Dror Goldberg - Easy Money

0:02You're listening to A Book With Legs, a podcast presented by Smeed Capital Management. At Smead Capital Management, we advise investors who fear stock market failure. You can learn more at SmeadCap.com or by calling your financial advisor. Welcome to A Book With Legs podcast. I'm Cole Smead. I'm the CEO and a portfolio manager here at Smead Capital Management. At our firm, we are readers and book junkies. It can be said that leaders are readers and we believe books provide us a great source of information for filtering what is and isn't important for us as investors. Investing is the last great liberal art and the best way to spend a lifetime of learning.

0:40This podcast is for readers, thinkers, business-minded people, and investors who want to grow their knowledge from great authors and their writing. Charlie Munger often talks about using multiple mental models and analysis. Our aim for this podcast is to help listeners test Munger's theory in business, markets, and people. Hosting this episode along with me is our chairman and chief investment officer, my dad, Bill Smead. Thanks for joining me. Thanks for having me. So we're going to have some fun today. This is a piece of history that I had never had unwrapped and told. And so I really appreciate it.

1:15We're going to discuss some of the modern history also of the dollar versus coins and the quantity theory of money through the lens of 17th century America. Dror Goldberg is joining us to talk about his book, Easy Money, American Puritans and the Invention of Modern Currency. A little background on Dror. He's joining us today from his home in Tel Aviv. Dror Goldberg is a senior faculty member in the Department of Management and Economics at the Open University of Israel. He is the co-founder and secretary of the Economic History Association of Israel. He has been published in the Journal of Money, Credit, and Banking, the Journal of Monetary Economics, the Journal of Economic History, and the Journal of the European Economic Association.

1:55He received his Bachelor of Arts and Master of Arts degree of economics, as well as a bachelor's degree in law from Tel Aviv University. He also has a master's of arts and a PhD from the University of Rochester in New York. Before we get started with talking about easy money bills, is there anything that you enjoyed out of this book or things you're looking forward to on our discussion? It fabulously lays groundwork that I needed filled in, and I think you feel the same way. Yeah, I think, I also think, and this is something we'll talk about later, but it makes me think about the dollar system even differently as kind of the father of all the modern currency.

2:34So, Dror, thank you for joining Bill and me. We're excited to talk about your work. Thank you. So to start us out, the question we love to ask authors is, what inspired you to write this incredible work? I did not plan to write a book about American history. Definitely. I grew up with very high inflation. It kind of amuses me when Americans speak of the 70s as high inflation. It didn't even make it to 20%, I think. I grew up with 450%. Let's say 3 % a week. That's kind of crazy. I was a teenager. I didn't really know what was happening. It didn't affect my business or anything. But I realized there was a lot of fuss about it.

3:23And then almost immediately when the government decided to kill it, it went down to 20%. And after a few more years, it converged to normal levels. So that got me interested about paper money, the power of government to decide to have inflation or not to have it. And that brought me to study economics. and in economics, I began with the mathematical models of money, which is what people usually do in academia, in economics departments. And after I was done with the theory, I became interested in the history and went down that rabbit hole, and it took me many years to emerge back. So in your introduction, you point out something that's prima facie and it's just true on its face.

4:16I'm going to quote your book. Money is therefore a prerequisite, not only for specialization, but also for urbanization and therefore advanced civilization. Can you kind of simplify this idea? In other words, I get where you're going, but can you explain what you mean by that sentence? I mean that we are still biological creatures. We have to eat every day, even a few times a day, and we have to get food. and if we don't have an easy way to obtain food, we are in trouble. The easiest way to obtain food is simply living in a village or hunt or something like that away from cities. Cities rely on our ability, the assured ability that we think we have that whatever good or service we produce, we will be able to get in return if not food directly then something that could be immediately exchanged for food if we don't get this assurance we are in trouble so I will give lectures and get I don't know in return I will get candles or books well that's not very useful if the grocery store will not accept candles and books when I try to buy food.

5:40So this somewhat pathetic need for food we humans have, that actually forces us to either live away from cities or to live in cities that have money in some form. It doesn't have to be physical money, but something like money or credit that is related to money. That was my point. And without cities, you cannot have advanced civilization. Dror, in the book, I'm going to quote you here. It says, The need for money could lead to inventions, but it will not necessarily do so. You mentioned that Joel Marker argued, History is full of losers that had the incentive to invent but failed. Ability makes the difference between winners and losers.

6:24We think the invention that has caused our paper dollar system has been taken for granted as other countries didn't succeed making this model. We believe this invention propelled us to the dollar system today. Is that fair in your assessment, or would you disagree with a statement like that? Yes, that's a fair statement, definitely. So in the book, you can actually see many cases, especially in England, the 17th century, where military forces stopped marching because of lack of pay. And it could have happened in Massachusetts as well. And the results in such cases were mutiny, defection, plundering the employer's own people.

7:07This was the standard thing because of the increased military expenditures after the 16th century. So it could have happened in Massachusetts. But those Puritans were wiser, and they came up with something that allowed them to pay soldiers, even when they ran out of gold or silver coins. And that became the standard for the colonies and directly to the dollar system. Absolutely. Explain what siege money was to bring the lines of war and currency together. So it happens sometimes in European history that some town was under siege. That terminology actually comes from numismatics. They find these really peculiar objects of odd shape and odd material that existed only in a very brief period in one particular location.

8:03So they call it siege money. So during the war, you have a siege of some city and they kind of have to get along. After everyone has hoarded the coins, the real coins, they had to come up with something different, especially to pay the soldiers. Soldiers were normally paid, and this payment was supposed to buy their own food. They didn't have the modern logistics of military forces that we have today. So the soldiers needed pay. And in various such cases, in Europe and later in America, whoever was in charge in that particular location often came up with some improvised solution to give the soldiers some objects with which they could go shopping for the siege money.

8:55So using that line of logic, I mean, what you just made me think of, Dorn, this is not in our script, were stimmy checks in the United States, was that just siege money? Right, because we were under siege, we were under attack by a virus, and the only outcome was to just hand out whatever you could to fight what was going on. much like siege money was used. Is that a similar kind of thing that we just saw? Well, the stimulus checks were kind of more of the same. In numismatics, when they talk about siege money, they refer to a new type of coin or something that looks like a coin, especially for this occasion.

9:37So this is in numismatic terms. In economic terms, I guess it's fair. I guess you can say that. Yeah, you got me a new term. because people call them stimulus checks or stimmies, as they were referred to affectionately here. And I'm going to start calling it siege money. And someone says, why do you say that? I'm going to immediately hand them a copy of your book. So one of the main principles in this discussion of how we got to modern currency is the principle of set-off or the idea of set-off, which was something that was being wrangled with even back during coinage in the Royal Mint. Can you explain Sadov and why it was important to any contractual obligation in the 17th century?

10:24So Sadov was one of the ways to settle debts that were denominated in normal units, like pounds and shillings, but it allowed you to cancel the debts without using coins. And not using coins had very large benefits, even in England, because coins were of precious metal and they were worn and torn. Sorry, they were just worn. And, you know, you could be robbed if you had too many coins and there was a significant cost of transferring many coins. So it was always better to set up things on paper. And set-off was one of those ways. and that way you could just get rid of most of the mutual debts if these were kind of a contracting party that operated together for a long period.

11:20And that was very useful. And this habit definitely made it to America and it actually allowed the use of, let's say, the Treasury's IOUs in tax payments, that is actually set off. That was the whole point there in 1619, maybe I'm getting the end of time here. But that allowed this operation that did not require coin. So the basic idea came from England. Most of the, I mean, if you take this invention and you take it apart into its smallest components, you find everything in England a century earlier. The brilliance of the Puritans was to put these things together to create something new. And that happens quite often in inventions.

12:08Sure. Yeah, because I think you mentioned in your book that the parliament in England did not formalize the use of set-off until 1729, so much later, as you're pointing out, than the Puritans. You also, I just, I found this very interesting. You discussed the kind of, I'll call it the spiritual relationship of money and contracts, because to your point, set-off is a contractual issue. and you through the lens of these Puritans you explain what credo and creed have to do with the framework that contractual obligations and payments are made on can you explain how Puritans looked at these contracts I do not understand much about Puritan theology I had to read some in order to understand the spirit of the time because they were very spiritual times.

13:04It was quite amazing. I'm Jewish. It was quite amazing to me to see how much they used the contractual terminology. So they had the covenant with God. Covenant was the main word that they used. And it was all the time about obligation and contracts and all this commercial financial terminology that I did not expect to see in religion. And it's possible that But this made them, I mean, this was most of the middle class people. They were very accustomed to trading at high levels. But I think this made the whole issue of contracts and obligations made it a bit more lively than other societies. Something that I did not expect to see in a religion.

13:55That was kind of unusual. So I'm going to ask kind of a strange question off that because I think you're touching at a very interesting subject. when you brought this up, our modern system, even our modern system relies on trust. You have to trust the system. You have to trust your counterparties. You know, this idea of covenant, it still holds true. So, you know, so you mentioned you're Jewish. You know, the faith that you have in the system, you know, to the Puritan point is not dissimilar to the faith that you have in God. Do you think that that tie to faith in God has had a binding effect on the monetary system or I'll call it the paper currency system that we have today?

14:42Well, your paper money says in God we trust. So maybe there is something to it. And by the way, I also think a really good point you point out is there was a religious zeal. There was a religious zeal among these Puritans to where, you know, to not fulfill your obligation was immoral. And versus we don't have that same feeling of immorality. There is much more of a culture of, you know, fake it till you make it or, you know, if I go broke, I go broke. Well, and these were massive risk takers. Yeah. I mean, that's one of the great things about your book is you get this incredible sense as you kind of walked through the various places that people landed in the United States.

15:28So we're going to continue. We've got a lot of good stuff to cover. You made a footnote about an unpaid debt of King Charles II. Today's sovereign, King Charles, then Prince Charles, repaid the debt without interest for 453 pounds. He didn't pay 47 ,000 pounds with interest. Isn't this the problem from focusing on the government debt markets instead of paper currency? They aren't money, and they'll get ruined by inflation. And with some governments, you never get paid back? Yeah, that's a problem. Trusting the government is kind of a tricky business. The Puritans, they had this covenant with God, and the paper money failed to circulate.

16:11At first, Pastor Cotton Meadow actually said, well, this is our government. It's not England, it's our government. And they had a covenant with the government that was equivalent for them to the covenant with God. And it was a covenant for the entire society. The church was a covenant among church members. Yeah, they trusted each other. It was, to paraphrase, I think it was Lincoln. It was the government of the people, for the people, by the people. So definitely, I mean, it was also a very small community. So trust for them was very tangible. They actually knew the people that issued the money.

16:53They knew the representatives, and the representatives knew them. I don't know if you could make something like that work, if you could invent something like that in a society of 300 million people. You could with 50 ,000, well, I don't know, like 7 ,000 of them live in Boston. You could pull it off. I'm not sure you could do it today, invent something like that. Such a very large and far more open society like you have today in the US. I wonder if there's 7 ,000 Puritans in Boston now. Well, yeah, by the way, George, you made me think of something when you're mentioning that. Think about the difference between that against, let's just use Bitcoin as an example.

17:37You don't know anyone that owns it. Right, that's great. That's a great analogy. I mean, Bitcoin can definitely work if we all knew each other and we all trusted each other. Yeah, that's a superb example, definitely. The problem with Bitcoin, you have these maybe, I don't know, a million supporters, but they are spread across the entire planet and they really don't know each other. I don't know anyone who ever tried to use Bitcoin. I never saw a price tag in Bitcoin. Nobody ever offered me payment in Bitcoin. Yeah, right to the point here. Reminds me of the tulip mania of 1636. Debentures were attempted as payment for soldiers.

18:20Teach our listeners what went wrong with this. So giving soldiers debentures was the normal routine. A soldier was discharged. The treasurer's IOU, which was called a debenture. and he stated the entire debt of the treasurer to be soldier for the entire period of service. So that's something nice to have. It kind of reminds of a receipt given by the first goldsmiths in medieval Italy. And the problem is that you cannot really use it as money because if you talk about a long period of service, in this case it was three months, that's too big of an amount. It's too big of an amount to go to a grocery store.

19:10Well, let's face it, they had more specialized stores back then. They had the baker, the shoemaker. It's too much to take to one single store and expect the seller to accept. It's just too much. Maybe if they had Walmart back then, where you can buy literally everything, including food, then maybe you could do your shopping with a single debenture. But in terms of the shop structure they had back then, it was just too large. So it couldn't function as money, even when they made it a legal tender for taxes. Just too big. So that's kind of the answer to our next query. Exchequer orders were during the second angle of Dutch war, were tradable, interest-bearing bonds.

19:58You point out this was not paper money. Is that for the same reasons you just stated? Yes, it was too large. Some of it was also not around denominations. That also makes it difficult. And they also had a problem there. They couldn't technically get too low denominations because they had a competition from the Mint. The mint was very strong politically, and it wouldn't let anyone persistently get into its range of denominations, which was up to five pounds. Well, and the exchequer still had to record the owner, though. If I remember, there was a general ledger, I think you pointed out. And again, and that's, you know, if I hand Bill a$20 bill or I hand him a$100 bill, there's no record that's needed, right?

20:52That's why drug dealers keep suitcases of$100 bills. There's no general ledger. And again, that was the same problem for the exchequer then. And I would argue is Bitcoin's problem. There has to be a ledger. The problem is, has that ever worked? Right. So for the exchequer orders, that was an additional complication. Even when the denominations were low, such as one pound, and that rarely happened. So that was an extra complication. What's the problem with the ledger? In the exchequer orders, you had to go to the exchequer physically in London and register it. That's a problem. It's okay for financial instruments.

21:35For money, it's not practical. As for Bitcoin, the problem with the ledger, well, there are different problems. Well, there is the cost. So they say that the transactions in Bitcoin are expensive. both in dollar terms and in terms of energy. And there is the problem of, you know, you're actually registering audio transactions and the police can actually find out eventually who you are. So audio transactions are on record somewhere. Initially, criminals thought they could get away with it, so that nobody could decipher this ledger. But actually, I spoke when I was in D.C., And I won't disclose any more information, but someone who works in BC told me, yeah, we can actually know who these people are.

22:25These stupid people that are actually registering their transactions on modules, and yeah, we can figure it out eventually. It takes some time and effort, but we can do it. So different problems, but yes, money needs to be anonymous to work perfectly. In the new country area, the land was tried as a backer of bank bills in a number of the various locations you mentioned where people came to this side of the pond. But it failed too. What was the problem with having land stand behind the currency? There was this English idea, to back paper money with land. in England it never made it probably because the land market there is so incredibly complicated if you really want to punish someone tell them to study traditional English land law, it's a nightmare and in America it was all very simple they just came there and started from nothing and somehow got land from Native Americans and that's it they got the land The complication was that, so specifically in Massachusetts, they tried twice going to pay their money back to their land, and they ran into the problem that exactly at that time, England was pressing hard on them, both on the political structure and the property that emanated from it.

23:55So they tried to have two land banks in the 1680s. I mean, this idea really fit America far better than England. So the idea was that you have a lot of property and you have a little liquidity. The profile was exactly that of the American settler. And you could deposit your land title and get paper money in return from the bank that issued it. There was no other paper money. and Peckermann was in small denominations. So they tried this, but England initially threatened and eventually did void all the land titles in Massachusetts. So that was the problem. The problem was not the ancient land law that made it impossible for this idea to arise in England.

24:46The problem was the political dominance of England. It was a very unfortunate coincidence that Massachusetts charter was indicated exactly at that time, in the 1680s, it might have worked. It was just bad timing. And actually in the 18th century, some of the colonies did not adopt Massachusetts legal tender paper money. They actually employed a system of land-backed paper money. That actually worked, but only in the 18th century. So you pointed out something that, you know, just on its face, I didn't think of, but you talked about during the 17th century, even though these people were, these were intellectuals, this was during the scientific revolution.

25:34But they had some weird conspiracy theories, I'll call it, not dissimilar to what some bright people have today. they thought a lot about things like witchcraft demonology and other weird subjects that you point out in your book I liken it to hearing a brilliant technology person then go off on a tangent about how we might plausibly have aliens as an example to today but I guess can you kind of explain about this phenomenon and do you think this helped kind of the imagination of the paper currency that we came to? Yes. So in the scientific revolution, they tried to understand many phenomena, which they thought really existed, but only then they actually succeeded in proving some of them and understanding some of them.

26:29Some of them ended up not being proved or being actually disproved. So there was a gravity. We all know about Galileo and Newton. There was air pressure. We had Torricelli, the theorist, who actually understood there was air pressure. There was von Gericke, who did the famous experiment with the horses that tried to separate a ball. You had the magnetism that one Englishman actually tried to understand and figured out that actually Earth was a big ball of iron. And you had astrology and you had witchcraft. For us, these are two separate lists. One is science, real facts, and the other is nonsense.

27:18But they were still in the process of figuring it out. And for them, astrology was evidently a true force. And same with witchcraft. So believing in witchcraft was not something for crazy people or for, let's say, the poor parts of society. Actually, that was top scientific activity. And at Harvard, you had people, the best case is the same pastor, cotton medal. So he was actually kind of an exorcist two years before he wrote a pamphlet. Yeah. Two years before he wrote a pamphlet about paper money and disclosing there that he had theoretical conversations about money with Brejerov, his father-in-law.

28:10He was actually an exorcist. He tried to cure a family of witchcraft and he wrote a best-selling book about it. Just two years later, he was one of the main forces behind the Dorselian witchcraft tribes. So that was part of the same intellectual phenomenon that was Harvard College. And I mentioned that Newton wrote his famous book just three years before my main event in 1687. And he spent as much time about biblical prophecies and alchemy. So they were still in the process of figuring it out. Now, did it help them understand paper money? So, well, actually, one scholar actually came up with something different.

29:05I quoted her in the book, Michelle Bernham. She's actually a literary scholar. And she thinks that there was some spiritual metaphysical relation. So, Cotton Maddow's main offense was that he advised the judges to send witch trials to use what they call the spectral evidence. It was dreams. Afflicted people, they could submit it as evidence that they had dreams that their neighbors were tormenting them. Just dreams. It's all in their heads. and this literary scholar Michel Bernhard said well that's pretty much like two years earlier he told the people in Massachusetts forget about the physical character of money as you are used to thinking about it, the gold or silver think about the spirit behind money the spirit behind money is that it kind of circulates magically between all of us between us from us to the treasury and from the treasury back to the government's creditors.

30:17That's the real spirit or the spectral appearance of money. It's not about the coin. Forget about the physical appearance. Look at the essence. They teach some pretty weird things in American colleges nowadays. I was going to say that's your point. I mean, as you're saying that, I'm thinking, wow, that requires a lot of faith. So let's move to currencies tried before they arrived at the dollar. Wampum worked far better for trade. Explain what Wampum was and why it caused the mind to imagine what could be for money inventions. So Wampum was, well, it was a sea shells produced by Native Americans in northern areas.

31:03and it was definitely jewelry for the Native Americans. Whether it was money or not among them, that's disputed. The colonists and today economists would say, yes, it was money, you could buy everything with it. Anthropologists disagree because for them, by definition, traditional societies could not use money. That's an invention of the evil white man. So they kind of categorically rule out this possibility. But in the book, I don't have to get into this debate. The main point is that colonists in the northern colonies decided to adopt wampum as money for themselves. So they did not see any aesthetic value about wampum.

31:52They did not use it as jewelry. But they knew that there were all these Native Americans nearby who would always accept rampant from them in exchange for beaver furs. That was actually the economic foundation of all the northern colonies from the Dutch colony of New Netherlands that became New York on the way up to Canada. So it all relied on buying beaver furs from the Native Americans. So that's how actually the northern colonists started using money, which for them had no intrinsic value. So for them, if you look at intrinsic value, it was more like paper money and less like the silver coins they were used to.

32:39So I think this might have opened the door, at least intellectually, to the idea that you could use an object that has no intrinsic value for you under some conditions. So unlike Bitcoin, it is purely speculative. There was some economic foundation here. There were these Native Americans nearby who did value it for aesthetic reasons and would always give you something valuable for it. It was kind of like redeeming later on, redeeming paper money for gold. The colonists knew that they could practically, not legally, but practically redeem wampum for different firms. So it was kind of simple. Maybe nobody realized it in real time.