primarily economic camps. One camp is commodity theory of money and the posing is the great theory of money. And what I think you do so well, Lynn, because whenever we talk about like these academics say this and these like what I think you do so well in this book

Starting point is 00:23:10 is that you make it way more digestible, it's so easy to understand for us, and it doesn't, it's not as daunting as it sometimes can be whenever you're reading those big, dusty economics books. So could you please talk about both of those theories, but also have you so beautifully are reconciling the two different theories? Sure. So going back to the earlier conversation, the two ways to solve the double coincidence of wants. It's either a highly saleable good or it's deferment over time. And so when you look at the major economic literature where people try to figure out what money is and define what money is, there's these kind of these two silos that a lot of these

Starting point is 00:23:48 theories tend to gravitate around. And so one of them is the commodity theory of money. And that goes back to Aristotle. Then, you know, Adam Smith, you know, in the modern times kind of revitalized that. And then the Austrian school, you know, really built upon that. And so the idea there is that a money, you know, the most saleable commodity naturally emerges in societies. And that is is what's used as money as a form of spot trading. It doesn't need any sort of like state backing. It just kind of naturally emerges over and over again. And of course, states can do things like make coinage and define the unit of account and authenticate it. They can play a role in that sense. But the commodities themselves become money. They just naturally become use as money.

Starting point is 00:24:28 If you're going to store something, if you're going to store your value, you know, if you're an apple farmer and you've harvested your apples, you want to sell your apples and you want to hold it in a scarce liquid, highly accepted unit of account that you can then, you know, pay for things throughout the rest of the year as you need them. So that's like, that's camp one. Camp two said, well, it's not necessarily commodities per se. And they would argue that instead credit is at the root of money. So, you know, if you sell me something and I don't have money on me or what I make you don't need right now, I could give you a claim for stuff. if I produce. So, you know, if you're a brewer and I'm a butcher and you, you know, I want some

Starting point is 00:25:14 beer, I can give you a claim slip that says, okay, this is now redeemable for, you know, half a pound of beef. And you can either redeem it at a future time, even though you don't need beef right now, or you could give that to someone else for something that they have of value. And so the idea was, it's about obligations. It's about, it's about credit. That's the foundation of what money is. It's about the fact that someone owes something else. And so what I try to do is look through these and see how they contrast and how they're related. And so my argument, I'm not the first one to say. There's other people have said that, you know, money is the best ledger. And so what my book does is really take that to its logical conclusion and explore all the ways where money is a ledger.

Starting point is 00:25:55 And so what I argue is that in the abstract, all these types of money are basically ledgers. So in credit, it's a more literal ledger. You know, if we're friends or we're hunter-gatherers, the ledger is a mental one. But you keep track of roughly who is pulling their weight, who's falling behind, who's over-contributing, and, you know, who has up social insurance, who hasn't, that kind of thing. Whereas in a more complex society, you have a more of like an administrative state. So, for example, in Babylon, you'd have the temples, keeping track of extensive ledgers in clay tablets. It's one of the earliest writings, and it's one of the earliest kind of formal

Starting point is 00:26:35 monetary systems. So these are extensive credit-based systems. Whereas commodity money is interesting because it's an abstract ledger. It's saying, okay, instead of humans running the ledger, we're going to let nature run the ledger. And so if there's a region filled with hunter-gatherers and they have shells, nobody knows how many shells exist, but they roughly know the properties of how hard is to make a shell, especially like a strand of shell beads. They look at others and see they can roughly see how common they see them. And then by exchanging it with someone else, physically exchanging it, that updates the status of the ledger. So if you look at this from like a God view, you see the whole field, you can see the whole ledger of who owned these shells, how many shells are there.

Starting point is 00:27:17 And so no participant necessarily sees the whole ledger, no humans maintaining the ledger, but the properties of nature and the collective human action are maintaining this ledger. And, you know, one thing I explore when reconciling these, you know, different conceptions of money is that generally in times or contexts of high trust, people tend to defer more towards credit money. Right. So if it's your friends and family, you defer with credit. You say, okay, well, I'm doing this favor or here's a gift. And that's just how that's kept track of. Similarly, in a highly organized state, let's say Babylon of its era or of course the modern day with central banks and stuff, we often again defer to credit. It's workable enough. It's highly convenient. Sometimes it's mandated and we defer to credit. Whereas in societies where things have broken down or we're dealing with strangers where we don't have the same, we're not from the same

Starting point is 00:28:11 system, then the commodity money tends to take over because that's where you don't have trust, So you don't have the luxury of time, deferred settlement. And so you say, no, no, I'll give you this if you give me this at the same time. And so, you know, during wars, during defaults, things like that, people then gravitate towards those harder commodity monies, even if they're less convenient to deal with on a, you know, transaction by transaction basis because it's a method of defense and kind of getting down to the root layer of what value is on the spot. Now, Lynn, one of the things we talked about here on the show a few times is how the human brain tends to think very linearly and that we also have a recency bias.

Starting point is 00:28:54 Now, what I love about your book is that you look back of financial history for literally thousands of years. And if we look back at the 20th century, the current system, as we know today, it's really the exception and not the rule. Could you please outline the fractional banking reserve system and why you compare it to a game of musical chess, a system that functions for a while, but if something stops the music, it can all fall apart quickly? Yeah, so as humanity began abstracting money, we didn't want to deal with the gold and silver directly. We'd rather have someone else hold them for us, and we have various paper receipts or ledger entries that we can more easily give to others in exchange for goods and services. is, you then have a kind of a foundational issue. If someone's holding all the gold and they're issuing all the claims for gold, and then they see that at any given time, very few people ever redeem the gold. And it's just sitting there. And they say, well, I could lend some,

Starting point is 00:29:53 I could lend a small percentage of it out. And it won't matter because most people never redeem the gold anyway. And so even as long as I leave a buffer, it should be fine. And then, of course, you know, you push it, you push it, you push it, you push it until you've, you've actually let out most of the gold. And there's really, there's two ways. to handle lending. And in practice, only one of them tends to be used. So there's fractional reserve banking and full reserve banking. So full reserve banking, another way of calling it is duration matching banking, which is that if I deposit money in a bank and I have the right to pull it out at any time, then they should have all that money there. Another hand, if I want to buy a

Starting point is 00:30:32 certificate of deposit, I could lock up money for two years. And then now the bank can make loans with that money for up to two years durations or less, right? So they've, they've duration matched their liabilities and their assets. The far more common type of banking, basically ubiquitous, is fractional reserve banking where they make two promises at the same time that are, you know, during time distress, not reconcilable. And then they hope through probabilities that that occurs rarely. So I deposit money that they tell me, you can pull this out at any time. You know, was to demand deposit, you can pull it at any time during normal banking hours, but then they go out and lend most of that in illiquid loans. And so at any given time, no more than 5 or 10% of

Starting point is 00:31:18 people can come in and pull their money out, even though all of them are promised that they could if they wanted to. And the bank relies on the probability, you know, what are the chances that more than 5 or 10% of people are going to want their money back at the same time? And that, you know, that works for years. It worked for decades. But eventually, the system gets so, over levered, so it looked like a liquidity mismatched, that a small problem, it could be a natural disaster, it could be a war, could, you know, any sort of like significant event or even just it can fall from its own just leverage, eventually hits the system. And then the problem is everybody realized that there's far more claims for gold or money than there is underlying gold or money.

Starting point is 00:31:58 And so you get massive defaults, you get massive problems. It's a huge cascading issue. And so that's kind of the one of the hearts of the modern financial system is that pretty much anything you can do, you will do. And so basically because fractional reserve banking can be done, it tends to be done everywhere. And it tends to be legally sanctioned as something you can do, even though in some sense you're kind of making a claim that you can't really back up when stuff hits the fan. And so that's kind of the heart of modern banking. And of course, as those types of crises inevitably happened every few years or decades, you'd have various ways to try to mitigate them. And, you know, the formation of central banks, you can argue really is two main purposes.

Starting point is 00:32:43 One was to fund war. So the Bank of England really was created to finance war. So that's number one. And number two, central banks were created to try to say, okay, during these rare occurrences where this game of musical chair stops. So people have far more claims than there is underlying gold. That works most of the time, kind of like how the musical chairs, you know, if there's, eight kids and there's seven chairs and they keep walking around the chairs. And as long as music's going, it's fine. But every once in a while, when the music stops, one kid's not going to get

Starting point is 00:33:13 their chair. Now, if you have a game of musical chairs with like 100 kids and 10 chairs, when the music stops, you can have absolute mayhem. And so the question becomes, is there something you can make as a backstop? And so one of the solutions that multiple different societies kind of landed on was a central bank. This is, okay, we can come out and kind of create more base claims to bail out these banks that run into liquidity problems all at the same time. And also one of the answers that commonly came up was peg breaks. So they'd say, okay, well, I know that claim was worth an ounce of gold, but, you know, times are tough. So now all these claims are only worth half an ounce of gold. And so everybody kind of gets a haircut to de-leverage

Starting point is 00:33:57 the system of claims versus base metal. And so that kind of dilemma, the way that we do banking has been at the source of how these kind of rolling crises work and why the system somewhat become more centralized over time in these recent centuries. Let's talk about the last century. Let's talk about Bretton Woods. That was polar designed from misconception in 1944. And looking back, it was destined to fall inevitably. Now, as you also outlined in your book, the system that we have now is also poorly designed and is also on track to be replaced eventually. What is the catalyst that you're looking for to see the fall of the existing order and the rise of anew? To answer to that question, I'll actually go back a little bit further. So I think we can

Starting point is 00:34:46 divide this into kind of three modern eras, or three eras within the telecommunication era, which starts from the invention and deployment of the telegraph. So the first one was the classical gold standard, where the major developed countries were on a gold standard and their central banks would communicate with each other and their correspondent banks would communicate with each other. And so you had these claims for gold to just ledger entries or paper entries, and there's a amount of underlying gold. And I cite a book from 1875 from Jevins, Money and the Mechanism of Exchange, where he examines the leverage of the system of the day and, and, and, and, and some of the pros and cons, how that was working. So basically, telegraphs and paper instruments made that system so efficient that all these claims would cycle with very high velocity and gold itself would rarely move. And that allowed for tons and tons of claims to be built on top of that relatively small gold base, something like 20 to 1. And the way he put it, like, it was funny because he's describing it both like excitedly.

Starting point is 00:35:48 He's like, look how efficient the system is. We barely ever have to move gold, and yet it works so wonderfully. And yet he was also fully cognizant of how bad this system could get if people forget that all these claims are redeemable for gold. And he's like, we must not forget the disaster that could happen if you don't make sure you treat these claims like they're actually gold because they are. They're redeemable for it. And that system ran into a wall in World War I because, you know, what started out as like

Starting point is 00:36:16 a small regional conflict, you know, quickly. quickly turned into a war across all of Europe. And it was in large part because all of these countries could just sever their gold pegs, drain their citizens' value, and channel it towards war. So if you go back to war the way it used to work, going back to your prior comment about debasement stig, you'd have a physical gold coin or physical silver coin, and there's layers of a value on top of it. So there's the raw monetary value. Then it's stamped with the king's face to help, you know, kind of verify that this is, this is the amount of gold it is. This is the appropriate fineness. And then you'd have a legal tender or other liquidity enhancement that if

Starting point is 00:36:56 you're using your local coin, it's generally easier. And you'll generally pay a monetary premium to have your local coin rather than some foreign coin that might not be accepted. And Kings would routinely, you know, kind of abuse that, where they would say, okay, well, times are tough. I need to spend more, but I can't tax less because I don't want like a revolution. So I'm going to like, you know, the tax of coins I bring in, I'm going to melt them down, make them a little bit less precious metal, and then pay them back out at the same unit of account. So that was a debasement.

Starting point is 00:37:26 But of course, you can only do that so quickly. You know, people are physically holding the coins. You have to tax them back, spend them back into circulation. Whereas once we hit the modern era where our money is abstracted, you know, we're all in this like telegraph base system, bank base system, we hold banknotes, we hold banknotes, we literally paper and we hold ledger entries in our bank, and this represents our money, and the banks and the central banks, the ones hold the gold, well, then the king or the president or the Congress, with a stroke of a pen at the middle of a Sunday night, they can just say, well,

Starting point is 00:38:00 okay, all those papers are redeemable for half as much gold as they used to be. So they can just siphon all the money, you know, as much money as they want without raising taxes and without any sort of like transparency. And then they can spend that on soldiers, they can spend that on equipment, and they can go fight war. And so it really speeds up the state's ability to kind of rugpole their citizens. And in the UK's case for World War I, not only did they rug pull their own citizens, but even they were the global reserve currency.

Starting point is 00:38:29 So multiple other countries stored their surplus value in UK banking system or debt instruments or bank, you know, different types of abstractions. And so all of that was rug pulled from those countries around the world and channeled towards war in Europe. So that was system one. It broke because it got highly levered, it got highly abstracted, and then it ran into war. And then after the wars, the Bretton Wood system formed, where the United States emerged as this hyperpower, it had tons of gold, and then other countries had sent their gold to the United States for safekeeping in case the Nazis overrun you. It's like, okay, well, at least the gold is stored in New York.

Starting point is 00:39:06 And we had, other than Pearl Harbor, we were largely unattacked, we had the biggest industrial base. And so the United States was in a position to basically set the rules. And so the bread and wood system was the dollar is backed by gold and redeemable for gold to foreign creditors and other currencies will peg themselves to the dollar. And so that's a system that we're going to operate under. And the problem there was that, again, because of fractionals their banking, the number of dollars kept proliferating compared to the amount of gold that the U.S. Treasury had to redeem. And so people often think of it as going for, from 1944 to 1971. But in reality, I mean, 1944 Bretton Woods Conference was just when the system was like basically designed and roughly agreed upon. It didn't really go into effect until the late 1950s. And so there was only like a 13-year period where the Bretton Woods system was in full

Starting point is 00:39:58 force. And when you look at that period, American gold reserves went straight down because the amount of claims for gold was growing, the amount of gold was falling. And literally 13 years of just gold down every single year, they eventually, she's like, okay, we can't do this anymore. It's not redeemable for gold, and they broke the system. So the cost of the Bretton Wood system was it only lasted as long as basically participants were willing to hold these claims and until America just didn't have enough gold to obviously support it. Then they transitioned to the current system, the Euro dollar system or the pet dollar

Starting point is 00:40:29 system, whatever you want to call it, where the dollar itself is at the heart of the global financial order, where the United States has enough economic military power, especially back in the 70s, and they made deals with all these OPEC nations, and they said, look, only sell your oil in dollars, and then take a lot of those surpluses and buy U.S. treasuries with them. So store your monetary premium in the dollar. And in an exchange, we'll give you military protection, will give you good arms deals. And so that kind of helped maintain that network effect. And so in this modern system, instead of gold being at the heart of the system, the dollar

Starting point is 00:41:05 is at the heart of the system. And all these countries around the world hold dollar. dollar denominated assets as their reserves that they can use to backstop their currencies, you know, when they need to defend them. And they're not pegged the dollar. Well, some of them are, but the other ones are more floating, but they're managed relative to the dollar. And the downside of that system is that the dollar gets this extra monetary premium that has nothing to do with our, you know, export competitiveness or things like that. The dollar is just so, it's the most saleable good among fee of currencies. And so it achieves this monetary premium that the other ones don't have.

Starting point is 00:41:42 And that makes it very challenging to produce things in the United States. We basically run this structural trade deficit to send out dollars to the world because that's the global money. And so the downside of this system, we get all these benefits from the system, obviously. United States is, you know, our unit of account is basically the unit of account of global trade. 90% of currency exchange is happening with dollars on at least one side of the trade. It's the heart of the whole system. We can sanction any country. We issue debt in our own currency.

Starting point is 00:42:15 Other countries issued debt in our currency, especially developing countries. And so it's a very privileged position, especially for the military and especially from a geopolitical standpoint. But the downside of the system is that our industrial base is increasingly uncompetitive. we have this kind of extra uncompetitiveness built onto our industrial base. And so when you look at the United States's trade balance before the system, for a period of time we were running a surplus and then it was kind of balanced. But after the system came in place, we started to run a structural trade deficit.

Starting point is 00:42:48 We pretty much have to in order to support the system. And that over time, that means a deeply negative international investment position. It means that our industrial base, especially over the past two decades, has stagnated. And so we become very services-oriented and we become kind of this hollowed-out shell that has a lot of geopolitical reach around the whole world, even as at home our industrial base suffers, our infrastructure suffers. It's ironic when you go to a developing country and their airports are better than the airports in like the empire country, right? You know, imagine the world of Rome where, you know, like other countries had better infrastructure than Rome. That would be interesting, right? So that's kind of the environment we find ourselves in now where the United States has

Starting point is 00:43:34 all this geopolitical power. It's good for Washington. It's good for New York. But it's been really bad for kind of flyover country where you want to make physical things, but it's much harder for you to do so. And that's been the cost of this current system. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 00:46:51 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. I sort of wanted to go back even more in history. That's one of the wonderful things about interview you, Lynn, that we can jump back and forth in history. And I want to go all the way back to the 1860s because everything is, there was a red threat to everything we talked about whenever we talked about financial history. And I wanted to talk about the American Civil War and President Lincoln and how he began to centralize the banking system. This was at the time

Starting point is 00:47:37 whenever the U.S. federal government issues the, issued the famous greenbacks as fiat currency. and that also allowed them to absorb from the population as long as they could retain that credibility and reputation. Now, you also had the Confederate States of America. They also issued fiat currency to channel people's savings toward the war, basically what you were saying before in the 20th century. Like we saw also that in the sense before. And that currency for the Confederate States hybo inflated whenever they lost the war.

Starting point is 00:48:06 So I guess with all of that as a backdrop to my question, how important is the strength of the U.S. military today, whenever we talk about the strength of the U.S. dollar? Yeah, it's a good question. And to touch on that initially, again, the 1860s are interesting because in addition to, you know, the Civil War and all that, you had the telegraph system recently deployed, right? So that telegraph system in the United States is partially what allowed centralization of the bank system to occur in the first place. It's hard to centralize something if you can't even rapidly communicate across that large area. And so again, it's, it's That's why I focus so heavily on technology as a driver of what money is or what the layers on top of money are,

Starting point is 00:48:48 because without the foundational variable, it's hard to have the derivatives of that. So it's interesting timing how they worked out. I'm not saying obviously telegraph calls the war. I'm saying that, you know, the bank system was centralized apart for the war, but it could only be centralized to that degree because the telegraph had been deployed to various degrees, or at least it made it far easier to do it. So to answer your question, I would say that the credibility of a currency is largely tied to that country's economic size, rule of law, and an ability to define itself or protect itself. Right. So if I, if I, like, I have, I have, you know, Thai bot and Egyptian pounds and Norwegian croner in the drawer next to me. And they're not very saleable where I am in New Jersey, even though, in particularly the Norwegian currency is quite strong. It's like the richest country per capita, or one of the richest countries per capita. But it's a small country, and the currency is not very saleable outside of Norway.

Starting point is 00:49:46 People don't even know what they would do with it. So I'd have to probably trade at a discount to get it off my hands so someone could figure out what they want to do with it. Whereas the dollar, because it's a claim tied to the world's top two economy along with China, but also combination of rule of law, openness and all these things like that, the dollar. is far more widely recognized. And so it's far easier to get the dollars and spend them for something in countries around the world than smaller and less saleable or less open currencies. Now, the military plays a role in that because if a country can't defend itself and can't defend its own rule of law, then that whole structure degrades. But I think there's a feedback

Starting point is 00:50:28 loop as well because, you know, a military can only be strong if the underlying economy is strong. And it's harder for economy to be strong unless their monetary institutions are reasonably robust. And so one of the ironic problems of the current Eurodollar pet dollar system is that as the United States has lost its industrial base, it also impedes our ability to do war in a way. So the United States is, you know, we have the most global Navy projection. That's kind of the source of the United States is differential. And of course, you know, the nuclear arsenal that the United States and a handful of other countries have. But our ability to exert physical force in a distant location is now somewhat impaired by the fact that our industrial base is so weak. It's like we have to

Starting point is 00:51:13 buy parts from China if we ever have a conflict with China. It's like that's how we kind of found ourselves because we deindustrialize our heartland. And so I think while a military is important for backing your currency, it's obviously not the only variable. Otherwise, you know, China's currency would be more accepted than it is now. You know, maybe not more accepted than the dollar, but it would, you know, you'd think it would be, you know, a third of the global reach that dollar has. But it's not. It's a, it's a, you know, single digit percentage of the global reach that the dollar has because there's a lot more that goes into currency acceptance than just military, even though the military is a variable. Thank you for clarifying that.

Starting point is 00:51:51 I think that's so important to understand in historical perspective. If we can continue on that thread here, you outlined the gold standard really, really well in your book. And we can roughly say, just to put some numbers on, that the era of the gold standard, the more modern gold standard began the 1870s, depending on also which country you're looking at, the United States increasingly joined that. You have the Quariness Act in 1873, then you had the Gold Standard Act in 1900. And today, we almost had 200 countries in the world and no one is using the gold standard.

Starting point is 00:52:25 We had the shift in 1971 with Nixon that we talked about quite a few times here in the show. We took the US, more or less the world of the gold standard. There were a few exceptions, including Switzerland that was the last remaining country in 1999. Talk about a small country with very little military power that still plays a role compared to its size. What you also talked about before was that the gold standard became highly inconvenient to run in 1971 and also the years before because there was this disconnect between like the dollars out there and the gold in the system. There's just there was disconnect there. And I sort of like wanted to to use that as an example and talk about the British. They've been on and off the gold standard.

Starting point is 00:53:10 And leading up to the First World War, the United Kingdom was the dominant global power. And in 1914, they issued war bonds to raise capital from the public to fight the war. And I should say, luckily for the United Kingdom, the bonds were massively or subscribed, but unluckily, the story just wasn't true. And you explained that so well, that story. So I would kind of ask for you to tell that story and share that with the audience. What happened at the time and what can we learn from a history about currency to basement from the world's superpower, which presumably were backed by gold at the time?

Starting point is 00:53:48 Sure. And to touch on the classical gold standard, individual countries could be on a standard, but what makes a global monetary order work is that you need technology to make it work and need some degree of peace or hierarchy in order for global agreements to happen. And so the reason that the global gold standard existed from the early 1870s until World War I was a combination of one technology. So the telegraph was deployed across Europe and then across the Atlantic. And so, you know, not the Pacific yet, but that whole kind of quote unquote Western world was connected. And that allowed central banks to communicate with each other quickly. And so that was that was one piece of what made it work.

Starting point is 00:54:28 And then two, geopolitical and order. So the Franco-Prussian war ended in 1871. And so that kind of marked an end of a period of war at the beginning of a period of pretty significant peace across Europe. And so that combination of peace, cooperation, order, and the technology to make it work is what gave us the classical gold standard. And the problem, as I described before, was that during that period, you know, very quickly, like already in the 1870s, let alone in the subsequent decades, you just had far, far,

Starting point is 00:54:59 far more claims of gold than actual gold because why not? It's like no one ever redeems these things who wants to hold physical gold. And so all these claims are moving around. They have very high velocity. And, you know, there are a couple of people sounding the alarm, but it worked well enough, as long as there's no problem. Of course, humanity is filled with problems. And so when they ran into World War I, you know, you start out this like, it's an Eastern European conflict. I mean, at its surface, it didn't involve the UK at all. And so you had kind of these preexisting military alliances, all these countries started getting involved. And once Germany got involved, the UK became concerned because Germany was a rising power to UK. So the United States was

Starting point is 00:55:41 technically the world's biggest economy even back then. By the early 20th century, they had emerged, but we were isolationist and pre-federed. So we were not this considered a threat. Whereas Germany is right near the UK, they had a growing industrial base. And they were like a threat. We can actually kind of compare it to the United States and China today. So there's a dominant power, and then there's this rising power that in some metrics is kind of catching up. And so the UK did not want Germany to win this war and then basically just have dominance across continental Europe. And so they decided to enter the war on the other side. And that's a hard sell to the public. Like imagine saying we have to raise taxes a ton in order to go fight

Starting point is 00:56:23 this overseas thing that trust us, it'll benefit us, but we can't exactly describe how. You know, if you're a steel worker in UK, you're like, well, why are you going to raise my taxes to go fight in Germany, right, or France? And so the United Kingdom primarily financed it with war bonds. They said, okay, we're going to issue a ton of debt. They're going to offer slightly higher interest rate to the normal, you know, UK bonds and help us go fight the war. And the problem was that, you know, even though they announced that it was fully subscribed, that capital just poured in, and really only about a third of it poured in. So they had this big, like unfinancible. They couldn't finance it with taxes. It would be very impopular.

Starting point is 00:57:03 And then they couldn't finance it with debt. And so that would be catastrophic. They literally, they don't have the resources to go fight the war. It'd be a huge PR loss. And so they just basically said, okay, we'll cheat then. You know, if you can't, if you can't do it the way you want, cheat. So instead, they went to the central bank, the Bank of England, and they said, okay, how about just create a lot of credit and just basically monetize the remaining two-thirds of these bonds. And so we'll put us spend all this money into the economy, into paying soldier salaries, into buying commodities, into buying equipment that we're not actually extracting from the economy. If they did it actually with war bonds, capital would flow out of the citizenry and then it would

Starting point is 00:57:44 be redeployed back into the citizenry and be used to fight the war. So you wouldn't have a big jump in the amount of currency. Whereas because you financed it with central bank credit creation, you spent money into the economy they didn't extract from it. So the money supply basically doubled and then price is basically doubled. And so if you were a holder of UK currency, you just got devalued. And it was opaque to you. You know, it's not like they pass higher taxes. It's not like they issued bonds that you voluntarily bought.

Starting point is 00:58:16 You were just devalued. It doesn't matter what you did. And you didn't necessarily see it coming. You didn't know. This was not like it's a publicly known thing that's happening. It was only undercovered literally a century later. the exact details of how they finance this initial kind of series of war bonds. And so as a householder, you just kind of got blindside.

Starting point is 00:58:32 You got rug pulled. And then worse yet, if you were a foreign country that was either due to colonialism holding UK assets or voluntarily holding UK assets because of the global reserve, you know, most powerful country, you got rug pulled too. You're holding this foreign currency. They just got basically cut in half. And then it's all just channeled into fighting in continental Europe. And so basically you had this in some ways beautifully engineered, high velocity, classical gold standard system.

Starting point is 00:59:01 But World War I showed how fragile it was. And then everybody basically got rug pulled at once. You had this wonderful quote here, Lynn on page 113. And it's from Keynes' famous book Essays in Persuasion. And he wrote that between 1990 and 1931. And he states that Lenny was certainly right. no subtler, no surer means of overturning the insisting basis of society that to debounce the currency. Now, again, we don't talk a lot about lending here on the show, but I was hoping

Starting point is 00:59:37 if you collaborate a bit more on what Keynes meant, well, I should say about what Lenin meant and whether or not you agree with that assessment. So the reason I quote Keynes is interesting. If I quote an Austrian economist in the problems of inflation, people can be like, well, yeah, yeah, no, we all know the options don't like inflation. The reason I like the Keynes quote is because he, in many ways, like the architect of this inflationary system, he's the major proponent, a major influence on how we run modern finance. And yet he had some of the most detailed breakdown of the problems of inflation, the fact that it's basically a tax on everyone, but then more specifically, it's an undetectable tax.

Starting point is 01:00:17 It's this purposely opaque way to extract value and then to deploy that value somewhere else. And as part of his quote, he basically cites Lenin and says, you know, the currency debasement is one of the most effective ways to kind of de-construct this whole system. And, you know, I'm not like, I don't discuss Lenin enough. I'm not like well-versed on the context where I study. I know Keynes way more than I know Lenin. But one thing I like to point out is if you actually read the communist manifest, So Karl Marx, going back to the foundation of communism, they talk about 10 ways, like 10

Starting point is 01:00:54 tenants that you'd have to use in order to bring about communism. Right. So this is from them. It's not from others. And one of them is centralization of all credit and banking into a national monopoly. So all money centralized and only the state determines who gets credit, who doesn't get credit. Number two is the centralization of all communication and transport. And this is from them.

Starting point is 01:01:18 I mean, it sounds like a criticism, but that's what they're describing among other steps that you need to do in order to bring about communism. And so basically, if you put your mind in the mind of a communist, you say, how can we enact our vision? Well, one of the ones is you have to mess up the currency. You have to centralize it. You have to build it to value people who you don't want to have money. You have to put a redirect the value from whatever when someone's holding. to whatever you think the state should do. And so that's basically what Keynes is talking about,

Starting point is 01:01:52 that you have this untransparent way to take value from others. And it's funny because Keynes was one of the few that was aware of the Bank of England's kind of trickery during World War I. And so he's an interesting character because on one hand, he's like the proponent of that type of, I mean, he's not a communist, but he's a proponent of very flexible monetary systems, these kind of opaque inflationary systems, and yet he's also describing in detail why it can be

Starting point is 01:02:21 harmful, especially if overused. And here we are. And let's actually stay a bit with that thought. But in your book, Lynn, you state that, I'm just going to quote here, to this day, there has never been a satisfactory explanation as to why the United States invaded Iraq. You also note that in 1999, Iraq, which at the time had the second largest oil reserves, began to sell oil in the newly created euro. Now, this might sound crazy if you're listening to this in 2023, but the world was very different

Starting point is 01:02:48 in 1999, and the euro was a serious contender. Like, the power relationship between Europe and the U.S. were just very, very different at the time. Now, Russia, Venezuela, and Iran were also dabbling in non-dollar oil sales around the same time. And the idea that the United States invaded Iraq due to the sale of oil in euros is often labeled as a conspiracy theory. And one of the things you discuss in your... book is that while it's probably wasn't the only reason for an invasion, do you think that it played a role? I do. And basically, monies emerge naturally. And to some extent, that even

Starting point is 01:03:27 includes via currencies. So, you know, if you go to an Egyptian and he's holding physical dollars, because he doesn't want to hold too many Egyptian pounds because they devalue quicker. If you ask him, why do you hold dollars? Well, why didn't you pick Chinese won? Right. This is an emergent decision. The United States' brand of money is more known to this person. It's more accessible. It's more liquid. It's more globally ubiquitous.

Starting point is 01:03:52 So in some sense, when fiat currency systems collide, the sounder and bigger and more liquid one is likely going to win. Right. So the euro dollar pet dollar system was partially designed, but then also partially, it's as the biggest, the most saleable money. It's the one that becomes dominant. But because these are centralized systems, they need kind of enhancements or management of their network effects in order to keep them going. And so in the 1970s, they had all those initial pet dollar agreements with OPEC to basically keep the ball moving on what was already a pretty strong network. So they didn't create the importance of the global dollar.

Starting point is 01:04:34 They already had that from Bretton Woods and World War II and all that. But that was a way to kind of keep it sustained. And when the creation of the euro came, as you pointed out, that was considered, you know, a comparable currency to the dollar. It was considered a rising challenge of global dollar supremacy. And we started to see in a very pretty rapid period of time, a number of countries that were not on good terms with the United States become interested in trading oil for euro. And we either went to war with them or we destabilized them or we sanctioned them. And it's interesting because, I mean, there are no shortage of dictators in the world. I mean, there are tons of dictators of, say, certain African countries, certain Southeast Asian countries, you know, North Korea.

Starting point is 01:05:20 We generally don't invade these areas. It doesn't matter if they're committing atrocities. You know, we don't spread freedom to these countries, you know, using the phrase sarcastically. We generally do these types of actions when we feel it's we're ending a threat to us or we're gaining some strategic advantage. So, you know, after 9-11 and the war in Afghanistan, there's this period of like confusion and this period of popularity and kind of pro-war mentality. And they basically use that to then go into Iraq, which does not even share a border. It's completely unrelated. And they're like, well, is an evil dictator?

Starting point is 01:05:59 He's got weapons of mass destruction. He's got to go. Let me find out there's no weapons of mass destruction. You know, he is an evil dictator, but there's plenty of evil dictators. is why did we pick that one, the one that happens to be a major oil producer who's now pricing his oil in euros, and we go in to take them out, and then they go back to pricing oil in dollars. And so, you know, I quote Ron Paul there because he gave a famous speech in the 2000s in Congress. So he put this all on the record, and he kind of lays out all these different

Starting point is 01:06:29 regimes that every time they're not on good graces with the U.S., especially when it touches our monetary system, we tend to either outright go to war or our CIA and others destabilize them and try to do coups and try to get them back in our favor. And so that was kind of an era where the United States felt threatened. And I would argue, and many others have argued, that a significant reason for why we did some of these military and geopolitical engagements was to try to keep the network effect of the dollar going strong. It's so interesting that you mentioned that, Lynn, and I would say probably due to my ignorance, you know, I never really connected anything between the currency and war efforts before I read Alex Gladstein's book, Check Your Financial Privilege.

Starting point is 01:07:17 I'll make sure to link to that. Preston interviewed him on his show. I also sort of like want to use that as a segue into the next question, which Alex also talks about and you do really, really well in your wonderful book. Because you argue that the Brentwood's monetary system and subsequently the Eurodollar, picture dollar monetary system represents a form of neocolonialism. How do wealthy nations push inflation and volatility to developing nations of the system's periphery? So back in the gold era, the underlying unit was something that no currency, no country could print, nobody could print gold.

Starting point is 01:07:53 You know, some countries could mine gold, but that's an expensive process. So gold was this like neutral foundation. And then there are all these claims built on top of it. And they all kind of had to deal with this layer of abstraction and occasional defaults problems. In the modern system where the foundation of money is the dollar that the United States can print and no one else can. And so what happens is, you know, if you're a developing country and you want to get foreign capital to help build and build your infrastructure and build your capital up, it's hard to do it in your own currency because you don't have the history. the institutions, you don't have necessarily the rule of law and the currency stability for outside financiers to want to finance you in your own currency. And so they often have to borrow

Starting point is 01:08:39 in dollars. You know, to much lesser extent, euros are yen, but it's vast majority's dollars. And so they have now debt in a currency that they can't print, but that one other country can print. And so that's a negative feedback loop because that now makes their currency even less stable, because now they have all these hard liabilities that they can't print. Whereas the United States, we can print our own liabilities. Japan, they can print their own liabilities. Broadly, one of the key variables that separates a developed country from an emerging country is that a developed country, most of its liabilities, the vast majority, are in its own currency.

Starting point is 01:09:16 It's not the only variable, but it's like a necessary but not sufficient condition to basically be a developed country. And so the problem with that system is that, you know, When the United States run this monetary policy, we mostly do it for ourselves. If look at the Federal Reserve's mandates, none of them involve other countries. So if our economy is running hot, if we have inflation, we can tighten the dollar. You know, we can raise industry rates. We can do quantitative tightening.

Starting point is 01:09:43 If our economy is weak, we can print money. We can cut interest rates to zero. We can do whatever we want. And so all these other countries who have both liabilities denominated in dollars, you know, or they have maybe they're a major credit donation. they have assets, denominent dollars, you know, their Saudi Arabia or they're Taiwan. They've had massive trade surpluses. They've built up dollar assets.

Starting point is 01:10:03 We can devalue those whenever we want. And then on the other side, if you're an emerging market with a lot of dollar diamond debt, we can harden those liabilities whenever we want and basically crush you. And so emerging markets that have all this dollar diamond debt go through exaggerated boom-bust cycles, which makes them less investable, which makes it hard to accumulate capital. and it's not based on gold. It's based on the foundation of what a handful of people in Washington, D.C. decide to do.

Starting point is 01:10:31 And so that basically gives, and back when the Bread and Wood system was designed, you had the IMF in the World Bank that were designed along with it. Those are the garvails and enticements of the system. So if a country finds itself needing dollars, because it pretty much has to use dollars to finance itself, and now it's run into a debt problem, as they all do, the only place they can go is they can go to the United States, to get like a dollar swap line, or they can go to the IMF and get a loan. And of course,

Starting point is 01:10:58 the IMF is primarily, it's basically entirely controlled by United States and Europe. And so the IMF says, okay, we'll give you a loan, but you have to change these things according to our will. You have to devalue your currency. You have to end subsidies for these things. You have to let our corporations go in there and do whatever they want. You have to export these things to us more efficiently, right? So we can shape those countries to our will because they can only finance themselves in dollars and we're the ones that have the dollars, right? And so the way the system essentially works is that the developed world, especially United States, but also Europe, pushes their volatility onto the rest of the world. So all of the emerging and frontier markets

Starting point is 01:11:40 of the world are at the side of it and just kind of getting whipsawed all around by whatever the United States and Europe decide to do with their monetary policy. And a handful of countries, like Japan has broken out of that system. They're kind of in the club now. China has been powerful enough. That's like arguably their main goals to kind of break out of that system. They've done it pretty effectively. But with a handful of exceptions, it's very, very hard for countries to ever break out of that system. They have these constant waves of volatility pushed to them in order to stabilize and reduce volatility in the United States and Europe. It's so interesting, Lynn, how money is underlying theme of so many geopolitical things here.

Starting point is 01:12:24 And, you know, it sort of like takes me to the next question about this old joke about a woman claiming that the world rests on a giant turtle. And then she gets asked, well, that giant turtle, what does that stand on? And she's like another giant turtle. and then you would continue to ask her like, what about that turtle? What is that sort of standing on? And she says, it's giant turtles all the way down. And so you're using that joke as this beautiful metaphor for the U.S. financial system.

Starting point is 01:12:56 So let's see if you can go from giant turtles to the U.S. financial system and tie that bow there. Sure. So if you go back to the gold-based system, in terms of financial markets, most assets are someone else's liability. So a U.S. Treasury bond is an asset for me, and it's a liability for the U.S. government. Corporate equity is an asset for me, but it's definitely a liability for that corporation, same with the corporate bond. And so most assets are someone else's liability. They're based on the ongoing operation of something else. Gold and commodity monies in general are assets that at their core are no one else's liability. So gold is, it took a lot of

Starting point is 01:13:35 energy to get it and refine it, and here's a gold bar. And whoever owns it, you know, if they custody it, that's an asset and it's known else's liability. It's not based on the continuing work or legal claims to someone else. And so when you have a financial system that's ultimately built on gold, most things are assets and liabilities and it's just a whole circular system. But at the very bottom of the system is gold, right, an unencumbered asset. Now, once we removed gold from the system, we rendered our system into that turtles example where it's turtles all the way down, meaning it's liabilities all the way down. There's no bedrock there. There's no, there's no bottom of the system where there's an unencumbered asset. Because right now, you know,

Starting point is 01:14:18 when you say, okay, what is a dollar in your bank account mean? Well, it means you have a fractional IOU to a base dollar. And you say, okay, what is a base dollar? A base dollar is a direct liability of the central bank of that country, let's say the Federal Reserve in this case. So that would consist of either physical bank notes or bank reserves directly held with the Fed. That's the monetary base. That's the ledger. That's the monetary ledger of the United States. And those are liabilities of the Fed. And you say, okay, well, what are the Fed's assets? How do they back up their liabilities? Well, if they hold treasuries and they hold mortgage-backed securities and a handful of other assets, and you say, okay, what are mortgage-backed securities? Well, they're an asset for the Fed,

Starting point is 01:15:00 but their liability to whoever owes those mortgages. You say, okay, well, what is the Treasury? Well, it's an asset for the Fed, but it's a liability of the federal government. And so what does the federal government support its liabilities with? Well, it has some assets. I mean, it has land, it has real estate, it has military assets. But if you add all those up, they're much smaller than, you know, the $32 trillion that they owe. So, but their primary other asset is tax authority.

Starting point is 01:15:27 They have a kind of a guaranteed income stream that helps them. support, you know, at least some of their liabilities. And so now we have this big circular system. There's no unencumbered asset at the foundation of the system. It's just it's liability, liability, liability, liability, and it's a big circle that leads back on itself. And that's basically the system we've had ever since 1971, whereas prior to that and really throughout modern history, I mean, throughout ancient history, you had unencumbered assets at the foundation of the system, whereas these past five decades have been this kind of an where there's no unencumbered asset.

Starting point is 01:16:03 Now, technically, you could say, you know, houses at the end of the day, you know, when you own property, like, you know, mortgages are basically claims on houses. You know, there's still are unencumbered assets that exist throughout the system. But the various monetary units that we use are not explicitly tied to any of them. You know, it's not like, it's not like a dollar's worth a certain amount of a house or a certain amount of gold, is that we have this kind of circular system that exists alongside unencumbered assets rather than being built on unencumbered assets. Lynn, before you dialed in, I had a quick chat with Preston, and basically all that we

Starting point is 01:16:42 said to each other was how amazing this book was. You know, there's probably one or two books a year that really, really stand out and makes you think differently about the world. Ideas I've never heard before, or at least did think about that way. And for 2020, I can just say that broken money is in that category for me personally. I'm going to not just buy it for myself. I'm going to gift it to friends and everyone who I think could find help in your wonderful book. This is just the first part of this conversation, Lynn, we're going to have today. The second one goes out with Preston on September 5 here, but I just would like to take the opportunity to thank you for writing this wonderful book. And I've probably praised it like 15 times

Starting point is 01:17:21 I rated, but let me just say for the 16th time, like, this is such an amazing book. And it's so is. So at least for me, so thought-provoking, probably because I'm completely ignorant and I haven't thought about the world like that before. But it was just, I kind of feel that there were so many, sort of like a bit like reading Delia's book that I know that a lot of audience are familiar with where he just like, there were a lot of thoughts and a lot of loose things. And to me, that book, Delius's book, for example, I could say same thing for you now, just tied so many things together. I think you said it yourself, Preston. It's just so much easier than don't listen to me. Just. Just. pick up Delia's book or pick up Lynn's book and you'll get it. It's the organization of all these ideas. So, like, people who just listen to that first part of the discussion with Lynn are like, wow, there's a lot going on here. And there is because we're kind of like pulling from various parts of the book. But for a person who sits down and reads it from the start to the finish, they're going to walk away.

Starting point is 01:18:18 And I'm going to say, oh, my God, it was just organized in a way that I feel like I got the whole picture now, opposed to these random or somewhat compartmentalized ideas. And that's what I loved about the book, was the organization, the flow of it, how she walked you from this very beginning. I think I was talking to Lynn offline. I started Lap and I was like, Lynn, I finished your book. And I felt like almost like a boxer where they kind of like corner you into the corner of the ring for the final like uppercut below knockout like at the end.

Starting point is 01:18:50 And I know that's that wasn't necessarily. maybe what Lynn was trying to do to the reader. But as a person who's looking at it from the outside of the end, it's really kind of hard to miss the really big so what by the end of the book, which is, and this is my words, Lynn, you can say, Preston, you totally missed the point. But it's this chronological history of money and technology. And then at the end, you're walking down this path of things that used to be really kind of bifurcated between like ledger money and commodity money merging. And the technology

Starting point is 01:19:30 of where that's going to take us into the future is going to be very different than what we've experienced in our lifetimes and in our past. And it's an exciting time to be alive. And I feel very blessed to have had the opportunity to read this just really profound book. Well, I really appreciate that. And I appreciate the opportunity to talk about it. And, you know, for people that read it, there's hundreds of citations in the book. And so the book couldn't come together without all these other people that have put out amazing content over the years. And so, yeah, what I really tried to do was, you know, I had a couple, you know, a couple kind of key themes or insights myself that I inject into it. But a lot of it is organizing all of the amazing things I learned over the years

Starting point is 01:20:12 from other people and trying to put them together in a way that makes sense for the reader. So that organization and the major themes, I think, are really important. And also, I think, I think one of the themes I kind of indirectly touch on is the idea of technological determinism where certain things naturally happen in a certain order. History is not random in that sense. If you read like the fourth turning from Neil Howell, for example, he kind of makes a similar argument that, you know, humanity tends to kind of go in cycles, like what happened before kind of naturally feeds and what happens next and then what happens in that era kind of

Starting point is 01:20:43 naturally feeds to what happens after that. It doesn't mean it has to happen exactly that way, but there's certain loose patterns that happen. And so I kind of, in a certain sense, this, as new technologies get discovered, they impact how we use money and what the pros and cons of that money are. But furthermore, those technology things almost have to happen in a certain order. So, for example, if we were to run the world back 10 times, you know, how many times would the bicycle be developed before the automobile? Virtually every time, because the automobile relies on the same technology that makes bicycles possible plus additional ones. And so there's no world where, say, telegraphs and Morse code are invented after, say, Bitcoins or Central Bank digital currencies or something.

Starting point is 01:21:29 It's like the foundations of sending very simple information, like abstracting transactions naturally happens before extracting settlements on a digital scale, for example. And so it's like we can divide almost monetary history into like three parts, which was pre-telegraph, you know, everything's physical. And then we've been in this past century and a half. where we've been navigating this kind of unique environment where information goes very quickly, but obviously material objects do not. And so in some ways, the past 150 years are humanity struggling with abstraction of our money,

Starting point is 01:22:02 including all the benefits from that, but then all the downside to that. And so I just think it's something that's not a topic that's been explored enough. And so I really appreciate the chance to come on and talk about it. And we're about to blossom out of that second phase into a third phase, which we're about to talk about in the next part. So make sure you guys are on the lookout for that. Well said, I think that's the best way we can end this first part series here with Lynn. Again, Lynn, thank you so much.

Starting point is 01:22:29 And we're just going to stop the recording and start a new one that's going to air on September 5. So everyone, make sure to download that. It's going to be a fascinating discussion. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network. Written

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We Study Billionaires - The Investor’s Podcast Network - TIP574: Broken Money 1/2 w/ Lyn Alden

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