The History of Money - Part 1 | Omid Malekan | Ask Altucher! EP05

26:53And so this was sort of happening in the United States in the 60s. The economy was growing, but also we were spending an enormous amount of money on Vietnam and LBJ's, you know, Great Society programs, which included, you know, welfare and student loans and all these things. And so Nixon finally said, look, we're not going to keep digging gold just to like match our need for money. You're going to just have to trust purely the dollar. Yeah. So the metal backing of money, one way to think about it is that it becomes a constraint on anybody abusing the mythology behind it. So if your currency is backed by gold, and that doesn't necessarily mean that you're issuing gold coins.

27:34Even if you say, look, see that big fancy building with the columns over there? That's the central bank. And inside there, there's a lot of gold. And if you really wanted to, you could take your government-issued paper money over there and get some gold for it. So don't worry about it. We're not going to abuse it. We're not going to inflate it. We can't print too much of the paper money because there's only so much gold. But as you said, that comes with its own constraints and problems. A lot of times the most common has been things like war, where the government needs to print or borrow a lot more than it ordinarily does.

28:09And it just doesn't have the gold. There are other problems with the a metal standard or a gold standard, somewhat less nefarious. And one of them is that it gives the issuer of the currency less control over the money supply and the credit cycle. Well, let me ask you, what happened in Germany in the 20s when suddenly, you know, it took a trillion marks to buy a loaf of bread? Like, were German marks backed by gold? I don't even know. I actually don't know. I have not studied that period closely. I mean, but the things that we do know that in the aftermath of World War I, the devastation that they suffered, plus the reparations that they had to pay to the allies.

28:52And I think they had to pay those reparations in the currency of the allies. So the German economy was almost like constantly exporting capital to its neighbors, which then crippled its domestic economy and the currency. So one key thing which can cause hyperinflation, which is what everybody's worried about in the US, but this is not a problem we have. One problem many countries have is what Germany had in the 1920s, what most countries in South America had in the 1980s, and on and on. what Zimbabwe had in whenever that was the 1990s is that if you borrow money in another country's currency, you risk hyperinflation if you can't pay that money back because you have to print more of your own currency to convert into dollars, for instance, to pay the money back.

29:41And it's just a death spiral. You end up printing trillions of marks in the case of Germany, whereas the U.S. doesn't have that problem. That's one key thing that helps us avoid hyperinflation. And that's why people are concerned if suddenly everybody starts transacting for oil in something other than the dollar, it could mean we might not be able to A, lend as many dollars to people, and B, we might owe money in currencies, not the dollar, if we're buying oil, which we do. Yeah, and I think hyperinflation is actually the wrong thing to be concerned about, because hyperinflation is fairly rare.

30:16I think the bigger problem is if you just have a sustained period of elevated inflation, as we did here in the US in the 70s and part of the 80s, that in of itself could be very devastating. That to me is a more reasonable concern about what could happen to the dollar. But it's not just the dollar. We are in this very unusual time in history where virtually all of the world's money is only backed by a promise by a government. So it's fiat money. There is almost no currency that's backed really significantly by any kind of commodity like gold or silver. And some countries have currencies that are pegged to other currencies.

31:00But we can talk about this when we get into crypto. But I always think it's ironic when you hear economists and other experts say, oh, well, Bitcoin can't be money. Because money is something that's issued by a sovereign and there's a central bank behind it and they adjust interest rates. but that's only been money for like 0.01 % of the time that money's been a thing. The history of money has always been changed. Even in the US, I mean, a lot of in the 1800s, banks, local banks would issue their own currency. So if you were in Montana, you could get like literally a$3 bill from the bank in Montana.

31:37And it was good because that bank was supporting it. It's not like in 1830, people would go from Montana to Chicago to buy a coat, you would have to buy everything in your local town and you would use the local currency. So it's kind of only a recent thing that all money now is issued by governments. Yes. Not only that, but we're coming out of a period after COVID where all governments significantly increase the supply of their money at the same time. So it's not surprising then that we're going through a global period of high inflation. Just out of curiosity, like on the subject, and there's a lot of different directions to go on the subject of inflation.

32:18But if the price of eggs inflates and many other things like that, the big problem really is wages have to keep up with it. If wages kept up with it, no problem. But why aren't right now wages keeping up with just everyday inflation? Some wages are very sticky. So if you think about people who have contracts for what they make, employers are generally hesitant they don't they don't just give raises for the sake of giving raises there has to be some kind of a market dynamic that forces them to then there's the issue of automation and technology and innovation plus frankly like you know people are sometimes hesitant to ask for more things are starting to pick up aren't they i don't follow the the macro road data that closely but yeah and inflation supposedly has been going considerably down pretty quickly right now maybe because of the rate hikes maybe because of the stock market's gone down and so many people are invested in the stock market maybe just because of fear of a recession coming but it seems like one of those things where and this is a big debate but and a different debate but whether the federal reserve knows what they're doing it you know or whether market forces comment yeah whether the market for well that's the whole thing with the bitcoin is that there's no central authority that decides the value of the dollars that are in your pocket but i remember i had a federal reserve deputy governor on the podcast early in the pandemic and he said the main worry the federal reserve had then was deflation because there was so much demand for the dollar around the world because the dollar was safe and is still the safest currency that they couldn't even inflate the dollar.

33:58And inflation is not necessarily bad if your economy is growing. I mean, look, the dollar has, quote unquote, lost 97 % of its values in the past 100 years. What used to be a dollar in 1913 is now worth three cents now in terms of what it can buy. But at the same time, it's the biggest period of growth and innovation in world history. I mean, we've put a man on the moon. We've created the internet. You know, we're practically curing cancer in the next few years. So inflation hasn't necessarily been a bad thing. It's healthy when people feel the growth in their country. Yeah, I think the only things we can say that are absolute is hyperinflation is bad and extreme deflation is bad.

34:40Those, I think, are universally acknowledged as being scenarios to avoid. Deflation when it's not accompanied by increases in productivity. Like monetary deflation. Yeah. When you get more in a phone this year than you got 10 years ago, like more apps and more speed and so on, the phone in a sense has deflated. Like if you're paying the same price, but you're getting so much more, that's kind of a deflation in the currency. But it's not like the deflation experienced, for instance, in the depression where people just hid their money in a mattress and were afraid to use it. So that resulted in deflation.

35:17Right. Right. If people become convinced that the value of money is only going to go up, then they don't want to spend it. They want to hoard it, which then diminishes economic activity. Which could be what's happening now. When interest rates go up, it means the demand for the dollar will go up, which means you don't want to spend your dollar for other things because you're getting a higher interest rate in your savings account. That's the hope of the Fed. But the politics of this is also very interesting because there are always winners and losers. So there's certainly people who really benefit from high inflation, like debtors, for example.

35:50They get to repay their debt with diminished value. But then there are people who really lose with it, which are people who don't have a lot of debt, but earn some kind of a wage where it's going to be difficult for them to raise prices. And this is, for anyone who's a student of history, the back and forth on this has always been very interesting and played a big part in U.S. politics um like i'm you probably know james the famous uh i think was it william jennings bryant speech the cross of gold speech which is considered one of the greatest political speeches in american history he was making the an argument against the gold standard he actually wanted a biometallic or a more silver oriented standard because it's more inflationary and at the time you had people who were farmers who were like, look, we got mortgages, we got a lot of debt, and our crop prices are too low.

36:45We need some inflation to economically right ourselves. Right. And there was practically no inflation back then in the 1800s, like almost zero. And having a gold standard or silver standard, to some extent, like you said earlier, controls inflation a little bit and doesn't allow the government to control inflation, which with pure paper money that's not backed by anything, the government pretty much controls everything. And that's a big problem, which again, there was an evolution of money and we'll talk about Bitcoin in a bit. But it's interesting just the story of money though, like what you refer to as the mythology of money.

37:22Like it's so hard, like you have to really be a mass hypnotist to convince people that this little piece of paper is worth one entire dollar. Like if you really look at the US dollar, there's this beautiful calligraphy and design. so okay maybe you'll trust that if you don't trust that it's in god we trust so if you don't trust the united states united states america is on the top but if you don't trust the united states america maybe you trust god because it's the god we trust and then you have not only god but look the kind of the god of america is george washington like he's the first president he was the most supposedly the most honest president so maybe you trust george washington His picture's right here.

38:04He backs this dollar. And then if you don't trust that, it's like a contract. There's the signature of the treasurer of the United States and the secretary of treasury. And then there's this number like A874-26024A. Like, why do we need to have that number? But it kind of signifies that this was really printed in the United States. And if you don't trust that, there's the words, this certificate is legal tender for all debts, public and private. And then there's Washington, D.C., and there's a seal on it with an eagle. And then you turn it over. If you don't believe any of that, maybe you believe in this, a pyramid with a floating eye above it.

38:45Like this is ancient history. And then there's like Latin or some other language written there. This is like it's not just us, the people in Washington, D.C. It's ancient history. It's 5 ,000 years old, these pyramids. Maybe you trust that. And on and on. It doesn't stop the ways in which the mythology of the dollar is written all over the dollar. And we can also see this in our personal lives. In Sapiens, Yuval Harari talks about the other big myths, religion being one of them. I think the three are language, religion, and money. But the funny thing is there are plenty of people today that walk around and they're like, I'm an atheist.

39:25I don't believe in religion. And you're like, yeah, fine. You're like a perfectly sane person. But if somebody comes up and he's like, I just don't believe in money and I'm never going to use it, you'd be like, wow, you've completely lost your mind. You need help. It's that pervasive of a myth. Well, and the thing is, obviously you get in real trouble if you counterfeit money. So again, just like the Medici's in Renaissance Italy, I mean, the US, you'll go to jail for a really long time if you counterfeit money. You probably know the Secret Service was actually originally, its job was to do things like crack down on counterfeiting of money and dollars.

40:05It just so happened. I think the story, wasn't it, that their office was the closest to the White House. So when they decided the president should get additional protection, it would become something that they do too. but their original purpose, I'll have to verify this, but I'm pretty sure the original purpose had to do with making sure that people are not counterfeiting money. Because if people counterfeit money, then it erodes the integrity of that money. And if the integrity erodes, then people stop using it and then it collapses in value.

40:47I remember in the 90s, early 90s, there was this period, the area where the so-called Silicon Alley was created, where all these web design agencies sprung up, there was more print shops, like you needed a poster printed. You'd go to these print shops and they had these, you know, the latest technology and copy machines. Now,$100 bills always had anti-counterfeiting features and then it evolved to$20 bills. But these one group of guys, they were using their copy machines to literally print one and$5 bills and$10 bills and just using them in local delis where nobody would question if they were counterfeit enough because they were so small.

41:24So counterfeiting has been like a big deal. Now it's all the way down to the dollar. I think there are anti-counterfeiting features of it. Yeah. I just Googled it. So the Secret Service was, according to their own website, was founded in 1865 to stop counterfeiting because after the Civil War, a third of all currency in circulation in the U.S. was counterfeit. That's crazy. I knew this one artist, JSG Boggs, who he was an ingenious. He would paint dollar bills for himself, and they would always have something wrong. Maybe it would be his picture on the$10 bill. He would always do something where it was clear that it was not money.

42:01It was fake, but he was constantly being arrested by the Secret Service because he was painting money. because here's what he would do. He would go to a restaurant and at the end of the meal, they would give him the bill and he would say, listen, I don't have any money, but how about I give you one of my paintings? And he would take out of his pocket a painting he did of a$10 bill and use that to pay$10 worth of his meal. And so two people would be sitting at the tables next to him in these restaurants. One, the Secret Service who would arrest him and the other collectors who would then buy from the restaurant the$10 painting plus the receipt.

42:42And that's how they collected his art. It was a fascinating thing, though, mixing the art with the money like that. Because money is beautiful, too, because of all this symbolism. Yeah, it's fascinating. But people should look up. Like if you Google JSG Boggs, he has some really beautiful paintings of fake money. So obviously, though, paper money has its problems and needs to evolve, too. One of the problems we discussed is the Federal Reserve, this central authority, which doesn't really necessarily know what they're doing. The Federal Reserve does a lot of good, particularly in times like these where maybe banks need more trust behind them or banks could collapse.

43:20But they also control the value of the dollar without your permission. They can either raise interest rates or they can print money. And by the way, can you define what does it mean actually when they print money? So I think it's time to introduce another category of money, which is that throughout history, money comes in two forms. There's token money, which is money that has some kind of a physical representation like a metal coin or a paper bill. And then there's ledger money, which is money that's just balanced, that's recorded on the ledger of some kind of an authority. Could be a bank, a fintech, the government itself.

43:58What does that mean? It means when I transfer money from, let's say, Wells Fargo to Bank of America, on some ledger in Wells Fargo for my account, money subtracted. And on Bank of America, in some digital ledger in a computer, money's added. But no actual currency goes from one bank to the other. That's right. And the vast majority of money in existence today is ledger money. Even like you can go on the Federal Reserve and look up the statistics. I think there's only something like$2 trillion in physical bills and notes out there, but over$20 trillion in dollars that are nothing more than really in modern times database entries at either commercial banks like Bank of America or the Fed itself.

44:44And this is true in every country, in every currency, in part because ledger money is a lot more convenient. If you think about large transactions, you wouldn't want to buy your house by showing up with duffel bags full of cash. Although I was recently told that that's standard practice in Argentina because it's dollarized. Yeah. There's a black market, a blue market, and the regular market in Argentina. And then there's the Bitcoin market to signify the different types of currency there. Right. And then ledger money is more useful across long distances. You wouldn't want to ship money to another country if you're making an investment there.

45:23It's more useful for capital markets. Imagine if every time you traded stocks, you'd have to pay in cash. And more recently, it's really a big part of the digital economy. One of the great innovations of rideshare services like Uber was that they integrated credit card payments into the app. So you no longer had to do this awkward thing that you and I remember that you take a cab and it gets there and the cab driver is like, that'll be$18.50. And you're like, I only have a$50. Do you have change? And it's very cumbersome. So there are many benefits to ledger money, but there's a couple of big downsides.

46:00And one of them is that you have to trust whoever is maintaining the ledger to do a good job of it. It's one of the reasons why banking and fintechs are highly regulated. You wouldn't want it to be like Bank of America accidentally deleted your balance and then your money's gone forever. And this is really a software issue. How did they avoid when they started doing this? How did they avoid not having major software issues where people would just lose their bank accounts and the bank would have no record of it, so they wouldn't be able to confirm or deny. Well, one is you would have a record of it.

46:34So you would go and deposit your money and then they would give you a receipt that says like you have this deposit here and they give you statements monthly that attest to that. But really like auditors, controllers, government regulators, there's a very, very complex apparatus whose job it is to make sure that these ledgers maintain integrity, which is not something that you need for token money. Like the$20 bill in your wallet is a$20 bill in your wallet. You could lose it, possibly, if you lose your wallet. But it's not like accidentally going to suddenly disappear, nor, importantly enough, can a corporation or government just snap its finger and make that$20 bill go away or be worth$1.

47:27And this is an interesting segue when we get into the world of cryptocurrencies, because a lot of people, when they think about something like Bitcoin, they focus on the supply. It's decentralized. There's only ever going to be 21 million of it. There's no central bank that can print more, etc. But I think just as importantly, there is the integrity that the whole complicated blockchain infrastructure provides, which is that while it is a kind of ledger money, right? The blockchain is a ledger. It's a database. it has unique properties of token money, one of which is that if you have a Bitcoin in your wallet address, nobody can deny you access to your Bitcoin in the way that banks routinely actually like deny people access to their own money.

48:17And it's not going to just like suddenly disappear because of a mistake or an accident. So we're going to talk about crypto and Bitcoin and the next evolution of currency in part two of this question the history of money but let's just list up until bitcoin the state of money has evolved to being you know paper money combined with 90 this sort of digital ledger money like money just kind of stored in a database and we didn't really answer the question of how do you how does one print money i guess the idea is the federal reserve just oh sorry yes it just increases what's on the ledger but but i'm not sure why but we'll talk about that in part two.

48:53What are the problems of this digital ledger money, which is most of the money we use and spend right now? So it's two. One is the supply issue, which is that it's, because it's trivially easy, you know, the TLDR of it is that for the Federal Reserve to create new dollars, they just put in a number into a database. Like at least in the old days, you had to physically print more money to a certain extent, but now it's all done electronically. And then the other thing is this question of access, which is that with ledger money, you're trusting the preserver of the ledger, the bank, to always give you access.

49:32And there are many legal reasons where banks don't. In fact, there are many legal reasons where they're obligated to deny you access, right, if law enforcement goes to them and tells them to freeze your money. and then in the geopolitical sense, you have things like economic sanctions. So those are two of the big downsides or risks of ledger money as controlled by governments and corporations. And then when you get into the world of a cryptocurrency like Bitcoin, the supply goes up, but it goes up algorithmically on a preset schedule and nobody can suddenly be like, oh, well, there's a pandemic going on.

50:11We need to print more Bitcoin. and then your access, my access, actually literally anybody else's access is guaranteed by the technology. So those are the two main problems. I would say there's a few others, but so just to summarize, one is if suddenly the Federal Reserve quietly decided to just double the amount of money in the system, then the dollars in your pocket would be cut in half in value because unless the economy itself doubled in innovation and productivity, there's no reason why there should be twice as many dollars in the system. And so that's what really causes inflation, which means the value of the dollars in your pocket go down.

50:50And you had no say over that. And then problem number two. Problem number two is access. If the government decides it doesn't like you, they could basically shut off access to your bank account. And that happens, by the way. Yeah, I mean, if your bank decides that they don't like you, they could do that. Or they could deny you a bank account in the first place. Right. Which has been a major problem in, in some areas of society. So there's a variety of problems there. I would say there's additional problems. One is there's, there's the possibility of human error. Like we discussed, what if your bank just loses track of your money somehow there's a software bug or, or there's a criminal or whatever.

51:29Another is there's fees in the system because I have to use a bank. And by the way, some people are, are don't, I don't have enough money to put money into a bank. And so they have their own issues, but because I have to use a bank, I have to pay fees. And let's say I was going to wire you money. I got to go through my bank, then the local reserve bank, then the federal reserve, then your local reserve, and so on. There's fees along the way. So I think you, Oman, were the one who told me, how much fees are baked into the financial system worldwide? I think total, the revenues of the world's payment providers is somewhere in the vicinity of$3 trillion a year.

52:05$3 trillion. And that's the fees. It's either fees, So you send the wire, they charge you a fee, use a credit card, the store has to pay a fee. But also if you think about like forfeited interest, like if you have money in a checking account at a big bank right now, they're not going to pay you interest on it. That 5 % interest that you could be earning now goes to them. So cumulatively, you can think of it as a tax on the entire economy. Right. And with crypto, because you're avoiding all of these systems that was kind of glued together in a hodgepodge sort of way crypto solves all these problems furthermore and this is the kind of the topic of your book re-architecting trust you don't have to trust your bank with crypto like your bank could go out of business but you still have immediate access to your money it's just in a sense you bank yourself that's right and you know there's a lot we we've seen this like for the first you know satoshi invented bitcoin in around 2009 or he released it in 2009 and that was right after the financial crisis where people were worried every bank was going out of business.

53:07Fast forward 14 years, suddenly everybody's worried once again, every bank. This was actually the dream come true for Satoshi in 2009. Banks have actually gone out of business now again, and Bitcoin shoots up as a result because this is the problem that was meant to solve, and it actually does solve it. If you look at survey data in the US, when they ask them about what kind of institutions people trust. A lot of times the least trusted institutions are government and then banks and Wall Street. And one way to think about the existing fiat money system is that it is a system that is controlled by the governments and banks.

53:49When you move into the crypto domain, it is a system that's actually mostly controlled by no one. But to the extent that there are any decisions that have to be made, they are made by the community. And that's why there are certain people who are actually very passionate about this being a new paradigm about how we create money and then preserve its integrity. And so in part two, we're going to cover a lot of this. Plus, we'll cover what happens when there's central bank digital currencies, because that brings up some of the old problems again in a scary way, maybe even worse. even though it has a crypto sort of feel to it.

54:31So money could evolve. We could see money evolve even further. But in the meantime, this is part one, the history of money. If you have any questions about what we discussed here, just tweet out at me, at Jay Alpucher, or tweet out at Omid, Malekhan Oms, M-A-L-E-K-A-N-O-M-S. And we'll answer again on this podcast. But history of money, part two, written by Mel Brooks. I feel like that's what it's. history of money part two uh we'll be in a a couple weeks after this one so we have time to you have time to ask questions and that's going to cover kind of all the new evolutions in money and what even might be coming down in the future so omid thanks so much for your expertise it was so fascinating i didn't really know a lot of these things and that's the history of money part one thanks james

55:27You