WBD645 Audio Transcription

The Failure of Central Banking with Matthew Mežinskis

Release date: Friday 14th April

Note: the following is a transcription of my interview with Matthew Mežinskis. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

Matthew Mežinskis is the creator of the Crypto Voices podcast and Porkopolis Economics website. In this interview, we discuss why free banking has always failed due to central bank interference, and how Bitcoin changes the rules of the game. We also talk about how credit is a natural economic phenomenon, and why narrow banking is centralising in nature.

“We are at peak central banking at the moment. The only thing more peak would be a nationalisation of the entire system, and no other bank, full CBDCs…the central bank’s basically controlling all the retail money: did you spend too much on alcohol this week? Did you not? Did you reach your quota of spending this week?”

— Matthew Mežinskis

Interview Transcription

Peter McCormack: Have you lost weight?

Matthew Mežinskis: Changed the diet a little bit.  It's mostly just the booze, I think.  I was telling Danny that mornings are more productive without it, but it's mostly a baby thing.

Peter McCormack: So you don't want a whiskey?

Matthew Mežinskis: No.  But I was going to bring you this Latvian Balsam shit that I brought last time and I remembered in the airport, "I gave him some last time".  I needed to check first if you drank it; I'm sure you haven't.

Danny Knowles: I don't think we ever drank that.

Peter McCormack: Are we recording now; is this in?

Danny Knowles: Yeah, we're recording!

Peter McCormack: Okay.  Did I tell you the time I drank Latvian Vodka?

Matthew Mežinskis: No.

Peter McCormack: I ended up in Lithuania watching a basketball match.

Matthew Mežinskis: No, you did tell me this actually at Honeybadger, you did tell me this.

Peter McCormack: Yeah, fuck, man!

Matthew Mežinskis: You ended up buying tickets, I think, to Eurobasket on accident, or something?

Peter McCormack: No, my Lithuanian neighbour who moved in, he bought them, and I had no memory of the night.  And then I woke up in the morning and my ex-wife, my fiancée at the time said, "You agreed to go to Lithuania to basketball", and I was like, "Really?  I'll go and tell him".  Anyway, literally as I knock on the door he's saying, "I've got the tickets", I'm like, "Oh, yay…".  So, two weeks later, I flew to Latvia, got picked up at the airport, driven to Siauliai and we went to a basketball match.

Matthew Mežinskis: Nice!

Peter McCormack: And I've got my shirt upstairs.

Matthew Mežinskis: Yeah, I'm a huge fan.  My wife is Lithuanian, obviously I'm Latvian-American, so I have some unique connections I guess to the Baltics and also to the US.  But any time we can promote the Baltics is good; they're good people there.

Peter McCormack: Well, so we have a lot of Lithuanians here.  Whenever I meet somebody and I'm like, "Where are you from?" they're like, "Lithuania", I'm like, "Labas", and they're like, "What the fuck?  How do you know that?"  That's the only word I know.

Matthew Mežinskis: It's some gross booze though.  There's the Lithuanian spirit, the liquor, and Latvia's Black Balsams, which is an intimidating name, but the Queen of England used to import it.

Peter McCormack: Really?

Matthew Mežinskis: Well, that's what they say.  I'm sure she took one bottle or something as charity, but it's the worst-tasting thing.  It's like bad Jägermeister; it's like Jägermeister that's not sweet at all, it tastes like bad cough syrup, but this is their drink so they have to promote it; it's funny!

Peter McCormack: Well, I didn't drink for the first 44 days of this year, and then I did, it's Danny's fault.

Matthew Mežinskis: For me, it's the baby.

Peter McCormack: Oh, it's the baby?  Good on you.  The only difference I felt is, I didn't physically feel different, but I just got more shit done.

Matthew Mežinskis: Yeah, mornings are easier.

Peter McCormack: Mornings are easier, but then I bought a bar, so I'm going to definitely have to drink again.

Matthew Mežinskis: Good for you, man.

Peter McCormack: But yesterday, this guy turns up and he's like, "I've got a gift for you.  It's Burnt Ends".  I tried it and I was like, "It tastes a little bit like Scotch, but it's a Bourbon".  I looked at it and it was a mix; it was a blend of Rye and Scotch, which was interesting, so we drunk half of it!

Matthew Mežinskis: There's a really good restaurant in Singapore called Burnt Ends; I don't know if that's related.

Peter McCormack: Well, it's to do with the steak, the burnt ends.  You had a Burnt Ends Burger, didn't you, recently?

Danny Knowles: Yeah, it's like a bit of barbecue.

Peter McCormack: Yeah.  Anyway, brother, good to see you.

Matthew Mežinskis: Likewise, good to be here.

Peter McCormack: We often talk about the same thing; we often talk about base money, and there's a lot been going on since I last saw you!

Matthew Mežinskis: In the banking world!

Peter McCormack: Yeah, I do wonder, one time we're going to meet up and just go, "Yeah, everything's broken now, everything's fucked.  We can't just go on about base money because it's just dead; what are we going to talk about?"

Matthew Mežinskis: Well, this is why you focus on base money and the system itself is too co-opted, it's too centralised.  And this is why it's important to make the distinction and why Bitcoin is base money.  But I was telling Danny, on the train ride up here I was thinking, "It's Good Friday, Easter weekend, I'm totally interested in pontificating in the big historical picture as well and where we've been going about banking and money and everything else", because obviously things look bleak, but I don't feel that way personally because of my holdings in Bitcoin, my show talking about this stuff, I try to marry some of the historical banking things with Bitcoin and why Bitcoin is a better money, it's a better base money, it can be better for the banking system, so I feel pretty good about all of that. 

It's just in the interim, of course, everybody is always curious and wondering how that's going to shake out, and want there to be blood in the streets and pandemonium.  I certainly don't want that; I think there are some bitcoiners that maybe do want that, as far as the revolution coming quick and fast and crazy.

Peter McCormack: Well, I don't, and listen, I've done everything I can to tell everyone I know, warn them about the risks of the traditional banking system and the decisions our governments and central banks are making, I've told friends until they're blue in the face, no one will listen.  Some people will listen, but a lot won't.  But on a personal level, I am comfortable in that I have Bitcoin, I have my protection.  I've been in long enough now that I have that security of a full cycle, which is a nice personal security to have.

I'd feel a lot more comfortable if the accusations of Operation Choke Point 2.0 didn't feel so real.  I feel if these psychopaths want to destroy the banking system, fine; it's not good, but please leave my lifeboat alone.  This is my choice, as a human, as a partly free man to be able to say, "Okay, I don't like what you've done there.  I want to park some money here and protect myself", that now to be attacked to the point where you think, "Are you literally psychopaths trying to force me to use your broken, corrupt system?"  That is the one bit that just frustrates me more than anything.

Matthew Mežinskis: Yeah, I think they are, but that's the history of banking right there.  Followers of mine, listeners of mine as well, they should know that I'm always trying to promote the old good system of free banking, I'm a big fan of that; Bitcoin can perfectly fit into that.  But I'm not disillusioned into thinking that free banking itself has failed.  I mean, we have a central bank in every country around the world, or some "monetary authority", as they're called; every nation is either using the dollar, or captured by some major currency; and that's the history of money and banking, unfortunately.

The systems that were free, and there were many, in every continent, Iceland, Scotland, Sweden, Canada, those are some of the more famous examples, but there were plenty of free systems and they worked really well for hundreds of years.  Every time a government got involved, every time the central bank got involved, things kind of went to shit, and that's obviously the thing to be wary of.  But at the same time, even though you can promote ideas of freedom and free banking, and I was looking at that history, which I think we can talk some more about today, the central bank always does more in the name of stability, price stability, in the name of elasticity of the currency being flexible for the currency, that's the same trope that they roll out again and again, and that's the same, exact thing that we're seeing right now. 

We need more flexibility in the banking system, and again it's an age-old thing.  So, Good Friday again.  If you looked at the depths of Dante's Inferno, the Seventh Circle of Hell --

Peter McCormack: Jesus!

Matthew Mežinskis: -- it's like legal tender laws and central banking, it's the legal tender being that they control the money; central banking, they control the credit, and those are the two things that even free banking, which has been really good in certain countries in the past, and we can talk about some examples, because I always think they're interesting and enlightening; even the free banking that really worked in the past, it has always failed eventually because as Milton Friedman said, "There's always an unholy alliance between the do-gooders on the one side, and the special interest on the other side". 

So, some things fail, some things break, something happened.  Obviously we need more regulation, we need something else, and this is in any industry as we know.  We could talk about schools, we could talk about guns, we could talk about whatever, but in banking, we are at peak central banking at the moment.  I mean, the only thing more peak would be a nationalisation of the entire system and no other bank, full CBDCs, a banking app on your phone, central banks basically controlling the retail money.  You know, "Did you spend too much on alcohol this week; did you not?  Did you reach your quote of spending this week in general?" 

Peter McCormack: That's the trajectory that it feels like we're heading on.

Matthew Mežinskis: Yeah.  But again, this is why we need Bitcoin, this is why I'm so optimistic about Bitcoin, because it's an escape hatch.  And I think it's more than an escape hatch.  A lot of times in Bitcoin land, where we like to call ourselves classical liberals or libertarians or free-market thinkers or voluntarists, but Bitcoin is definitely -- you've had progressive, socialist bitcoiners on your show.  I can't think of any example in libertarian thought, or classical liberal thought, that has been more permeating through society than the invention of Bitcoin. 

It doesn't matter your political affiliation, it doesn't matter if you like free banking or if you think fractional-reserve banking is evil, which it's not, but we can talk about that if you want, but it doesn't matter because Bitcoin has permeated through that, these stigmas in certain groups where, "I'm not going to hang out with that group, they don't have my values", or this and that.  Bitcoin is for everyone and it's base money and you should understand the difference.

Peter McCormack: Well, I find the rise of the progressive bitcoiner really interesting, and we've had some on our show, we're seeing this cohort building up, and the range of issues they're discussing is really interesting.  But I think their draw to Bitcoin is probably similar to everyone else's, is that I think they also recognise that the political system is broken.  I think a lot of progressives I speak to privately say the ultra-progressive left do not reflect them and the way they see the world and it's become an embarrassment, yet it's become weaponised by corporations, it's become weaponised by the government, and I think they're also seeing Bitcoin not so much just as a monetary option, but also seeing it as something to anchor to that breaks you away from peak centralisation of everything.

So, drawing these progressive bitcoiners and these conservative bitcoiners together and getting them around a table, they probably agree on a lot more than they think.

Matthew Mežinskis: Yeah, and they say this in politics, I mean most people are middle of the road, at the end of the day it's the middle of the road, it's the regular people that can point any election into -- this is why you have typically in the US, for example, our famous two-party system, where you go Democrat then we go Republican then we go back to Democrat; no one of course figures it out.  But it's the people in the middle of the road that become disillusioned with the one party and they go back and forth.  And Switzerland is very good at this as well, Switzerland is even better.  You never let the hardliners take control.  It seems like there's maybe more risk of that in certain times and places in the last couple of years, maybe even in the US in certain parts, but you certainly never want to let the hardliners take control.  I mean, we saw that in the 20th century.  So, yeah, there's a lot of interesting stuff going on. 

I mean, where I'm from, as we said, the Baltics, I mentioned it the last time I was on the show, the good old Polish-Lithuanian Commonwealth.  Actually, I saw Izabella Kaminska was a recent guest.  I didn't know that she was in Poland, or did work in Poland.

Peter McCormack: Yeah, we love her, she's amazing.

Matthew Mežinskis: Yeah.  I didn't actually know she was pro-Bitcoin either.  I hadn't read her in a while, but back in the day wasn't she not favourable to Bitcoin?  We don't have to go on that.

Peter McCormack: I mean, was she possibly, but I think most people who first discover it aren't favourable, especially journalists.  You can come at it with a little bit of cynicism.  I mean, even Saylor was and he's now the biggest bull.

Danny Knowles: Yeah, she was pretty critical of Bitcoin in the past, definitely.  But her world view, she's a bitcoiner, and that was one of my favourite interviews we'd done in ages.

Peter McCormack: Yeah, she's so smart and her understanding of history and how history repeats itself, which is something I think is super-important for bitcoiners, because I think some people have this kind of world view where they think they want it to go, but they haven't really looked at the historical context.  I mean, those who claim to be anarchists I don't think really have had a look at the historical context, when you have a breakdown in society and a collapse of government, what that actually means, especially for women in society; it usually means a lot of theft, rape, murder, and that's not the Bitcoin world I want to head towards, so there's a high risk of that.  She has a great contextual understanding of how governments collapse, revolutions happen, and it was great to talk to her about that.

I think she's mixed in well with the Bitcoin community.  I actually have a really weird connection to her, it's so funny.  When I was 22, 23, this guy got in touch with me and said to me, "I heard you're into web design, do you want to set up a business with me in London?"  I did and then I met Izabella.  That same guy is now her business partner, it's like this really weird connection.

Matthew Mežinskis: Nice!

Peter McCormack: But no, I think she's great.  I think more rational people like her, rational journalists, who have a good understanding of history, coming into Bitcoin I think are going to be a useful lens to progress us past this libertarian Bitcoin world, and I'm not against libertarianism; I think they've got great ideas.  But this kind of rational voice of how this fits into the current world I think is useful.

Matthew Mežinskis: Yeah, and just to go back to the Poland point, and it's a point about Ukraine, I'm going to have a bit deep into this.  Your show of course, we can continue on if you want, or go back to the money topics, but she mentioned Poland on your show, being a very famous -- this was a very unique part of Europe, which a lot of people don't know about.  It's actually an extremely tolerant part of Europe, the Polish-Lithuanian Commonwealth.  It was an elective type of monarch.  They had a king but when the king was dead, the king was dead; it wasn't a major hereditary thing.  They would elect a king, and I don't have to go into all this, but it was a very tolerant society.  It included Poland, Lithuania, parts of Latvia, all of Belarus and all of Ukraine; not all of the eastern part of Ukraine, it was mostly not, which is where much of the war is today.

But that whole society was completely overlooked, I think, by most people.  We didn't even study it when I was growing up, or when you were growing up, because a lot of the history is only now being uncovered, because it was trapped behind the Iron Curtain.  Poland obviously, Czechoslovakia, the Baltics, everybody was behind the Iron Curtain so not a lot of the good history was coming out.  And people just didn't care as much.  You thought about the western monarchs, you thought about all that stuff, but I do think that the stuff that's going on in Europe, the borderline fascist stuff that Russia's doing, I mean Russia's deported over 1 million people.  This is a fact from last year; I don't even know the latest statistic.  They've deported over 1 million people, hundreds of thousands of children to Russia at this moment deported; it's genocide.

Peter McCormack: Yeah, well that is actually in contravention of the --

Matthew Mežinskis: Geneva Convention.

Peter McCormack: It contravenes the Geneva Convention.  It's one of the most important rules within the --

Matthew Mežinskis: It's genocide.  It's the same thing that my ancestors dealt with.  I have a family picture of my second cousins, but there were eight kids, all deported by the Soviets to Siberia.  Some made it back, some died there.  There were two deportations, one in 1941 which was the most brutal, it was the end of the Soviet reign and the Nazis came in; and then the Soviets came back, did another deportation which wasn't as brutal, it was mostly just hard labour.  But the one in the early 1940s was very bad.  It was bad for the Polish Intelligentsia.  Of course, the Jews as well suffered horribly.

But the point I just wanted to make about all this was you can very quickly slip into the extremes, and I think that people don't quite recognise how easy that is.  And my part of the world saw the worst of it.  I mean, the Holocaust was in Eastern Europe, all the camps were there.  Hitler's Lebensraum, they didn't want to have camps in Germany, where Germans could see them; it's dangerous stuff.  And the Polish-Lithuanian Commonwealth, it was the most tolerant part of the world.  The UK kicked Jews out at some point, like 1,200 or something; Spain, because they wanted them to be Catholic, they left; so, a lot of Jews found themselves in Poland.  This is a famous thing, it's not unknown, like 1,000 years, Jews were in Poland living peacefully.

Then all of a sudden, you get some crazy, fascist dictator who's in conjunction with another crazy, fascist dictator, Stalin, Hitler obviously being the one that famously killed 6 million Jews, but Stalin killed more people in general; they come together, they start World War II.  And this is where I just hate all the Muscovite Russian history, they don't admit it, they never admitted any of the occupations in the Baltics, they've never admitted taking over Poland as being something that was bad or cruel.  But this goes back 200 years for us, so we can finish this topic.

Peter McCormack: Keep going, man, I'm good.

Matthew Mežinskis: For like 500 years, this Polish-Lithuanian Commonwealth, which was an elected monarchy, they had rights.  There's this historian I've been reading actually lately, because I'm interested more in this, especially during the Ukraine stuff.  His name's Robert Frost, he's even making the case.  This goes back to what I was saying about this stuff being uncovered more recently.  He's making the case that it was even kind of a republic, what was going on here.  Where you had empires and kingdoms in Western Europe, this was a republic.  You had people coming to the table voting and you had local courts, everything. 

Jews as well, they had what was call the Shtetl, it was little Jewish towns, where unfortunately they were still discriminated there where they couldn't own land to farm, but they weren't farming people, they were more bankers, and they were actually invited in to help with banking in the Polish-Lithuanian Commonwealth.  And so, it's just very interesting history, and they peacefully lived there for 500 years; 1,000 years they were there, but the Commonwealth was 500 years, those are two different dates.  Then the 20th century happens and it just all goes to shit, and just hysteria, people blaming different groups, not tolerant.  I think that there's a pattern there. 

Timothy Snyder interestingly, he's the best historian on this, he has a book called Black Earth.  He has another book called Bloodlines, it's incredibly depressing, about this time, but in Black Earth he makes the case that it was actually the destruction of the states that caused the Holocaust, the destruction of the Baltic States, the destruction of the Polish State.  The actual nation itself lost its identity.  And so, that's why we couldn't stop it.  We couldn't stop it anyway, we didn't have the guns and the tanks.  But it was still mostly Germans that were carrying it out.  But you had local collaborators, you had Polish collaborators and stuff, because this goes back…

I'm even seeing just tragic things on Twitter from Ukrainians in some of these lands that were occupied and now they're free, like in Kherson, where there's like a shopkeeper, he's got two kids in the basement, the Russians have occupied the area upstairs and he has a grocery store and they tell him he has to go open the grocery store and provide for the soldiers and all this.  And he's like, "I need someone to watch my kids, and they said, "I'll shoot the kids if you don't do this", and it's just absolute terror.  And I don't think he's a collaborator, he's clearly someone who's coerced, but these lines get greyer and greyer, the more that you lose your sovereignty, you lose your property rights, you lose your identity and it's just a tragic, tragic history.

Anyway, the reason I brought it up is, this has been going on for like 200 years in Eastern Europe.  The Polish-Lithuanian Commonwealth actually ended in 1800.  Catherine the Great, she said, "Poland should be wiped off the face of the map".  In 1800 she said this, 1795.  Poland was actually divided up three times, Poland and Lithuania, up until 1795.  And the same exact thing was said by Hitler and Stalin in the 1940s.  Poland, it really wasn't a state, it didn't exist, they had no history.  They said the same thing about the Baltics. 

So, this is the serious stuff, this is why it's interesting, my two interests, basically this Eastern European history and also money; they're all interesting things to study these days.  We can get back to the money stuff, but as far as the crazy, fascist, dictatorial stuff, we've seen this story before.  And it's interesting what Timothy Snyder says.  He says, "When you have a full destruction of the state, the nation, that's what laid the grounds for the Holocaust".

Peter McCormack: When you say, "Destruction of the nation", how do you mean?

Matthew Mežinskis: Literally the same thing that Catherine the Great said.  Catherine the Great said, "No more Poland, the name Poland should never be returned".  The exact same words were echoed by Hitler and Stalin.  They took over the state completely.  There's more points that he makes here.  So, Estonia was part of this, they were also captured by the Soviets.  There were three occupations for us.  It was first the Nazis came in.  The Soviets took over a little part of -- sorry.  First the Nazis and the Soviets came in and divided Poland.  Poland fell in like a month, September 1939.  The Baltics, we fell a year later to the Soviets.  The Soviets came in first.  Then Hitler double-crossed Stalin, Operation Barbarossa, which this is like the glory of Russia now, they say, "We stopped Hitler".  You teamed up with him to start World War II; they never admit this.

So then, the Nazis were in the Baltics, carried out more Holocaust atrocities all over Eastern Europe at the time.  This was during World War II for four years, and then the Soviets came back, pushed the Nazis out, took over all of Eastern Europe and we took West Germany, the Allies that is, UK, France and Britain.  Germany was obviously totally destroyed.  And that's another thing.  The German State was completely de-Nazified, it literally was.  And the ironic thing, you remember what Putin said when he rolled in a year ago, he said, "They need to be de-Nazified and de-militarised".  He's speaking in the most psychological, what's the term?

Peter McCormack: Pertinent?

Matthew Mežinskis: No, he's in denial.  This is exactly what needs to be happening for them, but that's not what's happening, and the Nazis actually had a hard time in Western Europe.  They occupied France, they occupied Denmark, parts of Norway, they didn't really occupy Sweden, they managed to stay neutral; but there's a story, which Timothy Snyder also says this as well, "99% of Jews died in Estonia.  99% of Jews survived in Denmark".  His main point there is that there actually was due process for Jews there.  They had citizenship, they had rights and it was still a normal country.

We didn't have a normal country.  We were neutral, we weren't allied with -- same with Poland.  The Baltics and Poland suffered the most, which besides the Jews, which suffered the most obviously; 50% of their population.  Poland lost 20% and we lost 15%.  We were absolutely the most desecrated countries and there literally was no state.  So, that's what I mean when there's no state.  99% of Jews in Estonia murdered, gone.  99% of Jews in Denmark survived.

Peter McCormack: So, when you talk about state, you talk about infrastructure, institutions?

Matthew Mežinskis: Yeah, and he makes that point.  Now again, people maybe listening to this show are going to think, "You're defending the state".  I'm just saying what I've read and this is how history has worked in the 20th century.  He also makes that point that actually diplomats interestingly got a lot of Jews out; the Japanese, no less, got a lot of Jews out of Lithuania on diplomatic cover.

Peter McCormack: Well, this is one of the interesting things where I get confused or I feel challenged with libertarians, in that there is this desire for more freedom and that their idea of more freedom is the reduction, or perhaps even the removal of the state.  But it's the establishment of the state and strong institutions which actually have brought more freedom to the world.  It is those where there are weak institutions, or authoritarian states, which have less freedoms.  And so I think you always risk with weak institutions ending up with less freedom.  We've seen that in Turkey right now, we've seen it in many countries that have established strong democracies, when institutions have been weak and you've had tyrannical leaders come in, that you've had the destruction of freedoms.

So, the destruction of the institution risks giving wrong people more power that actually destroys freedoms, and that's what I always worry about.  It's not that I love the state, or I worship the state; I've got many reasons to be critical, especially here in the UK.  But I can still go down to Downing Street and I can protest; I can write certain things.  Yes, we have defamation laws, which aren't great in this country, but I can still write critical pieces, fact-based critical pieces.  If I do that in Russia, you might end up with a bullet in the back of your head, or tortured or poisoned.  If you criticise the state outside of Russia, you might have assassins fly, find you and poison you.  You might be on a plane, have a cup of tea and end up poisoned.

Matthew Mežinskis: That was the MO before the Germans started the gas chambers, but the shot to the base of the neck, that was the Russian way to kill you!

Peter McCormack: Yeah, so this is where I get the real challenge in with Bitcoin.  Look, I know there's plenty of reasons to be critical of the West, especially everything that happened in Iraq.  We can't undo that; that was a huge black mark on our nations.

Matthew Mežinskis: Yeah, totally.

Peter McCormack: But at the same time, it is very clear that Vladimir Putin is a psychopathic dictator who is happy to see the deaths and rape and murder across Ukraine and potentially other states.  And the only support he has is from other dictators, such as Lukashenko in Belarus and Xi Jinping in China.  These are the Axis of Evil and I just find it maddening where, when we discuss these subjects from a western liberal democracy, that people rationalise some reason for what Putin's doing.  And this was a war at a time there was no need for war, there was peace, yes there were some border disagreements, but they're at peace.  So, I just find it absolutely maddening and I look at these people and I think, "We agree so much on money and then your entire world view, I just see it differently".

Matthew Mežinskis: Yeah, and I realise that perhaps the audience that we might be talking to here on your show as well, and I've heard a lot of your battles as well that you've had with guests and even amongst yourselves, internally, debates which I understand completely.  I don't think there's an easy answer for that, and I love talking about anarcho-capitalistic theory.  I like David Friedman's writings about anarcho-capitalistic history in society.  He's writing a lot about medieval Iceland and places that had basically free markets and all that stuff. 

But at the end of the day, where we are in 2022, I'm just saying for me personally, for us personally in Eastern Europe and the Baltics, it doesn't matter at all.  All that matters is that we stop the war in Russia, Russia's war on Ukraine, and we stop murdering, raping and deporting children and Ukrainians; it is literally a playbook from World War II.  There were more articles that just came out that that was -- they've seen documents of all this stuff.  And again, they literally thought they were going to take it in three days.  He was so misinformed.  All the generals were coming in with their regale, their parade gear as well, because they thought it was going to be three days and then they'd be doing parades; that's literally what they thought, they're so delusional.

Peter McCormack: And we're what, one year in now?

Matthew Mežinskis: More than.

Peter McCormack: Yeah.

Matthew Mežinskis: And so it's absolute devastation.  And for us, these are the things we've been warning the West for 20 years.  And I agree with you completely, this is another thing.  People will say, "What about us and what about Baby Bush?"  This was the war of my time growing up in college.  I was as anti-Baby Bush and Tricky Dick Cheney as you could be.  It was obvious.  They were Saudis that attacked the Towers, we don't need to rehash all this, but it was obvious.  And we go into Afghanistan, we go into Iraq, just left Afghanistan.  Iraq, there's girls in school now which is good, but the point was not -- it was not good that we went in.  Those were occupations.  We only went in with Great Britain by our side, by the way, Tony Blair, the Prime Minister of the United States.

Peter McCormack: Who I consider a war criminal.  And he went against the consensus of the nation.  Yes, he had political support within Parliament.

Matthew Mežinskis: Because he was the Prime Minister of the United States!

Peter McCormack: Well, yeah.

Matthew Mežinskis: It's a macabre joke.  I'm just waiting for your reaction there!

Peter McCormack: Well, yeah, I know, I understand your point, but I always try and remember.  I think there were three politicians who stood down.  Clare Short, I'm pretty sure stood down; I think Jack Straw might have stood down; there was another one.  I could be wrong on Jack Straw, but for a politician to quit Parliament over that, even one, is a huge, huge deal.  We had the largest protest in the country, over 1 million people protested in London against the war.  None of us wanted us to go into it.  We all knew we were being lied to.

Matthew Mežinskis: But they did it.

Peter McCormack: But they did it and it's happened.  I'm against that, we don't need to rehash that as some post-rationalisation for what Putin's doing; they're both wrong.

Matthew Mežinskis: You should be on our side then, if we're talking about freedom in Europe.  I mean, not repeating the mistakes of the 20th century, be anti-Baby Bush and be anti-Daddy Putin.  I mean, both are bad, both are just degenerate.  I mean, the most awful things about us, if you would believe that.

Peter McCormack: Did you find them?

Danny Knowles: Yeah, Clare Short, Robin Cook, Andrew Wilkie, Dennis I don't know how you say his surname, and Matthew Parish.

Peter McCormack: So there were five?  Robin Cook was the other one I couldn't remember.  Yeah, so I find it frustrating, I find it really demoralising at times.  But quite interestingly, we interviewed this guy, Ahmed Gatnash.  So, he runs a human rights organisation that tries to push for better human rights across the Middle East, and he was connected to Jamal Khashoggi, because they were working on Arabic Twitter, which is plagued with propaganda, using specific technologies that have come out of Israel, ironically.  Governments such as Saudi plague and disseminate so much propaganda amongst Arabic Twitter, it's become almost useless.  So, they were working with Twitter to try and make it a little bit more useful, but he was connected to that.

But he spent a lot of time just explaining the volume of propaganda that's distributed on social media channels from these nation states, and I can only assume, as I have probably been captured by certain propaganda at times, that these people are being captured by propaganda that's coming out of Russia.  That's all I can assume.  They've built an anti-West position, because the amount of freedom they have in their country's not enough, they want more; or because of the mistakes that Baby Bush or Clinton or Obama, whoever's made, they've just become anti their own nation, that they've become susceptible to Russian propaganda.

Matthew Mežinskis: I still try to make the disclaimer, and I think we should always do this when we talk about governments that are out of control, it doesn't have to mean the people.  I think the people do get, at some point, like happened in World War II, you didn't have to go to Eastern Europe if you were a German soldier, but they ended up going.  Okay, so they did, so we don't need to analyse that; Jordan Peterson talks about that.  It got out of control, it did, which is horrible for us and Ukraine is still suffering for that.

My original point, why I brought Poland and the Polish-Lithuanian Commonwealth in, because this was generally a prosperous part of Europe that was free for 500 years.  But anyway, what was my second point with that?  Maybe, I'll come back to it, but I had a follow-up to that!

Peter McCormack: Shall we talk about money?

Matthew Mežinskis: Yeah.  No, well let's stick with this just one second.

Peter McCormack: Please do.  Look, I know how important it is to you, because the other thing is that I see all these --

Matthew Mežinskis: Oh, I got it, I got it!  Okay, so I generally make the disclaimer, I'm not talking about Russians, I'm not talking about Germans, I'm talking about Washington, Berlin and Moscow.  It's clear, and now Beijing has entered the fray and is here to stay.  It's clear, they're not communists in North Korea, they're just people that are trapped, good people that are trapped by a tyrannical dictator.  This is clear.  We should all understand this, not talk around it, not beat around the bush, not act like it's not real.  The tyrannical policies come from the top, we should remember that absolutely, and we are fallible. 

We have done this in the West.  We did it with Iraq and Afghanistan, as we just said, but it's just clear that this is what they're doing.  They're trying to destroy state, genocide, and we're not going to stop fighting.  If anything, I'm more encouraged over the last year actually because of, number one, Ukrainians' resolve, their individual resolve and their collective resolve, it's incredible; number two, Finland just got into NATO, so here's the solid argument, "It was all NATO's fault".  I'm waiting for the Russian tanks to line up on the Finnish border of 1,000-plus kilometres with Russia.  I'm waiting, dear Putin sympathiser, please, let's see now if it was all about NATO.  Finland, the largest reserve army in Europe, 500,000-plus people, because they know their neighbour.  I'm waiting for the Russian tanks to just line up along Finland's border, because it's all about NATO, isn't it?

Peter McCormack: Erm…

Matthew Mežinskis: It's not about NATO obviously, it's about Ukraine and a dictatorial asshole, but anyway.

Peter McCormack: No, but I think you make a really good point, the distinction between the people and Moscow and London and Berlin.

Matthew Mežinskis: The capital, the dreaded capital.

Peter McCormack: Yeah, the capital, I think you make a really important distinction.  But I find the whole thing so depressing.  But then there's the flipside where I feel really conflicted with, I see a lot of Americans criticising, mainly on the conservative right, but critical of the support, the military support, financial support, that's been given to Ukraine.

Matthew Mežinskis: I can speak to that if you want.

Peter McCormack: Well, just my only historical context is that it's no different to me than the support that America gave the UK in the Second World War, and we would never be critical of that.

Matthew Mežinskis: I would say surely this is more of a European problem, and I don't doubt that, I don't deny that and everybody should understand that.  We Eastern Europeans have always said that.  We also need help.  I mean like I said, our states got destroyed, our nations, our identities got destroyed and no one helped us.  I said this on your last show, you might not remember; the US has had an unbroken relationship with the Baltics for 100-plus years now, and how could that be if we were occupied by the Soviet Union and part of the Soviet Union, not an independent country; how could that be that our flags are flying in Washington?  It's because they never recognised the occupation of the Soviet Union, something that Russia and Moscow have never admitted that they occupied us.

There are times when the West needs to step in and help.  I wished they helped more, my ancestors, I wished they'd helped us more; they didn't, they chose to stop.  Churchill actually had a -- it was called Operation Unthinkable, by the way.  It was to go into Moscow after the Nazis were taken out; he had a plan.  I'm not saying he should do it, I'm not saying whatever, I'm just saying it's interesting that he had planned that way.  But look, there were times that they knew they were just horrible, awful tyrants, but we forget.  Life moves on, you need to trade, you need to start things up again.

My relatives in Latvia, say the ones that grew up in the 1950s and 1960s, this is something we should never want for our children; they were worse off than their parents, and this was all because we got swept under the rug of communist, totalitarian Moscow, and that's just sad.  You've seen those pictures, they've been going around Twitter, I'm sure.  They were primarily Germans, but there's also conservative Americans during World War II saying, "Let Hitler -- let Germans make their own decisions, no war, let's stay out".  You've seen this.  Do you think that was a good idea?

Peter McCormack: Of course not.

Matthew Mežinskis: Yeah.  But again, I do submit this, I don't know, olive branch, whatever.  I'm not telling Americans to come over and start nuclear war, not at all, and by the way, no one is talking about attacking Moscow, never have we ever said that.  We just know who our enemy is, we know that they haven't had a democratic leader ever in 1,000 years, except for maybe nine years between 1991 and 2000 with drunken Boris Yeltsin, who was hilarious, but tragic at the same time.  I know that, I know that it's a European problem.  If the Texas libertarians want to get the US out of NATO, go for it, I have no qualms with that idea at all.  I'm not for some woke, liberal, I don't know, transgender NATO taking over the world; I mean, it should be obvious this is not what we're talking about here!  We're talking about base values, human rights, freedoms.

Peter McCormack: One of the interesting points that came up, I think it came up on Joe Rogan's show, was a discussion about how it's this whole -- I think it was when he had Michael Malice on, they were discussing how it flipped, that it was the neo-cons in Iraq, and now it's the Democrats who are getting involved in a new forever war, and I think they missed an important distinction, in that the war in Iraq was an attack.  It wasn't a defensive move, this was an offensive move into two countries.  Afghanistan, following 9/11 it's unsurprising that happened; but Iraq was an offensive, unnecessary move. 

The difference here is that Ukraine is the defence of a nation that's being attacked, and that's very much within the wheelhouse of how a progressive thinks.  If you read The Righteous Mind by Jonathan Haidt, he talks about the care/harm side.  This is why progressives are for so much equality and fairness because that's what they care about; it's the care/harm.  And so it's only natural that they want to defend a nation that's being attacked.  So, I think they missed what isn't to me a flip; it is right within the wheelhouse of how these people think.

Matthew Mežinskis: Yeah, and I would look at it a little bit from the side of Switzerland, who always adhered more to the US Constitution than the United States; I don't mean literally, I mean figuratively.  They were designed after the US Constitution.  Size does matter.  There's a great book I just mentioned on Marty's show and I always forget the name.  Donald Livingston is the author, Rethinking the American Union, or something like this.  And of course it's more about real federalism and everything.  And size matters.  The disastrous capital idea of the Hunger Games can be such a thing when you have the capital just so far away from the people.  Size does matter.

If you measure the capital, the representatives in the United States' original colonies versus the representatives today and tried to standardise it, you could go either way.  You'd either need thousands more representatives today, or if you looked at back then compared to the representatives now, five states would have zero representatives; it could go either way looking at that.  So, size matters.

My point began following up on your point, is I think Switzerland is a very good model of not letting the extremes get out of control, and that's always the case.  The middle ground, middle-of-the-road people that understand basic human rights and liberty and want that, they want that for their children, they're never going to want the one side or the other to get out of control, and Switzerland has always actually succeeded at that, always.

Peter McCormack: Do you know who I think Matthew would have an amazing conversation with?

Danny Knowles: Who's that?

Peter McCormack: Natalie Smolenski.

Danny Knowles: Yes!

Peter McCormack: Do you know Natalie?

Matthew Mežinskis: I don't.

Peter McCormack: She's been on our show twice.  She actually wrote an article, Rethinking the American Dream or the American Republic.

Danny Knowles: The American Dream, I think.

Peter McCormack: She's been on our show twice, she's utterly brilliant.  Somehow, I need to get you two together, maybe here in 2024.  I think she's going to be at the Miami Conference.  What was it; Rethinking the…?

Danny Knowles: American Dream.

Matthew Mežinskis: American Union maybe?  Oh, sorry, what she… yeah.  The one I'm talking about was Donald Livingston, by the way. 

Peter McCormack: Or, no, was it The Re-founding of the American Republic?

Danny Knowles: I don't know, let me check.

Peter McCormack: I think it was The Re-founding of the American Republic.  I'll find the article and send it to you, I think you'll enjoy it.  She recognises similar things, but she's utterly brilliant.

Matthew Mežinskis: Yeah, I'd love to.  I mean, I think we've covered a lot of ground.

Peter McCormack: Do you do this stuff on your podcast?

Matthew Mežinskis: Yeah.  I mean I do these dailies, which we wanted to talk about today, that I'm doing more on money.  I do drop a lot of this in, as always.  But I do think the most interesting history is monetary history.  That's where everybody trends towards, decisions are made around that.  And I think actually, most historians don't even understand that.  I wouldn't say the historians that I've quoted this far, but a lot of people they just are completely blind to the power that money has to either do good things or bad things.  I'll give you two examples, a little bit of that monetary history.

So, we had the most famous, hilarious scammer, he's a Scot, his name's John Law.  Do you know who he is; do you know this name, John Law?

Peter McCormack: Why do I know that?

Danny Knowles: I don't know him.

Matthew Mežinskis: He's very famous.

Peter McCormack: Maybe you told me about him before.

Matthew Mežinskis: Maybe, I might have, I can't remember.  I've talked about him before.  He's hilarious because he was a gambler, he was smart.  He was from a family of goldsmiths and bankers, so smart, but a gambler.  He actually lost a dual over a woman in the UK, couldn't come back to the UK, bounced around Europe, eventually made his way in France, fell in love with a royal.  Eventually made friends with the Regent at the time, of Louis, I don't know, XIV, XV, something like that.  This was early 1700s.

Peter McCormack: Sounds like Catch Me if You Can!

Matthew Mežinskis: Yeah!  His story is amazing.  I would recommend, what's his name?  Bad on names this morning, from the Hoover Institution, he's also a Scot, he lives in the United States right now.  I'll think of it at some point.  Anyway, his story about John Law.  But lots of people have written about him, he's famous.  Basically, he became the first central banker of France, making friends with the Regent for King Louis, who was like the Regent of Orleans or something, and coincidentally he also went to New Orleans.  He had this Mississippi -- do you remember the Mississippi Bubble, the Mississippi Company?  Basically, it was a completely paper-based fiction, paper money.  Paper money's not bad, we can talk about this history as well, but it's bad when it's at the control of the state.

So, he was just making friends in France.  This guy must have been like Bill Clinton times a billion.  He was so suave that he made his way into the Royal Court of France and he became the first central banker.  And so, the rest of the bankers in France figured this out about him, they figured that he was kind of a shyster, and he started a bunch of paper money schemes, and everything, and backed by the state, and everything.  And so they said, "Let's try to collect on this guy".  And the way that free banking works, if you extend your credit too much, paper credit, bills of exchange, cheques, all this stuff, bank notes, when this starts -- this is a good topic to talk about.  We'll get more into free banking as well.  But when you start getting too much paper out into other banks historically, the way that the market works is, other bankers see that paper and they know their reserves, they know what a prudent level of lending is.  Again, it's why fractional reserve isn't bad in a free market.

So in a free market, what do free bankers do?  They claim gold on that bank where they see all these cheques and banknotes coming in to their coffers like, "I think they're just issuing way beyond their means", and so they go claim.  There were five banks that try to do this against John Law in France in the early 1700s.  The Regent bailed him out.  This is when he truly became like a central bank.  They thought that they would get him, and they did, they did get him.  But in the middle of the day, the Regent sent a boatload of gold to his bank, it was called Banque Générale, eventually Centrale, or something.  In the middle of the day when everybody would see, sent a boatload of gold on crates into the bank to instil confidence.

Only in a state-like situation, a coercive government situation, would this work.  Compare this now to Scotland, free banking situation.

Danny Knowles: Wait, why did they do that, first of all?

Matthew Mežinskis: To stop the run, to instil confidence.

Danny Knowles: But in free banking, would they not want to let that fail?

Matthew Mežinskis: Exactly, this was not free banking.  So the state, the Regent, the guy that's actually watching over King Louis, one of the King Louis, he's like, "All right, we'll stop this, we'll help you out", because again, I don't know, Law was sleeping with his cousin, or I don't know, some royal; he was such a suave guy.  And so they bailed him out.  In the middle of the day, a boatload of gold goes into his bank, while all these other banks are trying to claim gold, and so they back off.

This is central banking, and this still exists to this day.  SVB is the same story.  But you contrast that story to free banking in Scotland, same time, a little bit later, I think it was late-1700s, there was this bank called the Ayr Bank.  They did the same thing.  They failed spectacularly and Scotland had no central bank; they were a free banking society.  And Adam Smith wrote about this, said it was a very good thing for them.  So, other banks in Ayrshire around this, they saw the notes come into their bank and were like, "This doesn't make sense".  They went and claimed their gold, the bank failed spectacularly.  And at that time, there was no D&O, Officers insurance, there was no limited liability; it bankrupted everybody in the bank, sadly but rightly so, and Scotland carried on.  They had hundreds of years of free banking.

So, that's how the banks should work.  I'm a big fan of this history, by the way, but then the people that say, "Oh, well, it doesn't work.  100% reserve banking is better", which we can talk about.  I fully admit that free banks have failed.  As I said at the beginning of the show, we now have a central bank in every country so that unfortunately, even if free banking could come back in one country and be great, there's always a risk that it could fail again and we'd have more central banks controlling the money.  This is why we need Bitcoin. 

Peter McCormack: Right, okay.

Matthew Mežinskis: But my view's a little bit different, I think, than most people in that they just want everything to be on the blockchain, which by the way is what we didn't say during the scaling debate, it should all be on the blockchain, but anyway, all payments, everything should be on the blockchain.  I don't care if it's on Lightning, banks, Fedimint, that's fiduciary media, by the way.  Anyway, I'm getting a lot of topics.

Peter McCormack: Yeah, we've got a lot of notes here.  Jesus!  Okay.  Firstly, Danny, we need to read more!  We don't read enough books.  Jesus Christ, you saved me.  It's like I get to read ten books in about an hour with you.  Okay.  You say we don't have free banking, but do we essentially have free banking with Bitcoin, because when everyone's levered up with Bitcoin and there is a run, they fail and there is no central bank that bails out any Bitcoin situation, whether it's BlockFi, FTX, Celsius, they've all failed.

Matthew Mežinskis: I would say, yes.

Peter McCormack: So, we do have free banking in Bitcoin.

Matthew Mežinskis: I would say yes for now, and here's the interesting point.  I have a different view of say the Caitlin Long view of Custodia.  I love Caitlin Long, by the way, she's been on my show, she's great, she should do it.  Custodia, they're in this fight, for those that don't know, they're in this fight, they're trying, and she will pursue legal action; they've been denied a master account, they've been denied a monopolistic privilege banking licence, which is another problem, by the way.  This goes back to the central banking and legal tender that I mentioned before, but nonetheless, we know that she's a good actor.

Peter McCormack: Sorry, what is a monopolistic…?

Matthew Mežinskis: Monopoly means one thing and one thing only, it does not mean a big company, never did.  In the days of Adam Smith, this is the real definition, a monopoly simply means, "A licence from the state to operate", that's it.  So, John Law was protected with a licence from the state to operate.  The Ayr Bank was not a monopoly.  And all banks are monopolies, now you need a banking charter.  Of course, we have tons of regulations that are just disastrous for banking.

Peter McCormack: So, we have two meanings for monopoly now?

Matthew Mežinskis: This is a debate that the Austrians have been fighting for a long time, a good fight.  Mises came up with this idea, he said there was never the idea of a natural monopoly, like some big company.  Marx said this.  He said that the fear was that there would just be one company ruling the world.  This is why communism, this is why we can't have a market, because there's going to be one company ruling the world.  This was one of his ideas.  That's the Marx idea of monopoly; that's never the case, it's never been the case. 

You can even see in the US, there's a great historian of this, his name's Thomas DiLorenzo, I recommend to people.  He's an Austrian, his writing, it's Thomas DiLorenzo.  You can look at the legislation, anti-monopolistic legislation against IBM, then you move onto Microsoft, then you move onto Google, then you move onto Amazon.  It's always one company that's just going to fuck us in the tech world.  That's always the view that somehow, it's like that.  But we see that it never happens.

For people that make the case, "It's because we have antitrust legislation", no, that wasn't the case at all, you have to go back and look at the Rockefellers; I don't want to go to that story right now.  But it's never the case that the government is actually saving you from monopoly, or that there's some big company that's going to just screw you and somehow be so good and provide such services that you need that then it's going to screw you later and price gouge, or something.  That's the cartoon version.

Peter McCormack: Is it an excuse to tax them through some fine?

Matthew Mežinskis: Sorry?

Peter McCormack: So for example, the antitrust legislation, or antitrust prosecutions, are essentially prosecutions against monopolistic powers, which usually end up with these fines that are in billions; I never know where that money goes, I assume it's a tax.

Matthew Mežinskis: Yeah, this is the deep state that we don't like.  All that stuff, it's just nonsense.  But Thomas DiLorenzo, I'm quoting him, he has this great story about IBM.  There was IBM antitrust legislation.  Of course, IBM, who would think of IBM now as being a problem?  In the 1980s, in the 1970s, it was; they took over the mainframe, the biggest mainframe operators and the PC as well, they were a monopoly.  There was like ten-year antitrust legislation being brought against them by someone, I don't know if it was the government or whatever, people, consumers, I don't know, class action, I don't know.  But it was ten years of legislation and then the judge died.

The next judge just said, "To hell with it, I can't review this, we're dropping the case", and they dropped the case.  This is IBM, famous IBM, who would even care?  You say it now, it's so laughable; they dropped the case, they didn't do anything.  And is IBM going to kill us now with robots in 2023?  No. 

Peter McCormack: They got out-competed!

Matthew Mežinskis: Yeah, that's a whole other topic.  But you always see these bogeymen in the markets and the government comes to save us, but it never does this way.  And by the way, I know people are going to try to say, "Oh, you're being paradoxical when you're talking about war and military"; not at all, this is a completely different thing, let's not mix those things.  We're talking about inside the country and free market property rights, all the rest.  Let's not go too deep on this show with those debates.

But yeah, when you're talking about freedom in the market, people competing freely, competitive companies, all the rest, the myth of the monopoly is huge.  So, that was a longer tangent on monopoly.

Peter McCormack: No, it's good.  But so essentially, I think we all agree that right now, we kind of have free banking in Bitcoin because there's no bailout because you can't print the Bitcoin.  I mean, I just don't see a scenario, even if the government held a bunch of Bitcoin, it was going to fail, it would release their Bitcoin to save the banking sector.  I think they would let things fail. 

Matthew Mežinskis: Yeah, which is interesting because they just sold a bunch --

Peter McCormack: Yes, they did.

Matthew Mežinskis: -- into the market.  It's kind of weird that you would want to outlaw something and then sell it and then outlaw after you sell it.  It's kind of weird.

Peter McCormack: They still hold some anyway.  Some of that's my Bitcoin, by the way!  So, the idea of the 100% full reserve, well 108% I think is what Caitlin Long wants --

Matthew Mežinskis: Yeah, we should revisit this.

Peter McCormack: Yeah, so the reason I want to revisit it and revisit the idea of fractional-reserve banking, because a lot of bitcoiners are against it, one of the things that I've had a slight concern with is the idea that in a bitcoinised world that we have a slowdown in credit.  And would a slowdown in credit see a massive slowdown in the economy, people unable to start business, unable to afford homes.  How much do we need credit and how do we have the right constraints in credit?

Matthew Mežinskis: Okay.  My view on credit is, it's generally fine in the free banking system.  I don't try to be more aggressive than that towards free banking.  So a lot of people accuse me as well, they're like, "You're blind to the ways of the state".  I don't think at all, and I think I've got examples of that.  So, the thing about credit is you can't stop people at any given point from interacting.  We could have 1 Bitcoin between the three of us.  I have 1 Bitcoin, I give you a loan, you have the same Bitcoin, you give Danny a loan, and then we go around to Emma and someone else, and we have now four or five loans with the same Bitcoin.

It's totally possible to have credit in a 100% full-reserve banking system, because you can make loans even outside of the banks.  And even the Church said this.  Who were the biggest people that were against the charging of interest?  It was the Church.  The caliphate never allowed it in the Muslim world, ever, for 1,500 years, although I think they have interest in their banking world now.  They don't have a clear definition.  If you have any Muslim scholars, I'd be curious, I'd wanted to know what is the definition of usury in the Muslim world today?  So, they never allowed it.

Peter McCormack: Because you have Muslim-friendly mortgages and I'm like, "Well, how have you done this; it's still a loan?"

Matthew Mežinskis: I don't understand it.  I think that they have interest, they're just defining it very narrowly.  The Church as well, this in my view is the bad nature of trying to over-control banking; the Church did the same.  The Church didn't let go of "allow interest" until 1600, and actually the Protestants were part of that, and the Anglican Church as well.  I think one of the Queens of England was the first one to actually allow, "Okay, it's okay to charge interest".  Still no usury.  But in the normal course of business, you can do interest.

But the Church was always against the charging of interest.  And by the way, I mentioned the Jews earlier in Poland had a great history of merchant banking in Europe, and in Poland as well, they were invited in to Poland Lithuania to help with banking, and we were pagan people, weren't really doing much trade in banking earlier on; they were invited in to help.  But it's not even stereotypical to say that Jews were involved in banking; why were they?  I just told you.  The Church forbade interest and the Muslims, I mean they were out anyway dealing with the Jews, they also forbade interest.  The Jews were the people that thankfully innovated banking and helped the charging of interest in Europe, so it's totally another good thing.  That's a little bit of a tangent.

Anyway, back to Caitlin Long, I think we should talk about this point, because this is an interesting one where this goes back to the idea of the narrow bank.  First of all, this argument has never been used against free bankers.  A 100% fully reserved bank has never been illegal throughout history; anybody could do it.  Anybody could do it and the most successful, I would argue, 100% reserve bank, which is reserved in gold today, is GoldMoney, Jim Turk.  Peter Schiff is an investor in GoldMoney, there's Roy Sebag, a great luminary I think in the space.  You're more than welcome to have a 100% gold reserved account in GoldMoney, but what's the catch there?  You've got to pay and a lot of people just don't want to pay, and that's okay.

So then you start to argue, "It's fraud, people lend out your money, you don't really know".  That's actually never been the case in banking history, never.  Let me ask you this, 1500s banking, what do you think was more prevalent, paper cheques, paper banknotes or coin; what was the most prevalent as far as just transactions?

Peter McCormack: I would have thought coin.

Matthew Mežinskis: Incorrect.

Peter McCormack: Okay.

Matthew Mežinskis: It is cheques actually.  The banknote itself didn't even develop until around the time of John Law, 1700s, 1800s, and mostly that was a monopolised instrument, it wasn't much of a free market instrument.  But the cheque was around for 1,000 years.  So here's another thing -- just stop me, by the way, if I'm --

Peter McCormack: Keep going, man.

Matthew Mežinskis: Okay.  This proves the point.  So the idea is that this is the biggest myth of all time, the allegory of the merchant banker trying to pull the wool over the eyes of, and I'm being facetious here, the middle-class peasant that somehow has a gold florin call and he's really looking for a sacred vault to put his gold florin coin.  So the bankers, they're the tricksters, they're the ones that are going to loan out the money and let you trade with the paper, but that's a problem because there's so many dumb plebs, middle-class peasants that have apparently 1 gold coin or a couple of gold coins, and really need a vault, they really need a bank vault.  You can maybe get a bit where I'm going there.

First of all, that's an allegory that just never happened in banking history, never.  It's never been proven; also, there's never been a gold exit scam of gold merchant banking, where the gold's in the vault, people are trading in paper, all of a sudden the gold's gone, or someone ran away with it.  Now, I'm sure you can find in banking history, like Medicis, some Medici banker ran away with a couple of sacks of gold in the middle of the night and never returned to Italy, I'm sure.

Peter McCormack: You can find it in crypto!

Matthew Mežinskis: Yeah, that's the thing.  You can find it in crypto.  So there's absolutely bad actors, 100%.

Peter McCormack: But it's a lot easier to run off with a seed phrase than it is to run off with a boatload of gold.

Matthew Mežinskis: Yeah.  So, George Selgin's written a lot about this.  He has a paper called Those Dishonest Goldsmiths; great paper, I would absolutely recommend it.  He tackles this full on.  But how do we know that this is a total myth and allegory, never happened in reality?  First, paper wasn't invented.  This always starts in Renaissance Italy, by the way; this is the story, it's Renaissance Italy.  Some dishonest goldsmiths are taking your gold disingenuously lending it out, and you're just trading the paper and that's it.  Again, you've got to ask yourself, who is the one…

Okay, so prima facie, the cheque started 500 years before that, it started in Iraq actually, it was called the saqq.  I'm not a chess buff, but that's an Arabic word.  In chess, it's a Persian word, I think it's shah mat; it's the same type of word, interestingly.  I know Persian and Arabic are a little bit different, but the cheque started in Iraq, it's called the saqq, that was around 1,000 years ago.  And the Chinese started not maybe a cheque, something called the bill of exchange.  It's basically a cheque between cities, we don't have to go too detailed on that, but it's basically a merchant paper system.  They started that almost 1,500 years ago, like in 600 AD, 700AD, the Chinese did that; Marco Polo brought that to Europe.

So, prima facie, this idea never happened.  It wasn't just like everybody needed a Scrooge McDuck gold vault to take their 1 ounce of gold coin to put it there.  Okay, so this is the next question, just to debunk this.  Who would need those types of services?  It is true, transporting gold is difficult, transporting gold is dangerous, so who would need these types of fiduciary media services where you're going to start changing cheques, bills of exchange and eventually banknotes?

Peter McCormack: The banks themselves.

Matthew Mežinskis: The banks themselves, the merchants themselves.  It's in the name; merchant banking!  It's the merchants themselves.  In China, the coins actually had a hole in the middle, and the merchants would run around with the coins on a string, and it became cumbersome.  And these weren't even gold coins, they were copper coins.  So, they started that, the first thing.  Genghis Khan's grandson actually monopolised that 500 years later, but it started in the market, important to note.  These were merchants in China, merchants in Iraq and in the Muslim world, and also the Medicis, the Lombards, they brought it up in Europe, as well as the Jews.  It's not a crime, it's not a problem, nobody's trying to pull the wool over anybody's eyes. 

It's precisely the people that are supposedly ripping other people off that need it.  They need to go, "I've got to make a payment to my relative [or] to my co-worker [or] my supplier in Genoa, I'm in Florence.  I don't want to send the gold; let's start sending a cheque", or what's called a bill of exchange.  It's kind of like a cheque that doesn't need a bank.  It's not worth going into now, but they would send the paper back and forth.  And so that's the beauty of banking, I think, and it's interesting.  And so this whole idea, which is unfortunately popularised by Murray Rothbard, is that it's fraudulent and it causes the business cycle.

Nowadays, no Austrian worth their salt will admit that it's fraudulent, they know that it's not fraudulent.  It's like an iTunes agreement; you don't read it, you click "OK".  It's the same with a bank agreement.  This stuff has been legislated on for hundreds of years.  It's very clear in your bank agreement, you are a creditor to the bank, they are a debtor to you.  There's no promise of a full reserve, it's nothing.  So, this goes back to the GoldMoney thing, it goes back to Caitlin Long as well.  If you want a full reserve, Bitcoin or gold or whatever, do it, I say do it.

The deeper question, which I always point out to people is, "What is fully reserved Bitcoin?"  It's Bitcoin that you hold yourself, you validate on your node, you hold the keys, all the rest.  That's fully reserved Bitcoin, so that's base money, that's why it's most analogous to the core of the system.  If you want to start lending them out, if you want some yield, if you want staking, as they call it now, or just interest, that's what people have preferred over the years and you see it in monopolised systems.  But you even see it more in free banking systems, it's one of the things that George talks about.

So, in the Scottish system, there was 1% gold in the vault to the cheques, the claims, the bankers' deposits outstanding; 1%.  People preferred, for all the reasons we know today, even today no one wants coins in their pocket, but even bills.  It's already taken over electronically, but even back then it was the same reasons: risky to transport, difficult to hold.  I'd rather prefer bills in my pocket than some clunky coins that are also at risk of being lost or theft.  So anyway, that was a huge tangent, longer than I planned, on free banking!  I really want to get back to Caitlin Long.

This is an interesting thing now that never would have occurred before, started with this idea, this narrow bank.  I actually don't know who's behind that.  It was a couple of years ago it came out, because Caitlin Long; it was called the narrow bank.

Peter McCormack: Yeah, Lyn wrote about it recently.

Matthew Mežinskis: Yeah.  So, they haven't been able to get a Fed account either, a master account either basically.  I think they might even have a banking charter, they've got the monopoly, but they can't get the account.  They wanted to basically just keep their customers' deposits on account with the Fed, not lend them out, and just take the Fed interest, which they've started to pay since 2008, very important point, and pay to depositors.

So, first point, as I hopefully just described in a longer tangent than I planned, 100% reserve banks have never been illegal before then, and you can imagine if someone is going through a bank run, these famous bank runs in the 1800s or something, what did they do immediately after they took their money out?  They went to another bank!  So, it was always open for entrepreneurship; it's never been illegal.

It is true though, and this is where I give a point to the full reservists, they're making this point but it's a little bit nuanced.  In the last 15 years when the Fed allowed interest to be charged on reserves -- before it was like, you'll have your reserve -- it's the same thing with cheques, by the way, you settle with neighbouring banks all the time, every day, cheques, whatever; you settle at the reserve account with the Fed, that's not a problem.  But they are not going to give you interest.

Peter McCormack: Hold on.  Do you want to bring him into the kitchen?  Are you coming, Obi?

Danny Knowles: Hey, how's it going?

Obi Nwosu: Hey, how's it going?

Peter McCormack: Obi, grab a seat, man.

Obi Nwosu: I just came early.

Peter McCormack: It's fine.  Do you know Matthew; Matthew Mežinskis?

Obi Nwosu: Hello, nice to meet you.

Peter McCormack: Obi's Fedimint.

Matthew Mežinskis: Fedimint?  I just mentioned Fedimint.

Peter McCormack: Yeah, you just brought up Fedimint!

Matthew Mežinskis: Yeah, I brought up Fedimint.  It's good fiduciary media!

Peter McCormack: And by the way, if you want a cup of tea, we'll have a little break.  This is my father.  He makes an excellent cup of tea if you want one.

Matthew Mežinskis: All right, I would love one.  I told my wife we're definitely going for an English tea at some point.

McCormack Senior: Coffee?

Obi Nwosu: Coffee, please.

McCormack Senior: Milk; sugar?

Obi Nwosu: No milk, no sugar.

Matthew Mežinskis: Milk is good, just milk.

McCormack Senior: You're a tea.  Tea, tea, two coffees.

Peter McCormack: Are we going to leave this bit in?

Danny Knowles: I think we should leave this bit in!

Matthew Mežinskis: Yeah, we should leave it; it's great!  Fedimint is great fiduciary media, by the way.  So the point is, getting long-winded here, we haven't even looked at any charts.

Peter McCormack: I know.  We've done 1 hour and 10 minutes leadup.  Normally, they're 5 minutes!

Matthew Mežinskis: So, the narrow bank, that idea.  They're not allowing it, obviously, because it is too safe for them right now.  But they never would give banks this interest on reserves.  When they did the bailout in 2008, which I can show you; actually, I'll show you right now, with a picture. 

So, this is a chart, I have my picture typically down here below, not so much white space, but you can see obviously two different monetary epochs.  This is the total money supply of the United States, only United States.  I do base money across 50 currencies, but this is only the United States over the last 60 years.  You can see this is one monetary epoch here, we'll take away this and this, it's just money supply.  And then you see here, 2008.  But what's the big thing that happened in 2008, why the money supply started to explode?  It was the explosion of bank reserves to basically bail out the banking system.  So, if I take away everything else and I just show you bank reserves, which is high-powered money, which is why I have this whale here --

Peter McCormack: Holy shit!

Matthew Mežinskis: -- this influences interest rates the most.

Danny Knowles: I think you should probably explain exactly what bank reserves are.

Peter McCormack: Yeah, for people listening.

Matthew Mežinskis: Yeah.  So, bank reserves are basically basic money along with cash, unfortunately monopolised by the central bank.  As I said, it's not good that the state monopolises this stuff, but the bank reserve and fiat cash, the things that you actually think of, the notes and the coins -- well the Federal Reserve only controls notes, other central banks denote notes and coins -- they make up the monetary base.  So, I can look at it from the other side here where I have vault cash, basically nothing.  The physical cash banks hold in a vault, you barely see the line change.  It's light blue there, it's a little bit, you can barely see it.  And then, what's called M0, or this is the rest of the physical cash.  So, this is the entire monetary base.  It's basically the Fed's balance sheet.

You see that this exploded here, primarily the bank reserve portion, in 2008.  What was it?  It was just a bailout, never good; this is the Regent in France bailing out his buddies, it's not the Ayr bank freely letting the bank fail, you know, succeed to fail on their own bottom.

Peter McCormack: And so it ran up when; 2008 to about 2014?

Matthew Mežinskis: Yeah.

Peter McCormack: Okay.

Matthew Mežinskis: So, this is another thing too.  Even though this is digital money, ledger money, when it falls, this is not money being printed.  Bitcoiners would always say, "The Federal Reserve just prints, prints, prints", it's actually not true.  I'm not defending the Fed, but you do have to be a little bit more nuanced.

Peter McCormack: So, what is happening?

Matthew Mežinskis: Well, right now, they're trying to control this COVID stimulus.

Peter McCormack: No, when it's being reduced.

Matthew Mežinskis: They're selling securities, typically bonds, into the market and then the banks get the bonds back, and then they get the bank reserves from the bank and they destroy them.  That's how it gets out of this.  But again, you didn't need a central bank for this.  The banks in Scotland cleared with themselves.  It was kind of a small country so it was easy, same with Sweden and Canada.  Also, this is actually a small country, it was the same.  But even the United States in the 1800s, we had a bank that was called the Suffolk Bank, it acted like a central bank.

So, what is it?  It's how you clear at the end of the day, and I think maybe an example will help.  I don't know how much longer we have though.

Danny Knowles: As long as you want.

Peter McCormack: As long as you want.  Obi's about two hours early!

Matthew Mežinskis: All right!  So, clearing.  This actually relates to the Fed now, by the way.  A lot of people call the Fed now a CBDC.  It’s not, it's just clearing bank reserves faster; it's not a CBDC.  So, let's imagine a cheque, good old fiduciary media, good old paper money, okay.  Let's say I send you a cheque; give me two banks in England.

Peter McCormack: Lloyds and NatWest.

Danny Knowles: Royal Bank of Scotland.

Matthew Mežinskis: Lloyds and the Royal Bank, okay.  What did you say?

Peter McCormack: I said NatWest.  I mean, that's a Scottish bank, probably based in the UK.

Matthew Mežinskis: Yeah, let's stick with NatWest actually, so Lloyds and NatWest.  I'm Lloyds, you're NatWest, I give you a cheque.  It could take some days to clear.  It used to take much longer, now usually they can get it done in days.  I mean, you could do it on your phone, whatever, it's even faster, but at least in the US; I'm not sure if you can do it on your phone here.

Peter McCormack: Yeah, everything's super-quick now. 

Matthew Mežinskis: But you still have cheques in the UK, right, actual paper cheques?

Peter McCormack: I mean, they exist.  I haven't written one myself in years, and actually interestingly, so I bank with Revolut, which is a branchless bank, and I own shares in a company and I received my dividend as a cheque, and I can't cash that cheque; I can't put into the bank because Revolut don't have branches, they don't accept cheques, you can't mail them to them, so they have no cheque service.

Matthew Mežinskis: Yeah, and it's probably better for them to keep their costs down.

Peter McCormack: Yeah, so I had to actually then go back to the company and they had to put it through as a direct debit.

Matthew Mežinskis: Yeah, it's the same in Eastern Europe.

Danny Knowles: I'm 31 and I've never written a cheque.

Peter McCormack: What?  You've never written a cheque?

Danny Knowles: Never had to write a cheque.

Matthew Mežinskis: It's pretty wild, because I'm 9 years older than you and when I was in school in the US, that was a daily thing.  I'd take my cheque, wait in line at the bank, deposit my cheque, 20 years ago.  It's an unbelievable thing to think about.  But the US is still tied to cheques.  The Treasury, they send out their stimulus cheques in cheque form.  They're way tied to cheques.

Danny Knowles: So they were actual physical cheques?

Matthew Mežinskis: Oh, yeah.

Peter McCormack: Yeah, you used to use it a lot for work, for business.  So, if you got an invoice in, you would usually, before you had online banking -- was my first business…?  I mean, there was online banking, but most of the time you'd be paying cheques.

Matthew Mežinskis: Yeah, so it's totally antiquated.  Obviously, with the digital world, we don't need it and with Bitcoin, we don't need it even more, but it's a good example to help you show how bank reserves work.  So, Lloyds, NatWest, cheque takes a couple of days.  Now, let's multiply this by a billion payments, or whatever, or how much it goes.  And also, let's say I'm Lloyds and Lloyds has a lot of cheques that are making their way into NatWest's coffers, into their tellers.  Not in the UK; let's just imagine this is the US, whatever.  I should have used a US Bank.  Wells Fargo and Bank of America; let's keep within NatWest.

NatWest has a lot of cheques going back into Lloyds' coffers.  Where do they clear those?  They clear them at the central bank.  But does the central bank care about -- let's say it's £1 billion, or whatever, and let's say it's £1 billion coming to you and £1 billion and £1 coming to me.  Does the central bank care about this £2 billion in total?  No, they care about the £1 difference.  And the £1 difference is this; that's how they sort that.  That's banking, that's clearing at the bank.  It clears on net.  This is why banking exists in total.  This is why the merchant bankers were doing this as well.  They don't care about gross payments.

Peter McCormack: Hold on.  So, if there's 50 banks, they've all got money going between themselves.  At the end, when they're clearing, the clearing is the balance held at the central bank?

Matthew Mežinskis: Yes.

Peter McCormack: I'd always wondered how that happened, I always wondered what physically happened at the end of the week, NatWest owed Lloyds £1 billion, whatever.  I wondered how did that £1 billion get to them, because it's not like they're coming up with a truck and saying, "Here's your £1 billion"; how's that actually settling; where is that number?  It's really because the central bank controls the issuance of money, therefore controls the total amount of money.  Therefore, they're really just adjusting between them.  That's something I've never understood.

Matthew Mežinskis: There you go.  And it's a net thing.

Peter McCormack: Did you know that, by the way?

Danny Knowles: Yes, I did.

Peter McCormack: He always says that afterwards, he always says that!

Matthew Mežinskis: But it's a net -- this is important.  This is why the Fed now, people don't understand it's not a CBDC.  I want to reiterate, I'm not defending the central bank.  Scotland did this, Canada did this freely, freely.  It's just this was again their impetus, "We need to have less discounts"; that's another thing we didn't talk about, by the way, the discount rates, you know what the etymology lists the discount rate?

Peter McCormack: No, tell me.

Matthew Mežinskis: All right.  So, this is the base rate of the system, this is why at the Federal Reserve they have the discount rate, in the UK it's called bank rate.  I believe it's the same analogous thing.  It's the base policy rate, it's what the bank will lend; it's the lender of last resort.  It's the lender of last resort rate to the banking system, so if you need it.  Typically they don't want them to need it.  During the Great Depression -- actually, I'll pull up, I've got a picture of it, it's better.  The Federal Reserve lent freely at the discount rate, which they probably shouldn't have done, and they never admitted, of course.  So, let's zoom in here.  This is the Great Depression, this is 100 years of Fed history here; these are the reserves in dark green; in light green, we have the total Fed balance sheet.

So, think of the reserves again.  I don't have a whale here as the icon, I have a bank picture, but this moves interest rates more than anything in the system; it's the reserves, it's the core, because the cash is not there.  It's in people's wallets, under a mattress, it's in grocery store tills.  Cash doesn't do anything as far as leveraging the system.  So anyway, look at this.  This is the Great Depression of 1920/21 happened here, when they conveniently raised interest rates.  Then they dropped them and dropped them, very, very low here, 3%.  Then they raised and raised them, because inflation was running hot, skyscraper index.  Mark Thornton from the Mises Institute has this, it's a great thing. 

Obviously, the skyscraper index, whenever there's a lot of skyscrapers being built, in record numbers, which was happening in Manhattan at the time, it was probably a problem.  It was happening here, the stock market, everything.

Danny Knowles: Can you explain the different between the discount rate and the Fed fund rate?

Matthew Mežinskis: Yes, I can.  So, Irving Fisher, he said right here, nine days before the Great Depression, stocks had reached a permanently high plateau, you know how it typically goes in this story.  And look at what the discount rate is; it's peaking again.  I know I'm cognisant now we have listeners as well, but the discount rate is not at an all-time high, again the Fed is only around for 20 years here; it was at an all-time high during the Great Depression, the Depression of 1920 to 1921, it's called. 

Tom Woods actually made that famous.  I don't think they even had a Wikipedia article before Tom Woods started talking about it.  It was at 7%, caused it, and then the Great Depression, they went up to 6%, caused it, and then fell.  They'll never admit this, although Ben Bernanke did say, at Milton Friedman's 90th birthday, "We did exacerbate the Great Depression, we'll never do it again", and he's true to his word, by the way, because it's the same idea here; bank reserves again, exploding.  It's the same picture, it's the Fed balance sheet, it's just on a weekly base, a little bit different.

But Danny, your question, the discount rate.  So, precisely in this time, in the teens and the 20s, when the Federal Reserve was -- George Selgin always jokes, "It was practice".  They never take responsibility for the Great Depression, even though Ben Bernanke almost admitted as much to Milton Friedman, but they never officially take responsibility.  They say, "This is like practice period, they're just figuring it out".  You can see how small it is here, and then it explodes during World War I; it's a couple of hundred million.  It explodes to over $6 billion, $7 billion.  Anyway, they were another bank.  They were another bank, they would clear, discount -- not discount, they would actually clear cheques, banknotes, everything at par; I'll get into the deeper level of discount rate in a second.

But what the discount rate means right here is, this is just the rate that they would lend to other banks.  And it should be the lender-of-last-resort rate.  This is what Walter Bagehot, English Editor of the Economist in the 1700s, said I think, late-1700s, maybe 1800s.  No, I think 1700s.

Peter McCormack: Do you want to know something really interesting?  Danny's got a new fact-checking tool for live fact-checking.

Matthew Mežinskis: ChatGPT?

Peter McCormack: Yeah.

Matthew Mežinskis: How does it work?

Peter McCormack: Well, previously you'd go to Google and you'd search for that.  Like the other day, I'll give you an example --

Matthew Mežinskis: But does it work well?

Peter McCormack: Brilliantly, apparently.  So, the other day, somebody referenced a chapter in a book.  So normally, you'd go to Google and then you would hope it would find the book maybe and then you can access it.  This time, you just ask ChatGPT and they said, "Yeah, this is the chapter, this is what it contained".

Danny Knowles: I just said, "Summarise chapter 27 in this book", and it gave me a summary, it was amazing.  But when it's finding a person and a date, it's just as easy to google it.  But sometimes, when it's a more obscure reference, I'll type in the reference and ask for its source and then just go to it that way, and it's quicker than going through Google.

Matthew Mežinskis: That's awesome, I should probably experiment with it.

Peter McCormack: You've got to experiment, because firstly I just thought it's the latest thing, you know.  It's the guy who was a blockchain expert, he's now an AI expert, and it's actually super-fucking-useful.  There's all the fun shit you can do and then there's all the useful stuff.  My brother's using it on the show all the time.  He gets AI to do the translations, it does all different kinds of stuff.

Matthew Mežinskis: Nice.

Peter McCormack: We keep debating, who's going to lose their job first?

Matthew Mežinskis: That's what everybody's saying, right?!

Danny Knowles: All of us all at once.

Peter McCormack: I think Danny survives longer, longer than me!

Danny Knowles: It would have been 1800s, I think.  He died in 1877.

Matthew Mežinskis: Okay, so it's 1800, thank you.

Peter McCormack: Have you seen Will Smith eating spaghetti?

Matthew Mežinskis: No!

Peter McCormack: Oh my God!

Danny Knowles: You've got to get it up!

Peter McCormack: Sorry, this is a bit of a tangent.  Search for, "AI Will Smith eating spaghetti".

Danny Knowles: Oh, then you've got to watch this other thing.  I'm going to send you a link.

Peter McCormack: This entire thing was generated by AI, that second one down.  Watch this video.  All right, it's not great, but this is entirely AI-generated.

Matthew Mežinskis: Oh my God!

Peter McCormack: Yeah.

Danny Knowles: But I've just sent you a link on Telegram, Matthew, pull this up.

Peter McCormack: Oh, are you doing the rapper guy?

Danny Knowles: I've DMd you on Twitter instead.  So, this is a Kanye AI voice.

[Video plays]

Matthew Mežinskis: Wow!  This is why I'm not on Twitter as much as you.  I'd just waste too much time!  No, but obviously I know it's not a waste of time for you.  You're doing good work here, but that's crazy.

Peter McCormack: Do you want to pause it?

Matthew Mežinskis: Yeah.  I forgot I'm driving!

Peter McCormack: So, that's a bit of a tangent!  Firstly, we're fucked, we're so absolutely fucked!  But secondly, I just think -- I mean, we're not even in the first innings yet with this AI stuff. 

Matthew Mežinskis: Yeah.

Peter McCormack: We're still in the dressing room, just getting ready, picking the team.  And the stuff and the speed at which people are figuring stuff out now I think is crazy.  And so, everything's replaceable.  I can see a path where -- there's eight people who work on this podcast -- where everyone's replaceable.  But I think you're last, because you need a coordinator.  I go first!  I'm one of the first who goes.  Well, editing goes, sales.

Danny Knowles: Also, think how much we have of your voice to model it off.  We've got 640 episodes of you.  You've said every world in the world.

Matthew Mežinskis: I've seen those of Joe Rogan, they're very convincing with Joe Rogan, and those were even early AI models.  They're even better now.

Peter McCormack: Yeah.  There's one where he interviews the old Apple CEO.

Danny Knowles: Steve Jobs? 

Peter McCormack: Yeah.

Danny Knowles: Oh, I've not seen that.

Peter McCormack: Yeah, it's wild.  So, they've literally just created a whole interview between the two of them.  So, I'm replaceable.  I think it's you and Austin; the partnerships guy, because he's got to get out there and sell the partnerships, and you as a coordinator.

Danny Knowles: All right.  Austin, let's talk!

Peter McCormack: I could retire though!

Danny Knowles: That's true.

Peter McCormack: It's mad.  We're fucked.  What was that interview you watched where we're all dead in three years?

Danny Knowles: Oh, yeah, on Bankless.

Peter McCormack: Yeah.  This AI guy, proper expert, "We're all dead"!

Matthew Mežinskis: But you know they say that, it goes back a little bit to the monopolistic discussion, whether it's one company or one tech taking over.  It doesn't seem to happen, but yeah, like I said, you never know.

Peter McCormack: Well, the argument now is, does this make us more productive as a society, or does the productivity not lead to -- sorry, I'll put it a different way.  So, we can eliminate jobs because we have AI able to do those things.  Does that leave other people to go and be more productive so we have a higher GDP; or, do we have a lot of wasted resource and then a lower GDP?  I don't know.

Matthew Mežinskis: Good questions.

Peter McCormack: Anyway, nice tangent, sorry!

Matthew Mežinskis: Good questions, very nice tangent!

Danny Knowles: Back to the discount though.

Matthew Mežinskis: Yeah.  So, the discount rate's basically the lender of last resort.  That's what the Federal Reserve should have, at least according to Bagehot's theory, Walter Bagehot from the 1800s, economist, late-1800s now, I'm sure of it; The Economist, Chief Editor for 20 years, he's not a fan of central banks either.  And again, I am not defending central banks.  But he said, it's a famous thing that he said, "Lend freely", the lender of last resort, "on good collateral at penalty interest", that's what he said.  This was not what they were doing here.  I know I'm not showing you any other market rates; I've done a daily on this, I'll get you some commercial paper in the future, I'll put it on a show.  They were just lending like a normal bank.  Many banks were just going to them like a normal bank and the Fed knew it was a problem.  And by the way, the Great Depression happened during this period, so they never really admitted it. 

People know this pattern, right.  Interest rates rise because inflation's running hot; the market collapses.  They drop interest rates, look at that, it was 7% discount, they dropped it to 3% in the roaring 1920s, skyscraper index exploding, stock market exploding.  Irving Fisher, nine days before this happened said, "Stocks have reached a permanently high plateau".  This is one of the founding economic wonks of, we can control money supply and prices and all this stuff, and then you see what happens, so famous last words.

Peter McCormack: So, the interest rate the Fed pays, is that based on the income they make by lending out to other banks?  If they're paying an interest rate --

Matthew Mežinskis: No.  The payment rate, which you might have heard I think Lyn Alden has pointed this out as well, which is good, Ben Bernanke used to say they never lost a cent on their open-market operations.  They are losing money now in a big way, because the interest rate that they're earning on their securities -- assets, liabilities, the total assets are in green, I'm not breaking it up, but just think "bought".  Here it was more banks, they actually had bank loans that they were getting back in interest, but that's way different.  The teens and 20s were way different than today.  Here, it's government securities.

They're getting lower interest rate.  Now it's higher as it's been rising, but it has been so low, they've been getting low, and plus they're paying interest on reserves, which I mentioned before.  They've only started doing that since the GFC, the Global Financial Crisis; they've only been doing that in the last 15 years.  So, they have interest coming in from their assets, they have interest going out that they pay banks, which they never did before, but now they're negative on that.

Peter McCormack: Why did they not do it before, and why do they do it now?

Matthew Mežinskis: Because that never would have been the way that banking would have worked.  I mean, banks don't centralise and just keep things at the bank.  The reason that this exploded here, this reserve, let's just take off the balance sheet; this is the key, the reason this thing exploded, where banks go from literally having $20 billion, you can see that number in the total, $20 billion, $30 billion; we don't even have to see the total, that's so small.  And then it just exploded to trillions, going to $2.5 trillion, $3 trillion.  The reason that they did that was to bail out the banks' bad bets. 

But they knew that typically in banking, as it's always worked for the past prior years and all the time -- again, free banks or unfree banks, it always works this way -- you make money by going short your depositors and going long loans, so you get money in from your depositors and you go long on loans, you lend depositors money; that's just how it works, you'll make the spread.  There's a golf saying, it's like, I don't even remember, it's like, "Borrow at 1%, lend at 2%, on the course by 3:00pm", or something, but it's higher than that typically.  Typically, it's 4% and 5% which you would even have to borrow at, and then you lend at a little bit higher, something like that, you make a spread.  I'm just throwing out numbers right there.

There's another point.  The History of Interest Rates, Sidney Homer, it's a tome, he's studied interest rates for 4,000 years.  Never have interest rates been as low as they were here.  In World War II, they were at 0.5% discount rate, I'm showing, and then the Fed fund -- I'm going to answer your question eventually -- the Fed fund gets up to over 20%, the discount rate gets to 14%, you'd have to go back to Ancient Greece to find that, even farther, like Ancient Sumer, never been that high.  And then, now we know where they've been.

Peter McCormack: Okay.

Matthew Mežinskis: So, 0%.  They've gone, in the last 100 years, the central bank, the premier banking institution in the United States, has gone to three extremes.  Never, ever has happened in recorded history, except like 20% in Ancient Greece.

Peter McCormack: Okay, and they increased their balance sheet too, they increased their reserves to bail out the banks, but what is the makeup of that?

Matthew Mežinskis: Yeah, so that's literally cash.  They're taking the bad securities, they bought these mortgage-backed securities, also Treasuries.  So, the banks have Treasuries, always they bank, but the Treasury always issues bonds in the open market; the banks buy that stuff for pension funds, hedge funds, that's just how banking works.  It's always this levering up on credit.  Someone issues, like the Treasury; banks buy it; they will take the interest from the Treasury, pay a little bit less to their depositors.  That's just how banking works, that's capital markets, it's not a crime, it's not a problem.

Peter McCormack: Then from 2014, they were paying it off, they were clearing it.

Danny Knowles: So, they were tightening?

Matthew Mežinskis: Tightening, yes, which is that QT, which is a bullshit term that they came up with, the same with QE was a bullshit term.  This was QE1, you can see right here very clearly.  Dear listener, it was like $8 billion, $10 billion bank reserves; then it goes up to $1 trillion two years after the GFC; then it goes to $1.6 trillion, this is QE2; then it goes up to $2.7 trillion, that's QE3.

Peter McCormack: But their bank reserves are essentially dead?

Matthew Mežinskis: It's a liability for the Fed, it's an asset for the banks.

Peter McCormack: Yeah.

Matthew Mežinskis: That's how it works.  Anybody could do this.

Peter McCormack: But for the Fed, it's kind of a debt?

Matthew Mežinskis: It is exactly a debt, it's a liability.

Peter McCormack: So, you call it a Federal Reserve, but it's a Federal Debt.

Matthew Mežinskis: Yeah.  They hold no gold.  So, by the way, let's put the balance sheet back on.  The reserve's on the liability side, so I'm taking that off because it's kind of confusing.  I could make these charts where they have liabilities on the bottom and assets on the top, but I'll get there eventually.  This is the total balance sheet, total assets.  There are securities on the asset side, there's the money on the liability side.  That's how it always works, by the way, in banking.

Remember what I said before?  You're a depositor in the bank, the bank is a debtor to you, you are a creditor of the bank.  That means the bank has a liability to you; your deposit represents a bank liability.  So, the way you want to calculate money, fiduciary media, in the economy is always the liability side, interestingly.  So, this is what people say, "It's debt-based banking", or whatever.  It is; money always comes on the liability side first.  Again, not a problem in the free market.  If you fail, fail on your own bottom.  But this has been centralised for the last 100 years.

Anyway, there was another question even besides Danny's that you had, and I'm going to try --

Peter McCormack: So, why does the Fed need to clear its reserves; why did they do QT?

Matthew Mežinskis: Oh, to decrease it?

Peter McCormack: Yeah.  Can't they just have those reserves forever?

Matthew Mežinskis: Well, they could and they certainly are.  I think, actually, they've just posted as of this morning.  It's still down a little bit more, but you can actually see it when I'm zoomed in.

Peter McCormack: But is it because the banks themselves need to clear their debt with the Fed, so there is that natural process?

Matthew Mežinskis: No, that has nothing to do with it, it's up to their discretion.

Peter McCormack: So, why do QT?

Matthew Mežinskis: This is base money, by the way.  Whether we say balance sheet or the reserves, I'm not showing the notes.  The notes make up the vast majority of the difference here.  There's some other things too; they have this reverse repo facility now, which is kind of from nonbanks.

Peter McCormack: I've got another question on that as well coming up.  But why do QT?  I get QE, to stimulate the economy, but why do QT?

Matthew Mežinskis: They say they want to normalise the economy, they know it's not good and everything.  You see how low this is?  They're not even at $1 trillion by the GFC, not even $1 trillion; $900 billion balance sheet, now we're in trillions.  They never got to $9 trillion, that must have been a voodoo number.  So last year, they never got to $9 trillion, it was like $890 billion, $892 billion, $891 billion; they never got to $9 trillion, it must have been a voodoo number.  Then Powell tried to cut it down.  And by the way, he reversed 50% of that in the last three weeks, so back to money printing.

But anyway, the reason why we never had hyperinflation here is not interest rate I'm showing on this chart unfortunately, I'll do a daily on this soon; it's this interest on reserve.  So, what effectively that did is, Uncle Ben, Helicopter Ben said, "Okay, we know that you made bad bets, this is a problem.  We're going to bail you out.  We're going to credit your account with reserves, we're going to give you all the reserves you need to make your books better", this is these trillions of dollars, "but we don't want you to lend that out, because in normal banking --", look how small the reserves are here.  You see how small these reserves are as a portion of the balance sheet of the Fed?  Remember, the rest is paper notes, most of it, during this time, most of it.  So, "We don't want you to lend that out, because we know it's going to be massively hyperinflationary.  So, I'm going to pay you", this is that expense that Lyn's talking about, "I'm going to pay you more than the market so you just keep those reserves".

So effectively, it's just a bailout, it's kicking the can down the road.  But I mean, this has been talked about for years, it's been 15 years now that this has been going on.  They know that this is not going to be an easy unwinding of this problem, and so this is what they're doing.

Peter McCormack: All right.  So, and I know I'm not the only one who thinks this because I've asked it a few times and people have commented back, but --

Matthew Mežinskis: I answered your question.

Peter McCormack: No, you did. 

Matthew Mežinskis: Okay, keep asking.

Peter McCormack: Today has given me the clearest picture of the relationship between banks and central banks to a point I never fully understood before.  A few things have been slotted into place.  Lyn Alden's brilliant, but sometimes having the chart has explained it to me.

Matthew Mežinskis: Yeah.  That's great to hear.  I mean, seeing it in pictures is much easier.

Peter McCormack: Yeah, so now I get those relationships.  The reverse repo.  Firstly, I'm going to ask you upfront --

Danny Knowles: Reverse repo always confuses me, and repo.

Matthew Mežinskis: Let me answer Danny's question first, because we're still on -- this is good, I'm glad we're jiving here with this.  So, discount rate, you see the discount rate?  So, this is really interesting.  I just did a video on this, so it's top of mind.  The discount rate is in black, do you see it?

Peter McCormack: Yeah.

Matthew Mežinskis: And the Fed funds now, they've started to publish it, it's a weighted average rate in the 50s, you see it's in the orange; you see that's below the discount rate.  This is actually perfectly Walter Bagehot, theory of banking, and Walter Bagehot's not a fan of central bank, I'm not either.  But he said, "If you're going to have a central bank, lend at penalty interest to good collateral to good banks, and lend freely if there's a crisis", that's the idea.  Of course the Federal Reserve doesn't know the interest rate, but this is what he says.

They actually adhered to this, and I wouldn't necessarily call this a penalty, but you can see it's the high end.  If you're listening to this, you see a black line that's above, and just little spikes down of the Fed funds.  And so now, what is the Fed funds?  This is the rate that banks lend their reserves, the dark green shaded area, to each other. 

Peter McCormack: Oh, okay.

Matthew Mežinskis: Why would they do that?  Well, remember I told you the example of £1 billion in cheques going to you, whatever that bank, NatWest, £1 billion and £1 coming to me at Lloyds; there's a £1 difference.  Not a good example, because you don't need to borrow money for £1.  Sometimes you need to borrow money to cover that, because you have reserve ratios, you have all these collateral ratios, all these other things.  So at day end, if one bank is short on reserves, they will borrow them; that's what they do.

Danny Knowles: And do they do that from the repo market?

Matthew Mežinskis: Yes and no.  The Federal Reserve is now more involved in the repo market than it ever has and I'll show you that, I've got to go to the other chart.  So, let's not confuse it though, because they've never traditionally been involved in the repo market like that. 

Danny Knowles: Okay.

Matthew Mežinskis: The repo market, all it means basically is when you're going to have Treasuries, securities, trade like cash; that's what you need to think of the repo market.  Again, let's take the reserves out.  Now, I'm talking about the asset side of the Federal Reserve's balance sheet, when they buy assets.  All this light green stuff, you see it on the screen.  Dear listeners, it's just a chart going from the lower left way to the upper right after the GFC.  All on the asset side is mostly securities.

If banks hold those securities, now we're not talking about the Fed but the other banks, they do the same thing.  They have securities as well, but sometimes they sell them to the Federal Reserve for reserves; sometimes they buy them from the Federal Reserve and then they give the Federal Reserve reserves and that destroys money.  That's what's happening in the last couple of years before COVID, and in the last year.  Anyway, I know it's hard to conceptualise all this stuff, but this is how the fiduciary system works, it's just how banking works.

If a bank outside the context of the Federal Reserve wanted to have more liquidity, and particularly nonbanks even, and this is actually another point I wanted to bring up, is particularly money market funds.  And money market funds, what is that?  That's just a stablecoin; you've got to think of a stablecoin.  Stablecoin is actually more like a eurodollar, because it's a money market fund, but it's outside of the control of the central bank.  That's what a eurodollar means, it's a dollar-based account in France or the UK or whatever.  There's eurosterling, there's euroeuros but they don't call it that because it would be stupid!  It has nothing to do with Europe, by the way, the eurodollar, it has nothing to do with Europe, it just means dollars outside of the US and it took the name eurodollar because of post-World War II, Americans were rebuilding Western Europe, so people wanted dollars.

Anyway, banks and really nonbanks were the big players in eurodollar markets, primarily money market funds.  If they wanted to get a little bit more interest, they could repo a security, and they're actually reverse repoing; it's confusing!  I'll pull up a chart to show you.  They're actually the reverse repos, so money market funds have the asset, they have the liquidity, and something like a hedge fund, it's not a bank, it could be a subsidiary of a bank, or like a Lehman which failed, and they weren't really a bank, investment bank, not a traditional bank, they're the repo party.  So, that's what eurodollars are. 

Basically, you have securities, but you want a little bit more liquidity, so you want to collateralise it, you want to put it as a loan and start trading it like cash.  They're physical securities, it's not like they're wiring it back and forth, but they're trading the balance.  The best way I think in Bitcoin land is to say, imagine you have an account at Kraken or Coinbase or, who's your sponsor; Gemini?

Peter McCormack: Gemini.

Matthew Mežinskis: Gemini, you had an account at Gemini and you want liquidity.  Instead of putting more Bitcoin in, or something, you're putting in US Treasuries to your balance.  So, you're adding US Treasuries and then you can do more stuff.  You can short, you can go long more, you can lever; it's just more risk.  And by the way, notice -- it's pure rehypothecation of a Treasury bond by the way, it happens in banking all the time.  Again, the free market would catch it better.  It happens even more in the regulated system.  Basically you have a Treasury.  Who pays interest on a Treasury security?  The United States Treasury, they've got to pay.  And what does that really mean?  It means the taxpayer, so the taxpayer pays interest. 

What happens with the repo?  The repo as well, the repo parties get together, say a money market fund and a hedge fund, they say, "Let's do a repo".  The money market fund takes the reverse position, they have the asset; the hedge fund takes the liability, the repo position.  Again, always count money from the liability side; the hedge fund has the liability.  It's just a short-term loan, but bottom line is it's called a repo, they are doing it for liquidity purposes on the one side, they'll get more interest from the money market fund; and also liquidity purposes on the liability side, the hedge fund wants to borrow, lend.

Danny Knowles: So, it's tied to collateral?

Matthew Mežinskis: It's a short-term collateralised loan, but the reason you do it is to take on more risk.  So again, the Treasury pays interest, but then you repo that Treasury further in the market; someone else is now paying interest on top of it.  So, the repo party actually still is usually going to be the hedge fund, they'll have the security, they have securities to repo.  They say, "Hey, I've got a security, let me repo it".  So, they still get some interest from the Treasury, but then they've got to pay more to the money market fund.  That's how it works.

Peter McCormack: Okay, so when there was a crisis in the repo market and the government was stepping in; why; what were they fixing?

Matthew Mežinskis: Yeah, that one's right here.

Peter McCormack: If there's no liquidity, who needed the liquidity?

Matthew Mežinskis: Reserves actually went up here a little bit.  But the bottom line is, the repo market, the yield spiked, so it showed you that something was wrong.  So you can see that also -- oh no, this isn't it, I'm not zooming in on the right spot.  It was September 2019; it's right here.  You don't see much change in reserves here.  Let me pull up a chart with repos to show you!

Peter McCormack: What is this website; is this yours?

Matthew Mežinskis: This is my stuff, yeah.  It's all local -- this is what I built for myself.

Peter McCormack: Is it all from local APIs, or do you manually put it in?

Matthew Mežinskis: It's a local API, but it's also a local collection of data and everything else.

Peter McCormack: Does anyone else have access, or just you?

Matthew Mežinskis: Just me.

Peter McCormack: You should sell this.

Matthew Mežinskis: I thought about it.  Originally, I was going to do an app and stuff like that, but then you get into licensing, you talk about data collection and all that stuff.  So, I settled on education for now, purposes; let's see.  Maybe you can help me with it?

Peter McCormack: Dude, I'd buy a subscription to this tomorrow!

Matthew Mežinskis: It's better than Bloomberg!

Peter McCormack: Yeah.  But this is useful.  I mean, we would use this, wouldn't we?

Danny Knowles: Yeah, 100%.

Peter McCormack: You should create subscriptions to this.

Matthew Mežinskis: We can talk about it.  I've got to deal with licensing and all this.  I have limited resources here, so it's mostly a personal endeavour.

Peter McCormack: Licensing what; what's the license?

Matthew Mežinskis: Well, this is Highcharts.  It's great software, by they way.  It's kind of open source, but you'd have to license it if you want to do more than just education.  And then there's the data feeds themselves, they get complicated.  There are plenty of central bank sites, which I do do as well.  They're generally open, but if you want to get the price of gold and you want to resell that, you've got to license that and all these other things, so it's annoying.  Look, I've never fully explored it.  I started to with the app, then I ditched it for this idea.  But look, man, I can say I'm proud of it, this is what I'm doing, my daily stuff, am I pumping now for this show; am I marketing?

Peter McCormack: Yeah.

Matthew Mežinskis: I do daily shows now on this.  I try to keep it more simple, we don't do like hour-long shows, it's like 10, 20 minutes.  I'm trying to get down to 10 minutes.  You can see I get on tangents!

Peter McCormack: Tell people where to go for that.

Matthew Mežinskis: So, the podcast has always been called Crypto Voices; it's still called that, but on YouTube I've had this brand now for a couple of years, it's Porkopolis.  It's named after my home town, Cincinnati was called that in the 1800s.

Peter McCormack: Love it!

Matthew Mežinskis: You can tell I like some history stuff.  So, Porkopolis Economics, it's the same YouTube channel, you can find it there.  So, here's the repo.  I want to get to your question about why that spiked, but let's just look at it really quick.  Here's the total money supply and here is repos.  Let's take off total money supply so you can see it.  This is a liability of the Fed's balance sheet, this is another huge one.  It's called the Reverse Repurchase Facility.  This is the Federal Reserve now getting involved, to your question, in the repo market.  They never really were before.  They did repo, you can see it goes back here, and remember, to count money, you count the liability side of any bank.  It doesn't matter if it's a central bank, they have liabilities in notes and reserves; or a commercial bank, liabilities would be deposits for them.  They used to be banknotes, but that's now -- we talked about this, I think it was you. 

Scotland, again, free banking tradition.  I think still the banks in Scotland in the UK issue different pound notes with different pictures.

Peter McCormack: Yeah, they do.

Matthew Mežinskis: Yeah.  That goes back to their tradition of free banking, which is cool.  I mean, it's interesting.

Peter McCormack: Yeah, I made the joke, I was like, "Yeah, those £20 notes are worth £19", and this guy's on YouTube like, "What are you fucking on about, you idiot!"  It's just nobody wants one.  Do you know, I've got up there, I can show you, I think I've got a Northern Irish £10 note.  Nobody likes them though.  When you go into a shop they're like, "What the fuck is this?"

Matthew Mežinskis: The shopkeepers get suspicious, yeah?

Peter McCormack: Yeah, they're like, "What is this shit?"

Matthew Mežinskis: All right, this is even a better thing.  Oh, I just took this chart off.  I've got the get the discount rate on both things.  The etymology of the discount rate is different than even being a lender of last resort.  Why?  The name; the discount rate.  This goes back to the free banking that I was telling you about in Europe, but also I China, in the Muslim world I'm sure it looked like this, I haven't done much research there. 

But the etymology of the word "discount", it literally comes from you're trying to clear all these balances, you've got cheques going into one bank, cheques going into another, they get together at some point, sometimes they get together at a correspondent bank, sometimes they'll actually ship coin.  The banks are always going to have wholesale rates.  They will clear all of these face values of cheques, bills of exchanges, which again, bills of exchange were actually more -- just think of it as a cheque that's meant to be out of town, an out-of-town cheque, and you don't necessarily need to be a bank to use it, let's not worry about it too much.  So, bills of exchange and cheques and eventually bank notes.

When you're going to clear this stuff finally and eventually at the central bank, but even before that when there was no central bank, and this is actually the nature of free banking as well, let's say you come into me in my bank, I'm in Genoa or something and you come into me from Florence and you've got a cheque and it's like 100 florins, or whatever, I don't know, there's like 50 different denominations.

Peter McCormack: Florins.

Matthew Mežinskis: Florin was actually the ounce of gold, but there was like 50 different denominations.  But let's say we want 100 grains; the US used to be -- I'm throwing out way too many facts there!  The US used to be on a silver standard actually to start, it was 375 grains of silver was a dollar; that actually was the definition of a dollar, it's about 80% of an ounce, anyway let's say 100 grains of gold.  You have a cheque and it's from the bank in Florence and I'm in Genoa.  You're a retail customer, you're a merchant, but I know that you're good for it, the cheque is good, but what are my choices. 

The best choice is that I give you an account at my bank.  Great, because then I've got the cheque and if I ever want to get the gold, I'm safer.  It's better than me giving you gold, I just give you an account.  I may even give you a full value for that cheque.  But say I want to give you gold.  Am I going to give you the full value; 100 grains of gold for that cheque?

Peter McCormack: No, because there's a risk.

Matthew Mežinskis: Definitely not because there's risk.  This is the definition of banking.  And actually, if you read Sidney Homer, The History of Interest Rates, all of the early rates are annualised interpretations of the discount rate.  You can decide an interest rate from the discount.

Peter McCormack: Oh, right!

Matthew Mežinskis: So, that's a fascinating thing as well.

Peter McCormack: So, the problem with central banks is they're trying to eliminate risk?

Matthew Mežinskis: Yeah, so this was the thing.  They actually said, even it's called the "discount window", everything went to par with central banking: Federal Reserve notes, cheques.  In the US, the discounts actually had three terms, it all means the same thing, you might have heard these terms: cheques were remittances; bills of exchange were called domestic exchange rates, again just think about it as a long-distance cheque; and banknotes themselves which we know, we understand what they are, the pieces of paper, that was called the discount.  So, all of them meant the same thing, but the history of that has to do with managing risk.  This is what a bank does.

I might have full faith that this is from that bank, and it's not just an arbitrary decision, there's lots of trade, it also has a function of distance.  They know you're 100 miles away, not so bad.  If I, as a bank in Genoa, want to actually get coin for this 100-grain cheque, there is some risk.  I mean, there is travel risk, everything, and there might be risk that it's a fraudulent cheque as well, so that's risk too.

Peter McCormack: So, why not let Silicon Valley Bank fail?

Matthew Mežinskis: Because it's a central bank and they never want to let anything fail; they should, absolutely should have, 100%.

Peter McCormack: And if they let them fail, yes, I mean there's political reasons as well, because there's impact on --

Matthew Mežinskis: We're long down the road from anything failing.  I mean, 2008 has shown us long-term capital management in the 1990s, we're long down the road.  They did let Lehman fail interestingly.

Peter McCormack: Yeah, but if they'd have let Silicon Valley Bank fail, it's not like Silicon Valley Bank failed with zero assets.  Their assets were actually valued at par, but it was just because they were long duration.

Matthew Mežinskis: Yeah, that's right, absolutely right.

Peter McCormack: So, depositors still could have got their money back, so why not just let it fail?  They don't want to let stuff fail, otherwise if they did --

Matthew Mežinskis: Because the system is a confidence game that they're managing.

Peter McCormack: But they came in because of failures, so therefore their mandate is to stop failures.

Matthew Mežinskis: Exactly, this is their time immemorial reason.  And again, like I said at the beginning of the show, it's not just banking.  They come into any industry, it's the do-gooders on one side, as Milton Friedman said, "The unholy alliance of the do-gooders and the special interest on the other", it is absolutely.  If you can get a little bit more monopoly, a little bit more monopolistic privilege, come in as a systemically important bank coming in to take over SVB's assets, that's a much better deal for the SIBs, the Systemically Important Banks, rather than SVB.  So, the choice is not to let SVB fail or not, it's to give more power to the SIBs.

Peter McCormack: So it's, "Okay, which one of your mates are you going to give this bank to?"

Matthew Mežinskis: Yeah, and I mean it's not a conspiracy; it's obvious, that's the history of central banking, that's a huge part of it.  I'm glad you brought it up because again, I like this stuff, I like studying it and talking about the markets, but I still view the deepest deaths of Dante's Inferno; it's not anything to do with fractional-reserve banking.  It's not fractional-reserve banking, it's just banking, this is how banking works, it's a discount rate.  There's no mysterious vault that a middle-class peasant, nothing against middle-class peasants in the Florentine times, but there's no mysterious vault that they have one coin that they're really looking for; it's the merchants themselves.

So, I'm a big fan of banking history, look at that and look who controls it, that will tell you things.  But the deepest depths of the problem is two things: legal tender; and then the control of credit itself, the central bank itself, which controls interest rates.  If you didn't have those two things, you would have freedom, but we don't have them.  Again, I freely admit, free banking has failed at the hands of the state, it has failed, it's taken over, so this is why we need Bitcoin, and Bitcoin is a new type of base money which is great; you have it or you don't.  But don't confuse Bitcoin with, by the way, any other account here, M1, M2 or M3.  By the way, M3 still exists, I've recalculated here; this is a little plug.

Peter McCormack: Explain to people M1, M2, M3.

Matthew Mežinskis: Sure.  So, just to be clear, everything in the blue here is base money, we looked at it before, M0, bank reserve -- this is reverse repo, I didn't tell you that; it's the Fed getting involved in the repo market, it's a liability.  So, state money, as I have detailed here, state versus bank money, Bitcoin is analogous, I'm not saying Bitcoin is the same thing, but Bitcoin is economically, legally, accounting-wise analogous to base money; you either have it or you don't.  It's the core of the system, you can't go deeper.  If Lloyds and Nat West want to settle, they're going to settle in bank reserves, they don't go to a deeper level of money.  So, if you want to talk about money, this is base money, that's why I'm always on it, and Bitcoin is analogous to that, you can't settle any level deeper than an on-chain UTXO, you just cannot do it.

This is a Coinbase account in green, this is a Kraken account, this is a Gemini account, this is a bank account.  Everything that is in green, it's an account with some fiduciary.

Peter McCormack: I get it.

Matthew Mežinskis: That's just how it works.  Obviously, they don't manage it well, you see it's grown like crazy!  Okay, so M1, M2, M3.  M1 is basically demand deposits, only demand deposits.  It also includes M0, which a lot of people confuse M0 with the monetary base.  M0 is properly defined as just the cash, cash and coin that is not in the vaults of banks.

Peter McCormack: So, in circulation.

Matthew Mežinskis: Under people's mattresses, in grocery store tills, in people's wallets.  That's a lot of money, by the way, that's a lot of money.  And by the way, this is also another reason why I'm not so fearful of CBDCs, even though CBDCs are an Orwellian hellscape, and I'm actually doing a CBDC tracker, by the way, with Janine from this month in Bitcoin Privacy newsletter.  Nick Anthony from the Cato Institute --

Peter McCormack: Love Janine.

Matthew Mežinskis: Yeah.  We're doing a CBDC tracker.  We're going to try and show a little Bitcoin history as well, for the Human Rights Foundation.

Peter McCormack: So, in Bitcoin world, would you only have base money and B1?

Matthew Mežinskis: I don't think so, that's my point of all this.  I think that you will have fiduciary media.  Like I said earlier, there's nothing stopping me from lending you a Bitcoin, and you lend Danny, and Danny lending Emma or anybody else.

Peter McCormack: So you'd have three levels, yeah, okay.  Lightning Network, is that still base?

Matthew Mežinskis: That's a great question.  Lightning Network's awesome, absolutely needs to be used as much as possible.  It's not used so much now, gross number-wise, but it's actually an interesting economic question.

Peter McCormack: Is that like B0?!

Matthew Mežinskis: It's a very good question, you ask the good questions.  I don't think there's an economic term for it.  I use this quote all the time in my presentations.  Peter Todd, way back in 2018, called it, "A middle-ground state".  I kind of like that because with this stuff in green which, dear listeners, it's just the highest money supply, it's huge, this is the bank money, Lightning is obviously not like that because it's locked base money.  That's the key with Lightning, it's locked base money that whatever these things we want to call -- I mean, I've seen different wallets call them different things, by the way, Lightning, Bitcoin, whatever.  But the Bitcoin that is trading on Lightning, it's not quite a claim, but it's also not quite under your control, like base money Bitcoin.

Peter McCormack: But it's still a bearer instrument?

Matthew Mežinskis: Yeah, but in a different environment than base money Bitcoin.  So, Peter Todd calls it a middle-ground state; I like that definition.  I'm open to more suggestions there.

Peter McCormack: But I can see the argument that it's still just base money.

Matthew Mežinskis: I think that he's said as well, and other people have said this, there's risk on the Lightning Network, it's a different type of risk.

Peter McCormack: Well, I was going to say, the risk is where we are in the roadmap.  It's still considered early, they're still figuring things out, there's potential attacks on the Lightning Network, there's potential flaws, so that's the risk that it can get stolen, yeah.

Matthew Mežinskis: It's a philosophical one too, right, because -- I'm not going to go further, I'm just saying we're still on this topic.  If you really want to get down to what is a Bitcoin, I mean I think the on-chain UTXO that you hold and you validate specifically with your node, where no other state can take it from you, I think that's a different level of Bitcoin than a Lightning node.  Look, I'm going to be very clear, I love anything that happens with Bitcoin, Fedimint, Lightning, it's awesome.  I'm just saying, there's some differences there.

Peter McCormack: I want to see this chart as a Bitcoin chart, Bitcoin base money, Lightning, Coinbase.

Matthew Mežinskis: I'm working on it, because that's the thing.  None of these exchanges, no matter what they say, by the way, are 100% reserve.  First of all, they trade shitcoins, that's another thing you need to understand.  That's why exchanges are different than a bank.  A bank would lend those deposits further and it would be very clear, even though a lot of people like to say it's not clear, it's fraudulent.  No, it was very clear, the merchants themselves wanted to do this all the way from the beginning of banking, so just to repeat that.

So, exchanges are unique right now, and this is a free market thing.  Exchanges are unique in Bitcoin because they can trade shitcoins, they can make revenue from shitcoin trading, which is a new revenue model that banks didn't have before.  Before, it was just interest.

Peter McCormack: Isn't that like Forex trading?

Matthew Mežinskis: Yeah, but Jesse Powell said as much.  He's like, "Look, I don't really want your Bitcoin, it's a liability for me", because he's being principled about it right now.  He could absolutely lend it out.  I mean, of course there's no -- he could do it, there's nothing stopping him.  He could do it, but because of the ethos of Bitcoin, exchanges have not, the good ones, let's say, have chosen to not do it.  We know the bad ones, we know things have failed.

Danny Knowles: Legally, could they do it?

Matthew Mežinskis: Well, that's the thing.  What regulation is there anyway?  If it was SBF's legislation, he'd be the one to lever it up more than anybody else.

Peter McCormack: Fuck that guy!

Matthew Mežinskis: Yeah.  But it's open questions still.  And that's another thing why free banking, don't just poo-poo it because it was overtaken eventually by state banking.  Bitcoin is a very different thing than gold, right.  I didn't finish on the gold money.  Just one more thing, then wherever you want to go or end the show, whatever, I know we've gone on a little bit long.  With gold, you would think that more people would want gold, and this goes way back to the Custodia question we didn't answer.  I used to track this with the base money; I haven't done it in a couple of quarters.

All the transparent gold and silver holdings in the world, that is every ETF, like Goldmoney, where it's transparent, they have the gold, they're auditing it twice a quarter, big doors, vaults, you know the gold is there, 100% reserve, gold vaults, Peter Schiff-type gold; all of the transparent gold and silver vaults in the world, the Perth Mint, all that stuff, it's not even a fraction of Bitcoin's market cap.  I don't remember the exact number.  Bitcoin is now over $500 billion, right?

Peter McCormack: Yeah.

Matthew Mežinskis: Not even close there.  Now, that doesn't mean -- there's still about $5 trillion in bullion; there's $5 trillion in jewellery, there's $5 trillion in bullion.  So, the LBMA is not a very transparent organisation, there's old gold holdings there, I'm not including that.  I'm saying transparent gold holdings, like ETFs, things that you can count up physically, the ounces, it's smaller than Bitcoin's market cap.

Peter McCormack: Part of the markets.

Matthew Mežinskis: Right, part of the transparent tradable markets, Bitcoin surpassed that long ago.  So, this is why Bitcoin is different and better and why I think Bitcoin destroys any of the risk of gold, and I give presentations on this all the time, I talked about it at Honeybadger last time.  If you were a gold bug in the 1970s, it's game on, we are going to win, gold is going to $850 an ounce from $35 an ounce during the stagflation of the 1970s, Americans are trading gold again, property rights are back, it is game on for gold.  Then what happened?  Gold had $850 an ounce in 1980, Paul Volcker pricked the bubble and all the interest rates slide up again.  Interest rates crushed the gold market, and also they are arguably selling more gold than they own.  That's another thing, that's a GATA conspiratorial question.

But anyway, central banks hold one-fifth of the world's gold, they control gold.  This brings me back to the Custodia question.  I think it's great what Custodia's doing, she should do it, she should fight for her legal right to have a full-reserve bank, even a bailment is what it's called when you actually know that it's audited, you know that you're not lending it out.  Do it, it's great.  Historically, that's not what free banking is, it's never developed that way, but do it.

The risk though of that is the same for the gold market, the risk we are facing there.  I don't necessarily look at it as a win.  If you're a bitcoiner anywhere in the world and Caitlin Long gets her master account, again I love her, I really support what she's doing and I guess as she's been on this show, I want to make very, very clear, I'm trying to be nuanced here; but if Custodia gets a master account, that's a short-term win for Bitcoin, it's going to help with adoption.  But that road, we've seen that road always.  It leads to centralised control.  It happened with gold, it happened even with silver societies, I mean any society.  Centralisation is not necessarily -- I mean, it's definitely not a good thing in the long term.  Maybe in the short term, gets people more involved and everything.

So, this is why you always have to have the ability to withdraw, and presumably, or not presumably, we know that you would be able to do that with a Custodia-type setup.  But at what point does that get turned off, at what point does Caitlin Long retire from the board, 20 years down the line after that, maybe a crisis occurs, maybe we need to turn off withdrawals for a week.  This is why free banking doesn't work in a regulated sense.  So, I am specifically talking about free banking in a no central bank, no regulation society.  I know that it's failed, fiat has always taken it over.  But I think with Bitcoin, we absolutely have a chance to -- you know, it's that whack-a-mole where it can be everywhere, and I'm not talking about a regulated structured, I'm just talking about really what exchanges are right now.

Why do we have exchanges?  It's the easiest way to trade Bitcoin.  Some people leave the Bitcoin on, some people not, we've got to educate, do all that.  But one more thing on this point.  I watched Sergej's interview, I like Sergej.

Peter McCormack: Yeah, I like Sergej.

Matthew Mežinskis: He made this point many times.  He's like, "At what point are we going to see this Bitcoin standard emerge?"  I believe it's going to happen, this is what I'm trying to prepare for, you're trying to prepare for, we're trying to educate on.  But are there going to be any loans; are we not going to make loans any more?  These are times of question.

Peter McCormack: We debated it yesterday and we were like, "Of course you're still going to lend each other money; you need money". 

Matthew Mežinskis: I just demonstrated how easy it is to make a loan; it's impossibly easy to make a loan.

Peter McCormack: But you need credit --

Matthew Mežinskis: I agree with you.

Peter McCormack: -- to do things.  I needed credit to buy this house, I needed credit to start my first business, I needed it, it would not have happened.  And that credit might be different, like my first house I went to my dad, I borrowed £5,000 and so that wasn't a bank loan, but it was still credit.  And maybe it's peer-to-peer credit, maybe it's between your friends, but you're always going to have credit.

Matthew Mežinskis: I 100% agree.  I've got one more point, I don't know if you guys got anything else?

Peter McCormack: Well, the other thing we wanted to do was CBDCs, but I think, look --

Danny Knowles: We're 2 hours 10!

Peter McCormack: I think we're just going to revisit that again.  Are you going to be at Honeybadger?

Matthew Mežinskis: Oh, yeah, for sure, that's my neighbourhood.

Peter McCormack: We'll do it then.

Matthew Mežinskis: Good.

Peter McCormack: Are you going to be at Honeybadger?

Danny Knowles: When's that?

Peter McCormack: I already spoke to you about it!

Matthew Mežinskis: September.  Just one final point.

Peter McCormack: It's pre-Australia, that's where I'm going before Australia.  Imagine that, our first Australia trip, you have to fly to Latvia to pick me up!

Danny Knowles: That would really annoy me!  Yeah, I'll do it, let's go!

Matthew Mežinskis: I don't know how you do it, Danny, I really don't, but it's impressive!

Peter McCormack: He's young, that's why.

Matthew Mežinskis: So, I was on the chart.  Remember that interest rates were 20%?  This is another thing where the full reservists, they don't understand it.  Legislation can be damning, it's just not necessarily where you want to look.  Really quick, you see this line?  This is the sacred demand deposit, this is what the full reservists say, we all need full reserves, even though the fungibility of money has never worked this way, the sacred demand deposit, this is a percent of total money.  Where has it been going from the 1960s to the eve of the Financial Crisis?

Peter McCormack: Down.

Matthew Mežinskis: And what is the percentage on the eve of the Financial Crisis, at least it's the last one on the tool tip there?  6.4%.  Even the full reservists who really want to make a big deal about all this stuff, they will admit, lending money's fine but it should be a savings account, a timed deposit, something where it's clear that it's an interest.  But the demand deposit, there's something sacred about that.

How do you explain the Global Financial Crisis if the demand deposit was, as a percentage of total money, 44% in the 1960s; and on the eve of the Financial Crisis, let's not worry about what happened afterwards, it's money printing, but on the eve of the Financial Crisis, it was 6% of the total money supply?  Well, I don't have these charts next, but you remember in 1980, the interest rates were 20%?  There was another type of legislation that was massively influencing bank deposits at that time, it's called Regulation Q, it's still in effect.  There are limits that the government sets on the charging of interests, it goes back to our interest discussion before, which is totally bad, it's not market,

On demand deposits, on savings accounts and on timed deposits, they put limits on how much banks could give, could give even, to their deposit holders, how much they could pay; they put limits.  And so what happened was you actually had -- let me just put these two money supplies here -- what happened is you got away from M1, you see how small it is, and you got into M2 and M3.  There are many different things but the big thing there is money market funds, and money market funds were a nonbank entity that started precisely at this time, in the 1980s, because people wanted the interest, they saw how much banks were getting in interest, but they couldn't get that.  Depositors were limited; Regulation Q, they were limited to 5%, 5.5% for the demand deposits, so they went into money market funds.

Lo and behold, what happens not even -- well, 20-some years later, Blythe Masters and the rest of the financial engineering, mortgage-backed securities purchased by money market funds.

Danny Knowles: So, is that like the blurring of mortgage-backed securities being used like money?

Matthew Mežinskis: Yeah, it's a different type of money.  Think of a stablecoin.  What do we say about the Church?  The Church said this about their lenders, is that they always find a way to get around the rules, and they do that the best in banking!  They have their rules and they'll get away, and they'll probably get around the rules with very unfavourable consequences that might not even be seen for decades.  And the money market fund market, Lehman, money market fund holder big time for their depositors, a lot of money market funds, they had these mortgage-backed securities, CDOs, a lot of problems and they failed, or had to be bailed out.

Peter McCormack: Matt, amazing, unbelievable.  We could have sat here all fucking day doing this!  But I love this because I've learnt something today.  I kind of had something click into place what I didn't really understand about the relationship between banks and central banks.  I did want to do CBDCs with you, but we can't do it.  But look, we'll be at Honeybadger, we'll do it there, we'll find the time.

Matthew Mežinskis: Absolutely.

Peter McCormack: Where do you want to send people again, tell them where to go?

Matthew Mežinskis: Porkopolis Economics is the YouTube; on Spotify, you can still see the videos, that's still the Crypto Voices podcast.  My branding's not exactly completely thought through, but both brands I am very happy with and I've been working for a long time on it.  So, if I can help you guys educate yourselves on money, and again I think it's about the history just as much as anything, I think that's the message.  So, I do some dailies like this on YouTube.

Peter McCormack: Go check him out, that was amazing, absolutely loved that.  Thank you so much.

Matthew Mežinskis: Thank you, guys.

Peter McCormack: Cheers.

Danny Knowles: Thank you.