WBD703 Audio Transcription

Part 1: The Emergence of Money with Lyn Alden

Release date: Wednesday 30th August

Note: the following is a transcription of my interview with Lyn Alden. 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.

Lyn Alden is a macroeconomist and investment strategist. In this interview, we discuss Lyn’s amazing new book: Broken Money. This show, the first in a series of three shows, delves into the history of money: the concept of money as a ledger, its different forms throughout history, as well as the properties that make a commodity suitable for use as money.

“Commodity money is like nature’s ledger…bank money is basically a ledger governed by nation states…and then open-source money like Bitcoin is money governed by the users.”

— Lyn Alden

Interview Transcription

Peter McCormack: Hi Lyn, you did it.  Congratulations, you got your book done.  Well done.

Lyn Alden: It was a lot of work.

Peter McCormack: Yeah.  So, how long has it actually taken you to do this?

Lyn Alden: so I spent about a year on it as my biggest side project.  But really it draws on the past probably five years of my work; it kind of summarises.  So, that year could not have materialised as quickly if it wasn't for the four years that preceded it.

Peter McCormack: Well, thank you for sending us the advance copy.  When you have the PDF you can't quite contextualise the size of it, but I saw you put a photo up on Twitter and it looks like it's quite the book.

Lyn Alden: Yeah, I don't write short stuff, but what I did try to do was make it accessible.  So, I didn't make it as short as possible because there's actually really good short Bitcoin books out there now.  There's plenty of really good ones that you can give someone and they can read it in a sitting or two.  What I wanted to do was tackle it, among the more in-depth part of the curve, but not necessarily that it's harder.  It's just kind of, in my view, starting from a very complete foundation and building all the way up to Bitcoin and there's not really been a book that explores it at quite that level, although there are some that are close and I draw from them heavily.  I try to build on some of the great books that have already been out.

Peter McCormack: Yeah, so who do you hope is going to read this book, Lyn?  who are you targeting with this?

Lyn Alden: So, a couple different groups.  I mean, one would be anyone who follows my work, whether they're into Bitcoin or whether they're just into macro and want to understand more about how money works.  So, basically anyone who's found my work valuable over the past few years.  It's funny, I often get people ask for book recommendations, and there's certain niches I can recommend, but there's never quite the book.  So, it's like I felt I had to write that book.  And so it's like, if you want to learn about the history of money, if you want to learn about the current structure of the system, if you want to learn about future options for money, like Bitcoin and some of the stuff that's out there, that book kind of covers them. 

In some ways, it's a direct Bitcoin book, but in other ways it's kind of like, if you know the book, Price of Tomorrow, it's kind of a Bitcoin book that's, you know, Bitcoin is not in the title, Bitcoin doesn't come up until later.  So, my book is kind of that where the first two-thirds of the book are not really a Bitcoin book.  It's really a book about monetary technology in all its forms.  And so, I try to reach what I view as a broader audience.  And I think one thing I do differently than other Bitcoin books is I explore some of the alternative views of money and try to reconcile those with ones that are more familiar to Bitcoiners. 

So, when you look at a lot of Bitcoiner books, they often talk about the commodity theory of money, which I mean it's a very good theory of money, but there are other ones out there, like The Credit Theory of Money.  So, it tries to actually deconstruct where these views came from, how they conflict, why some of these original theorists came to different paths and then brought them together.  Because one of the things you'll see, especially this comes from the left more recently, but generally if you bring up the commodity theory of money, there's a bunch of literature on their side where they'll say, "No, the myth of barter, that didn't really happen", they'll bring up credit theory concepts.  So, in order to somewhat speak their language, I say, "Okay, well let's look at that theory too and see how it contrasts or differs". 

So, I try to take what I view as a slightly broader view of money than what I've seen in other Bitcoin books.  But of course, that's part of what makes it a longer book, is that we're diving a couple of paths before we get to the right path, I think. 

Peter McCormack: So, is it essentially what you've done with this book, are the first two sections really a Trojan horse into Bitcoin?  You've kind of done the thing where you don't perhaps want to scare people off with Bitcoin, because I can imagine I know you've got two big circles.  You've got a big Bitcoin circle, but you've got a big macro circle, and I know not everyone in macro buys into the Bitcoin side of things, that perhaps maybe they're going to read this book and you're going to gently introduce them to Bitcoin?

Lyn Alden: That is part of what I do and that's what makes it different than a flat-out Bitcoin book, is that those types of books have Bitcoin in the title usually, and people go into it thinking, "Okay, I want to learn more about Bitcoin".  This book, I mentioned that the book will touch on Bitcoin, and it does, but really it's a book about monetary technology, which in some ways is a broader concept.  And generally, as new technologies come around, we get to see older technologies in a new light and so we get to go back and look at things that we might not have seen the same way if Bitcoin had never existed. 

So, Bitcoin is definitely a really important lens for the book, but yeah, what I'm basically trying to do is kind of ease someone into Bitcoin.  And from a bitcoiner side, I think it would help them to have a stronger kind of background in monetary history and to be able to answer some of these alternative theories or criticisms in a way that some other books haven't quite explored.  And then for the non-bitcoiner, or the Bitcoin-curious, or someone that might be familiar with my work, they know I like it, but they never really took the time to understand it, I do think the first two-thirds of the book help set up so when I finally get to Bitcoin, it should be somewhat palatable, at least for anyone that has been interested in the book so far.

Peter McCormack: Right, well I'll be interested to see what George Gammon thinks then, if you're listening, George, I hope you enjoy the book and you get a copy and talk to Lyn.  Right, we wanted to make a show with you about this book from the second I knew you were making it, and then I spoke with Danny about it and he said, "Really, to do this justification, we need to make it into three parts".  So, for anyone listening, we're going to we're going to make three probably short one-hour shows as a breakdown of the book, that hopefully leads people into buying the book, and I've got a feeling this might be something I send out to my friends who I've really struggled, a lot of them, to get into Bitcoin. 

I was just in Argentina, it's very easy to explain Bitcoin to people there, they understand it.  Here is very difficult, here in the UK, because people don't have such broken money.  So, we're going to do it into three parts, the past, present and future.  So, essentially the past being the emergence of money; and the present being how we've got to a place where money has become broken; and then the future and how we potentially fix it, or technologies that make money better.  So, we may cover some absolute basics here Lyn, stuff we've covered before, stuff plenty of people who've listened to this show will have heard before in the past, but like I say, my goal here is to get this show out to friends and families and nocoiners who want to understand what's going on.  So, if some of the questions are a bit basic, excuse me, you've probably answered these a bunch of times.  Okay, in the words of Robert Breedlove, what is money?

Lyn Alden: So, I view it through the idea that money is a ledger, which John Pfeffer and others have said before, and I really take that pretty literally, and I dive into that full concept and explain why I think that is the best way of thinking about it.  And the way I describe it is that commodity money is like nature's ledger, it's a ledger governed by nature; bank money is basically a ledger governed by nation states, effectively, especially in the central banking era; and then open source money like Bitcoin is money governed by the users, or the creators of it, the people that run nodes that define the ruleset.  And so, these are all ways of kind of keeping track of who owns what in this liquid way.  And a question I keep coming back to in the book is, who controls the ledger?  So, for example, going back to my prior point about the credit theory of money versus the commodity theory of money, the reason I bring up money as a ledger is because that's one way to reconcile those. 

So, the commodity theorists would say that basically money is a commodity, usually gold, but anything before gold and certain other technological eras, you can have other types of commodity money.  And then money would arise naturally to fulfil the role, because barter doesn't work at scale.  Barter works in small amounts, but it's filled with frictions.  And so, money arises naturally to solve that, but there's kind of two main ways to do it.  The first would basically say, "So what you're trying to solve with barter is the double coincidence of wants".  Basically, if I have something and I want to trade with you, Peter, we have to both have something that that person wants at the right time.  And so there's a lot of ways that that trade can fail. 

The two ways to make that easier are, one, we can bring in the component of time, which is basically bringing in the component of credit, where I say, "Okay, you need something.  I don't need anything right now from you, but I'll give it to you knowing that in the future, I might need something", right?  But it only works if I know you.  So, that's one way to try to solve the problem of barter.  And then the other one is to say, "Well, we don't really trust each other.  What could we trade on the spot that we both always want?"  And so generally, you get some sort of liquid commodity that becomes the one side of most transactions, the most saleable good.  And it could be shells, it could be copper, it could be all sorts of things it could be, and as different societies of different levels of technology encounter each other, eventually humans found that gold is basically the best money by its properties.  And so, those are two ways in which we solve the problem of barter.  And so I would say that basically, money is a ledger that helps us, when possible, avoid barter and help make other transactions more efficient.

Peter McCormack: Okay, so when you say money is a ledger and there's ledgers which are governed by nature, I remember when John Pfeffer said the same to me, he said to me, Wences told him that, "Money is a ledger and Bitcoin is the best ledger ever created".  But when I think of a ledger, I think of a record, as a record I can access.  How would money be a ledger if there's no central, actual kind of spreadsheet that you can see; you understand where I'm going?

Lyn Alden: Yeah, I think that's where it becomes more abstract ledger, that the idea of a ledger becomes a useful tool to help us understand what we're doing with it.  And so, there's the literal ledger, which I mean the modern form, for example, if you have money in a bank, all it is is you have an entry on the bank's spreadsheet basically, their database.  They just have a ledger, a literal ledger, you're there.  And then it's funny, even the bank's cash is just an entry on the central bank's ledger.  So, we just literally use a series of ledgers for our money.  When you go back to ancient times, like ancient Babylon and places that, they had ledgers as well.  Some of the earliest known writings were these literal ledgers, just basically saying who owes what for what things in the past. 

The reason I think we can think of physical commodities as a type of ledger is to basically say that that ledger exists and we just don't have full access to it.  So basically, it's a ledger that's updated by physical possession.  So, when you, for example, use shell beads as money, they've been fairly popular among hunter-gatherer societies for their properties, no one knows exactly how many shells, beads there are in the region, they don't know exactly all the full parameters of the ledger, but they can have an idea of it.  If anyone ever played real-time strategy games, like StarCraft, we start out the game, you don't really see any of the map.  And as you learn about it more, you see more of the map.  And you rarely ever see the full map, but you kind of get a part of it. 

I would say it's kind of like that, where you're updating the ledger that exists that no one person knows the whole thing, and nature's administrating it, nature's the one that dictates how hard that type of money is to make.  So, shell beads are very hard for hunter-gatherers to make, but they're not very hard for people that have experienced the Industrial Revolution to make; whereas something like a gold coin is hard for anybody to make.  And so these are these different ledgers with different properties.  And the challenge comes when cultures collide, and one culture knows how to kind of dilute the other culture's ledger, and they know they can do it, and it takes time for the other culture to figure it out because they have this problem where they don't see the full ledger. 

So, I use ledger both in the literal sense and as the abstract sense, because basically what it means is, "We've agreed on this game to use these units as money", and it's really what we're doing is we're agreeing on an administrator.  We're either going to the same bank or the same central bank and saying, "Okay, this is our ledger", either because we have to or because we have no better option; or we're agreeing that gold coins or silver coins or something else is our money, and it's again because there's no other better option in that environment.  So, it's really just about having this kind of liquid accounting system that we both choose to operate based on the properties that we think are workable.

Peter McCormack: Right, I can almost guarantee, if some of my friends are listening to this right now, they're going to be like, what do you want about ledgers?  What do you mean about a nature's ledger?  What do you want about beads?  I think to set the stage to understand this, what we're trying to do here is build up the evolution of money, where it started from, how we got to the point where we have the money now, where it's broken.  Can you talk to that kind of evolution of money, where it started, the different monies that were tried and why they failed, and how we ended up getting to the point where we have the money we have now, which by the way, might take you 10, 15 minutes to explain, but that's what I want people to understand.

Lyn Alden: Yeah, so within our industry, Nick Szabo wrote a pretty foundational essay, called Shelling Out, something like nearly two decades ago.  And then also, there are a number of books, like the Bitcoin Standard that I think cover this quite well, which is basically going back to some of the early history and seeing what type of money arose naturally, and then what killed it over time.  And so for example, you'd have cultures where, and this was common in kind of the early cultures, is different types of beads, with shell beads being the most common, but it also, could be teeth and other types of materials, where money has certain properties, for example, a store of value alone is not sufficient.  If you have a house or a tent, or some sort of large item, it does have value to you, but it's hard to exchange with others.  It's not liquid, it's not divisible, it's not durable, it's not portable.  It's got a number of things that are missing from it. 

So basically, monies arise because they're better at those properties.  They're these small units, they're divisible, they're ideally re-combinable, so if you have a bunch of small units, you can put it back in a bigger unit.  When you trade with someone else, there's not a lot of difference between units.  So for example, if I want to sell my house, I have to find a buyer that wants this specific house, which is different than its neighbour houses and even more different from houses five miles away.  They have to want this specific size, this specific quality, this age of a house, all these unique properties.  Whereas a gold coin is pretty similar to any other gold coin, at least of a similar size.  And so basically you have this situation where monies arise and it's usually in those early days a commodity.  And shell beads are a type of commodity in a way, or they could be a more elemental commodity.  And so as different cultures ran into each other, you'd have some cultures using shell beads, other ones using cocoa, you'd have other ones using salt, other ones using furs.  And basically those were all these kind of monies that serve the role good enough to make barter easier to do, especially when combined with the idea of social credit. 

So, when social credit exists within a smaller group, they didn't necessarily have to exchange these items with every transaction.  It's only when they wanted to either settle after they might have done multiple kind of credit-based transactions, and then they want to settle with themselves, or when different groups that don't know each other well come across each other and they want to trade without knowing each other.  So, the combination of both delayed settlement, so the idea of credit, and the idea of these commodities, would arise.  And so humanity on all these different continents went through all these different iterations, and both my book and others kind of goes through and catalogues some of the examples that arise.  And like I said, they range from shell beads, to cocoa, even feathers.  But a general convergence that occurred is that as people went through the Industrial Revolution, they could make almost all these types of things readily.  They could go and use mechanised processes to make ten times as many shells.  They could go and collect all the furs and the feathers.  And so they could basically devalue the money that these people were using. 

But the two commodities that were very, very hard to devalue, even with modern technology, are things like silver and gold, and really the full stack of precious metals, because they're far rarer.  They have a natural inbuilt difficulty adjustment, so the ancient people already got a lot of the easy surface deposits of gold, and so as our technology has gotten better, we've gotten better at making gold or producing gold, but also gold itself is getting inherently harder to produce, because all the easy deposits are already gone.  And so, even during the 1970s when the price went up tenfold, our production rate did not, on a percentage basis, materially increase because it's just fundamentally very hard to make more gold.  And so, if you kind of catalogue the history of human interactions and civilisations running into each other, basically you'd have a shell culture and a silver culture collide, and the culture with silver's money has enough technology to devalue the shells of the other culture, but the shell culture can't make more silver, and so naturally silver ends up dominating between these two. 

As all the different groups came together, it came down to silver and gold being the commodities that were workable enough into the modern era to survive all types of debasement.  Because when we talk about commodities as a ledger, what we're really asking is a couple of questions.  One is, who can determine changes to the ledger?  So, if we're using physical money as a ledger, it's updated by physical possession.  If we're using some third-party ledger, like a temple administrator in Babylon or a bank, a modern bank today, we're relying on them to update the ledger for us.  Or we're also, asking the question, who can dilute units of the ledger?  So, who can say, "There's not enough units in this region, so we've now added more", right?  And so in the era of commodity monies, you had to actually physically make more.  Whereas in the era of modern ledgers, you can just decide there's more. 

But going back to that prior time, if a money is not sufficiently hard, like if we have a shared delusion and we pick the wrong type of money, a third party, like Danny, could come along and realise that we're both using a wrong type of money that he knows how to make more of, and he can dilute us.  So, it's kind of like this big iterative thing where humans spent thousands of years trying to, anytime some commodity gets a monetary premium, everybody would try to make more of it until they find the money that they really can't make almost any more of, at least very quickly.

Peter McCormack: A bit like shitcoins and Bitcoin then!

Lyn Alden: Kind of, yeah.  Kind of how if you look at the tens of thousands of cryptos out there, very few of them ever make a higher high against Bitcoin in the next cycle.  There's always some new round of coins, they get a big pump and then they fall, and just as a general policy, they just keep devaluing against Bitcoin.  And if you look at most commodities relative to say gold, most things end up getting devalued in that way.

Peter McCormack: Yeah, I think the shitcoins essentially tell the history of money, where exactly what you said, where if there is an opportunity for somebody to dilute it and to enrich themselves, they will.  And we've had scammers for thousands and thousands of years.

Lyn Alden: I think the interesting thing about Bitcoin and the whole industry is that it does put some of these monetary experiments to test very rapidly.  And we even saw that a little bit pre-crypto with video games.  And so I covered, for example, and I originally learned from this from an article by Gigi, which is basically the in-game economics of Diablo II, which is basically that the creators, the designers of the game, had gold in the system.  They had a type of money, but for a variety of reasons in the game, it was a pretty crappy money to use.  And so players naturally gravitated to using these special types of rings as money, like stones of Jordan.  And that was just an emergent phenomenon, just money arose naturally, just like Adam Smith wrote about, just like the commodity theorists write about.  Money naturally arose, and it was not the money that the game designers thought would arise and it just solved a problem. 

So, those video games would give us these kind of accidental experiments to run human history with a different set of physics or a different set of rules and see what money emerges.  And Bitcoin and crypto has kind of done the same thing, where it challenged some people's view of what money is or how money works, so they dismiss it, and then it just keeps coming back.  Or they think, "Okay, that's interesting money, I can make a better money".  And then they go out and make a what they think is a better money, and it doesn't catch on for any number of reasons.  Sometimes they're outright scammers, other times they have honest intentions, but they're saying, "Hey, that's not good, let's make this".  And so the market is kind of iterating and showing us what makes good money, and historically a key property of money is that hardness, that immutability.  Gold won against most other commodities, because it's the hardest one to increase the supply of, it's the most reliable.  And so that's not the only variable that matters, but it's a very, very large variable among the ones that matter.

Peter McCormack: It's really interesting to hear you talk through this and talk about these commodity monies.  For something to become a commodity money, did it have to have some form of agricultural or industrial use for it to emerge as a form of money?

Lyn Alden: So mostly, yes.  The short answer is that they all tended to.  The big exception, that I think is highlighted, is the stones of Yap that didn't really have any use other than aesthetic.  But aesthetic is a type of use.  And so most of the early commodity monies would either be consumable, like grain, for example.  In Babylon, you had grain and silver, and ledgers, literal ledgers of money.  And so generally you had something that either could be worked into something else or is consumable.  But what makes a commodity money different than a pure commodity is that it's basically the best of the commodities for storing and transferring value in.  And so, more people hold it because they expect to give it to someone else, rather than they expect to consume it themselves. 

One of the criticisms that's sometimes applied to Bitcoin is the idea that it doesn't have inherent use, and therefore, it can't fulfil the same role as commodity money.  But there's a couple of shortcomings with that argument.  One is to point out some of those early exceptions where something would have very minimal use, like shell beads or the stones of Yap that are primarily these aesthetic items; aesthetics are a type of utility.  In Bitcoin's case, it gives you an ability that other things don't do, which is the ability to bring liquid wealth with you globally or to send wealth anywhere you want, reliably.  So, before the mention of a Bitcoin, there's no easy way to do that.  So, it gives you this utility access to what is basically the world's most decentralised and immutable database.  And Bitcoins are the cost of entry to update that ledger.  And so there is a utility there, it's just not as obvious as some of the commodity monies. 

Then we can also ask, well, any crypto can give you that utility?  And it's like, well, sure, but they don't give you that utility over the same duration of time.  So, for example, if I hold another type of crypto, next week I can expect I'll probably be able to use it similar to how I can Bitcoin, but I don't know if five years from now that that network will still have any value compared to something like Bitcoin.  So basically, Bitcoin is at first the only way to do it, and then it became the most reliable way to do it.

Peter McCormack: Yeah, so I'm looking here at your list, or the list of things that came from the Bullish Case for Bitcoin, which is durable, portable, fungible, verifiable, divisible, scarce, established history, and censorship resistant.  But Vijay doesn't mention utility here, and so one of the things that I'm trying to understand, Lyn, is that there are all these properties that seem to have emerged, and I think that's probably by the failure of one money over another, so once they've tried a new money, maybe it is more divisible, is more portable, and that's the reason that it's become a better money, because of its properties.  But when we get into the area of utility, that seems to also become something which is a different property that's almost a shared agreement, like we agree that other money is not so good and we agree this is a better form of money because it has these utility properties that improve it.  Is there a shared belief or a shared agreement that comes into play with forms of money?

Lyn Alden: So, I think that's part of it.  I think the reason why utility is often relevant is because it's something that at the end of the day, someone can use for its end purpose, right?  So for example, I might not want to hold gold, I might not want to wear gold jewellery in other words, but I know that other people do.  And so, I understand that holding gold coins gives me that option that I can sell to someone, almost anyone in the world, who either wants it for similar reasons that I do, or for someone who actually just might want it for its end purpose.  Similar with Bitcoin, where I can hold Bitcoin, I might not even want to use it for a while until there's more merchants that accept it, for example, or until the tax situation around it is different, but I'm holding it for the optionality.  And there are end users that actually want it for its very specific end use, that it's for their purpose, a better medium of exchange or better tool than any other type of money. 

I would describe utility as something that, it's part of what creates a spark of demand that would lead us to think that this will be a useful type of money.  Sometimes it's an end purpose, other times it's because it's better being money.  So, for example, the dollar has no intrinsic value, but the benefit of a bank ledger is that before the invention of Bitcoin and cryptocurrency, this is one of the only ways to send money quickly, and to basically reduce the frictions of trade.  And so, you can't eat a dollar, but dollars are still useful enough that they could, with various mandates, make it workable.  So, I think utility, it's one of those things where as we got better at money, we generally gravitated towards less utility over time. 

Some of the earliest monies, the utility role would be a bigger part of it, like grains as money, for example.  That would be a bigger share of its overall value, whereas generally what we would do is gravitate towards things that we actually don't use that often, like gold, because all of the utilitarian things is generally stuff we get better producing because we need it more often, it's not as rare, we evolved to need it for a reason because it's common, so we'd figure out how to make more of those.  And the things that we don't need as much of, say shells in a hunter-gatherer environment or gold in a modern environment, those are things that end up having longer staying power, ironically because utility is actually a much smaller part of what they're useful for than everything else.

Peter McCormack: It's one of Peter Schiff's biggest criticisms of Bitcoin where he talks about it having no use outside of being money, when he talks about gold having industrial uses, etc.  How much have you looked at the growing use of Bitcoin outside of just being money?  And I know it's inherent properties of money make that work, but let's talk about perhaps the mining sector, or even this emergence of the ability to use Bitcoin to send dollars around the world.  We know that people the security of Bitcoin, but we know certain places in the world, they want the stability of a dollar, and so people are building the ability to send dollars on the Bitcoin network.  Does that mean it has a different utility, a similar utility, rather than an industrial utility, maybe a financial utility, which is not the Bitcoin itself?

Lyn Alden: I think especially in the intermediate term, yes.  I mean, basically when we think of Bitcoin there's this age old question, what is Bitcoin?  Because Bitcoin keeps revealing new facets of itself to us, or at least if you go back to the Bitcoin Talk forums, most of these things that the market is still discovering were addressed early on and different facets of Bitcoin take on more meaning once something gets developed, say Lightning or when AI comes around or when stablecoins are invented.  These sort of things add new ways to think about Bitcoin or to use Bitcoin. 

The way I would describe it is basically what a blockchain is, is a decentralised database.  And it just so happens that the killer app for a decentralised database is money, because money is constantly looking for what is a ledger we can all agree on.  You know, we might agree to use dollars because it's the fiat currency of the most powerful country in the world right now.  We know that over the course of the next six months, they're probably going to be fine, dollars, and so we can use that workably enough.  We might use gold because we both understand that it's the commodity that's the most useful is money.  And with a database, when you find one that's sufficiently decentralised and immutable, and you say, "Wait a second, this is basically money in a decentralised cloud.  I can hold a unit of this or units of it, and I can either send it to anyone or I could remember my words and travel around the world and reconstruct my ability to access it there".  And so there is that utility aspect. 

I think the vast majority of its long-term usage will be for money, just because money is such a big application and it's so suitable for it.  But there are other things like data storage.  People have put arbitrary data into the blockchain that they want to preserve there.  It doesn't prove that it's true, but it proved that it's not tampered with from the point of insertion.  And so, it could be putting culturally relevant books in there, it could be timestamping other systems into it, whatever the case may be, I think that is a long-term use case that I expect to be smaller than money.  And then there's other things that you can use that as a network, like you can use Lightning as a network to run around stablecoins, for example, in a way that is cheaper than Ethereum.  That's a similar reason why Tron popped up, is because people wanted to use Tether more cheaply than they can use it on Ethereum. 

So, generally between Bitcoin and stablecoins on other networks, money has been by far the dominant staying power use case for this whole field of technology.  And most other stuff becomes a narrative and then kind of fades away into either obscurity or at least a smaller market.

Peter McCormack: One of the topics that I had never considered with money going back six years, when I was getting first deep into Bitcoin, was the idea of scarcity.  It's nothing I'd ever thought about.  I didn't understand inflation, I didn't know why there was 21 million Bitcoin, although I learned pretty quickly.  But can you talk to why scarcity is important with money, but the fine balance between having the right scarcity and why extreme scarcity would be bad for money? 

Lyn Alden: Yeah.  So money, at the end of the day, when you look at some of the literature, basically like Mises or further back, it's the most saleable good, which means it's basically the most liquid good.  Like, what good could you bring with you as a bearer asset that you know you could find someone pretty quickly to take it off your hands at something close to the market price?  If I have a fine bottle of wine that's worth, I don't know, $300, if I just wanted to quickly dump that on the market somewhere, most people don't know how to evaluate wine, most people don't even know, so it's a very specific type.  And so I'd have to find someone and probably give it to them for $100 or something like that, because I'd have to find someone who -- basically there'd be a lot of slippage in that transaction unless I happen to find this right wine shop, unless there's certain areas where I could get full retail price or full price for it.  But the ease of which I can do it is low because there's low liquidity, low fungibility, that kind of thing. 

So, when you have a good money, you have one that's got plenty of liquidity, plenty of accessibility.  And the fine line there is if you have a money that is not divisible enough or not fungible enough or is hyper-rare, like it's rhodium, for example, most people don't have any, most people don't identify it.  And so just because it's super-rare, doesn't mean it actually gets monetised.  And so it's kind of a weird accident of history that the things that get monetised are things that are quite rare, but that they're already widely held.  And so those tend to be things that are hard to make, but that they're long-lasting once they're made, and so we build up pretty significant stockpiles. 

That's where, for example, Saifedean popularised the idea of the stock-to-flow ratio, which is different than the stock-to-flow model; you know, that's different than saying you can predict the price of Bitcoin based on it.  But it is saying that for a money, generally, instead of looking at extreme scarcity, like rhodium or meteorites, things like that, that they're so rare, they have liquidity and fungibility and divisibility problems; and instead it's saying, what elements or what commodities or what types of money are hard enough to make that even though there's quite a bit of it, most people have some or easily recognise it, but that also you can't really make more of, because if you can make a lot more of it, then everybody has a disincentive to want to hold much of it.  That's why we don't use salt as money any more, for example, whereas we do still in some ways use gold as at least as a store of value type of money.  And so it's really about that concept of a lot has been made, but it's hard to make more.

Peter McCormack: And so, that is why gold and silver essentially won prior to getting to paper money?

Lyn Alden: Yeah, generally as you move up the commodity chain, usually the commodities with the higher stock-to-flow ratio, because it's almost synonymous with that liquidity, because it's not hyper-rare, it's widespread, but then once it's gotten to that widespread stage, it's hard to further dilute.  And so that'd be shells, like complex shell ornaments.  For example, a hunter-gatherer environment, they're challenging to make, even though they're fairly common.  And the same thing would be true for, say, gold and silver in later eras.  We kind of steadily moved up from using things like grains as money, which have a low stock-to-flow ratio, to moving towards things like gold, that have a very high stock-to-flow ratio.

Peter McCormack: How do people abuse gold itself?  Because I know, for example, the great example is the coin clipping and the fall of the Roman Empire.  Whilst gold is good money, it was still essentially misused or abused by centralised forces.

Lyn Alden: Yeah, so gold, it's interesting because gold was the best money, but it was still imperfect, and that applies to silver as well.  So, they're imperfect in the sense that it's not super-easy to verify the fineness of gold or the amount of gold, unless you want to weigh it with every transaction.  And so, there are various technological layers employed on top of gold to try to make it even more effective at being money than, say, raw gold would be, and coinage or coin-like objects were among the earliest ones.  So, you blend the natural properties of gold with some sort of recognisable authority, like a kingdom or an empire, that says, "Not only is this gold, this is a specific amount of gold and we're going to add a face of an Emperor on it and we're going to put ridges around it so it's hard to reduce the amount of physical gold".  As long as it looks visibly intact, you're getting most of the gold that's supposed to be there, and you can generally trust the purity based on the reputation of the empire, which over time gets abused.  But basically what they would do is they would use their technology to make that gold even better money. 

So, a gold coin would have basically three layers of value.  So, one would be the underlying gold itself; two would be the coinage premium, that it's basically been put into a verifiable measurable shape and someone's done that work for us, which is convenient.  And even today with the technology we have, an American Gold Eagle coin will generally sell more per ounce than, say, a 400 ounce gold bar, because that additional layer of acceptability and verification is useful.  And then the third layer would be legal tender.  So, if you had an empire with certain gold or silver coins, these were kind of mandated or expected to be accepted everywhere in that area, and you have foreign gold or silver coins of a similar size, they'd still be recognised as money and they'd still be useful, but they'd be less liquid, less recognisable, and less accepted than the domestic currency.  And so, they'd often trade it at a slight discount when they're outside of their own jurisdiction, because it's just a foreign object.  It might be a slightly different size and therefore it doesn't easily fit into our calculations; it's less easy to prove that it's the real thing; and so you'd have that third layer of value. 

The problem was that these layers of value would give kings the opportunity to debase their coins.  So, the unit of account would be somewhat abstracted from the sheer amount of gold or silver in the coin.  And so a king could say, "Okay, well we're going to tax all these coins and then we're going to melt them down and we're going to change them from, say, 90% gold to 70% gold so we can spend more gold back into the economy without raising anyone's taxes.  And that works for a while because, one, I mean, at first you wouldn't even necessarily tell the difference between 70% gold and 90% gold; and two, when it's still stamped with the same unit and the king saying this is the same unit, it takes time for that greater supply of money to kind of force up prices.  The initial people that get that will still treat it the same way.  And so gradual debasement became a common occurrence throughout pretty much every culture that ever had coinage, and it's because of that, those layers of extraction between the fundamental value and the market value.

Peter McCormack: And then gold met its limitations and we had the emergence of paper money.  We should talk about that.  I don't think it would be fair to say that gold failed, it's just gold had its limitations.  I think if gold had failed, it would have disappeared but gold still has value and use today.  But the emergence of paper money, was that really just to make gold more usable? 

Lyn Alden: So, you had paper money come to the fore in many different areas and a lot of people when they think of it, they think of the Renaissance, they think of Europe.  Whereas, what doesn't get a lot of attention is how widely proto banking and various paper instruments were used outside of Europe before Europe turned to it.  And so, it emerged naturally across the Silk Road, for example, or even in ancient Egypt with like papyrus, bills of exchange. 

Basically, it started out more as not as what we think of it now, full banks and bank notes.  Instead, it started out more channel-based systems, where let's say you two know each other, you're in different cities.  And so if I'm in Peter's city and I want to send money to someone in Danny's city, I can go to Peter and say, "Hey, okay, here's some gold coins.  Can you have Danny go and give someone the same amount of gold coins in another city?"  And so, you two have the benefit of that established connection, maybe a merchant caravan connects between the cities every week and you're able to send messages or send messengers, and you're able to, using a paper instrument, I can send money through your network to someone else for a small fee. 

So, these services arose partially to serve credit, but mainly to make this gold and silver more divisible, more easy and convenient to use, especially over long distances.  And so, that eventually coalesced where you'd have increasingly efficient fungibility.  So, instead of just this this specific channel-based network, instead Peter's organisation would get so big that his financial organisation is known at a wider distance.  And so, for example, if he issues paper that's known for a certain amount of gold, that's now a proper bank, that is something that is recognised over a longer distance and it can be used in a more broad way. 

So, generally what you had is this emergence of first that kind of proto- or channel-based banking and it would emerge into this more broadcast, almost broadcast-based banking, where paper banknotes are out there, they're fully interchangeable with other banknotes and they're recognisable over longer distance.  And really, this was basically just an increasing type of technology, an increasing type of interconnectedness, to make it easier to move money without actually having to verify physical precious metals every time.

Peter McCormack: It sounds a little bit Lightning channels being opened up.

Lyn Alden: Yeah, the Hawala system in particular was very Lightning-like.  It was basically analogue Lightning from 1,000 years ago.  And I think that successful things tend to reemerge in different ways.  That kind of shows the robustness of that type of system.

Peter McCormack: Can we just talk quickly about other forms, of or other attempts to create money that failed?  I'm particularly interested in tobacco, when that emerged as a form of money.  And the reason being, like I said, I just got back from Argentina and we know they have massive issues with broken money there.  One guy I met with, he uses soybeans as money.

Lyn Alden: So, different types of agricultural products have been money in many different regions, going back to ancient Babylon with grains, for example.  And of course, the challenge is that they're seasonal.  So, the money supply will increase and then contract and then increase and contract based on harvest time.  And of course, the other problem is that if they're too widely used as money, like as a store of value, then they're more expensive than they should be and more people get encouraged to plant more of that crop.  And so, it's generally one of those things that people fall to as a backup or through lack of a better option, rather than something that's inherently workable over the long term. 

So, tobacco was one of the more interesting examples, which is in the early American colonies, when they were still pretty small and still rather undeveloped, they didn't have a lot of gold and silver and especially proper coins.  And so they'd find other things to try to use as money.  They started using the shell money of some of the natives for a period of time.  They would have legal tender, like shell money.  And then they also turned to tobacco money because tobacco was a major crop, and compared to other types of agricultural products, is pretty high value density per size and weight, and so it could be used somewhat for that role. 

But then the problem is, it doesn't have the properties of gold.  So, if too many people are holding tobacco, tobacco is more expensive than it should be, so more people say, "Well, I'm going to plant tobacco then".  And then then the state would say, "Well, only certain people can plant tobacco, because it's not scarce enough, so we have to artificially make it more scarce.  And so, it's only people with these characteristics that are this well-connected, and so forth, can plant it".  So, then you bring in all sorts of ethical challenges and just also, then there's bootleg tobacco planting, right?  People are saying, "Well, I mean I'll live dangerously, I'll plant it anyway".  And so it's just hard to make it so that nobody's planting extra tobacco. 

Then you have issues where it's not very fungible, it's not very durable.  So, someone could say, "Well, tobacco is this exchange rate", but then there's super-high-quality tobacco, and then there's old or low-quality tobacco, and people would naturally want to spend the low or old quality tobacco and sell the best tobacco overseas for its true price.  And so then you'd have basically an attempt at a tobacco standard where a warehouse would come along and say, "We'll hold the tobacco and grade it, and you can trade pieces of paper that represent the tobacco".  And it's almost this experiment where they kind of recreated the whole gold standard, but with tobacco.  And of course it broke much quicker than the gold standard did because it was unsound at its foundation. 

Peter McCormack: I love the sound of that though; big tobacco fan, obviously!  Okay, we want to finish off talking about this unified theory of money, and then we'll close up before we go on to part two later in the week, but can we get into this?  Can you explain the credit money and commodity money, what they are and what their differences are, just so people understand; and why and how they both exist?

Lyn Alden: Right, so the commodity theory of money basically asserts that due to the need to satisfy the double coincidences of wants, in order to make trade easier to do, a commodity will naturally rise in a culture to serve as money.  The state doesn't have to impose it, it doesn't have to come from some authority, it will just kind of emerge naturally.  And as different types of monies run into each other, the better types of monies will win out.  And so in any given region, that money will be the most liquid, the most saleable, the most recognisable good to serve as one side of every transaction.  And the literature on that goes back literally to Aristotle of ancient Greece, and then it was Adam Smith who revitalised the topic in modern economic literature. 

Then, the Austrian school focuses heavily on the commodity theory of money.  Basically, it's a full focus on how money tends to arise naturally, and that it relies on nature's scarcity to determine why is gold better money than tobacco, for example.  And it's like, well, because we haven't found a way to break gold in a way that we know how to break tobacco, for example.  And so we keep iterating, and cultures keep finding each other until we find what is the best of all commodities of money.  And the answer is gold. 

The credit theory of money came about somewhat later, although in some ways you could arguably trace it back to Plato, but basically it's a newer type of theory of money.  And they basically say, "Commodities are irrelevant, superfluous, and money is nothing more than basically this shared mental ledger that we all have".  And so, if some authority, like an empire or a kingdom or any sort of government or even just a small community, like a town, decides this is what we're going to use as money, mostly just credit, just information, just keeping track of who paid who for something else, they say that makes money.  And when you have basically the origins of chartalism, or the state theory of money, they basically say what gives a credit money its demand is authority.  So, a tax authority can say, "Everybody owes dollars in taxes every tax season, and they're only payable in dollars", and so everybody in that society now has a demand for that unit of account, as long as that government has the power to make that argument and as long as it's a workable enough system that people put up with it. 

So, generally those have been the two competing theories.  And where the credit theorists started to make some degree of inroads is that they would go back and look at modern hunter-gatherer societies, they'd look at older societies, and they would say, "Hey, the standard description of barter doesn't seem to come up as often as we'd expect it should".  So, they would say, if the commodity theorists are right, we should see barter become more common until money gets emerged and fixes the problem.  Instead, what we see is that there's extensive uses of credit, or gift credit, in hunter-gatherer societies before they even get highly specialised, and therefore that they've been able to circumvent the problem of money in some ways, at least some of the time, without having to resort to commodities.  They can just resort to their own mental ledgers, doing favours for each other and then reciprocating later, or having some sort of community system to run this type of thing. 

So, what I focus on in that chapter is instead of dismissing the credit theory of money, I would say, okay, let's take this seriously.  Let's actually explore the details of how we get here and then where it might go wrong.  And so, in general what I did was I acknowledged the historical aspects of the credit theory of money to basically acknowledge that credit is, in many ways, at the origin of money in a similar way that commodities are, and it really just comes down to who are we trusting to administer this ledger.  That's at the end of the day what this means.  So, if we trust the state or we trust our local town, our temple administrator, like in Babylon, the temple administrators would basically be running the literal clay tablets, right; if you have some sort of organised system, there's efficiency gains you made from that, but of course that type of system can break, someone can literally break all the ledgers.  Some king can just decide the unit of account has been halved from here forward.  There's all sorts of things you can do when you have that kind of centralised power.

Whereas, if money is silver coins or gold coins, or very hard to make shell beads in a certain level of technology setting, that money is much harder to cheat because no central authority can come and just change the rules.  And so throughout society, you'd have these periods where commodity money would take over more, usually as a result of a breakdown in society or war, or things that.  And other times, we'd have quite a bit of organisation and people would gravitate towards these more credit-based types of money.  And so what I did is just kind of break them down and say, well, let's examine both types of money and make sure the person using that money understands the source of scarcity for that money and how the rules can be changed in ways that might not be able to be changed in another system.

Peter McCormack: Yeah, that's what I was going to ask.  What is the argument between the two theories?  Because we clearly have both forms of money now.  I personally am similar to you and Danny, we all value commodity money more, certainly more in the Bitcoin side of things, and that's because we understand the flaws, the inherent flaws of credit money.  But what is the argument they're having?  Is it those who support the credit theory of money believe that is the best form of money; or, what is the argument?

Lyn Alden: Usually they would argue that it is better.  You'll find different types of them.  Generally, it's more from a left type of fiscal view, so the idea that the state should have more flexibility over spending.  The general idea there is that a state should not be confined by the amount of gold.  They would list that as arbitrary and say, "Why should the amount of gold in a region dictate the spending and the taxation of the country?"  And so they would say, this is perfectly workable to have another system that doesn't tether itself to a specific amount of metal in a region.  And they would say that this is a more efficient and more effective solution. 

A general tendency that you see from people in that camp is, one is that it emerged a lot after the invention of telecommunication systems.  That's really when the theories would actually get some power behind them, which is that when money started moving a lot faster than metals, the abstraction between money and metals started to widen, and so there are more of these thought leaders popping up and saying, "Wait a second, do we even need the metal then?  If we're just basically updating ledgers between each other over telecommunication systems, do we even need the coins any more?"  And what they would generally do is be over-optimistic on how well the state would administer that ledger system. 

So, you'd have some early credit theorists say, "I bet if we didn't back our money with gold any more, our money would actually probably get more valuable because, look, they're making more gold every day.  Maybe our money would appreciate versus gold", and of course it never does.  But in general, yeah, their view was that gold and silver are outdated as money, and they'd even generally go a step further and say they weren't even as important in the old days compared to just maintaining reliable ledgers.  And so that's kind of where that debate comes from. 

Some of it's that natural political debate between economists who prefer more bottom-up type of emergence versus economists that prefer more top-down type of organisation.  But it's also, I think, somewhat of a historical perspective to see how different societies organise themselves over time and how that money shifted over time, especially as our technology to abstract money became better and better over time, and as that abstraction grew, it makes it easier for people to step back and say, "Well, what is money; or, do I even need the original money any more?"  This question started to rise as that developed over time. 

Peter McCormack: So, they've really been testing that ever since the gold standard was discarded.  But would we not be easily able, I'm sure you would be able, to argue against this?  Because if we look at the state of the global economy, the amount of debt held globally, really it just feels there's a pattern through this conversation then, whether it's shells or beads or shitcoins or the credit theory of money, any opportunity anybody has to create and debase the money they have.  And in the credit theory of money, it's really just that governments have been able to print and create as much as they want, which has had disastrous economic effects for the people furthest away from the printer. 

Lyn Alden: Yeah, I'm firmly of the view that money should be scarce, and ideally money should have rules that are more immutable than any human administrator can change.  And so, what I do in the book is I take the credit theory seriously and I say, "Okay, here's what people think, here's why they think it, here's some historical evidence for how they came about that".  And then I would say, "Okay, from that baseline, here's my criticism".  So, I start chipping away and giving all the examples of debasement, all the impacts on people that that debasement has. 

One of the biggest arguments I find against debasement is that it's a non-transparent type of taxation.  So, even if someone has a view that government should be large and powerful and able to spend a lot in the economy and control the economy, few people would admit that they should be able to do that non-transparently, right?  So you're saying, well, if something's popular enough, if certain types of spending are popular enough, you should be able to do it with taxes.  Why do you have to spend more than you're making and dilute everyone's savings and their wages in this non-transparent way?  And so I think the biggest criticisms of the credit theory are that every system controlled by human ledgers or human administrators degrades over time, most of them degrade quickly.  I mean, the success rate of emerging market currencies is very low.  I mean, currencies come and then most of them within a human lifetime run into hyperinflation or triple digit inflation at least, which if sustained long enough, is basically hyperinflation.  And only a handful of them have really been able to instead do a slow-motion inflation, where they devalue significantly, but in any given period of time they're still workable money, but they just slowly have these small effects over time. 

Part of the reason they've been able to stay around is because in this telecommunications era, gold doesn't move fast enough, only abstracted things move fast enough.  And so, it's hard for a more physical thing to compete with such an abstract thing, even if that abstract thing loses value slowly.  So, yeah, the credit theory of money, I think, is one of those things that's worth understanding, even when you disagree with either all of it or most of it, because I think you should be able to articulate the flaws with it and articulate how people got into that intellectual position, so then you can potentially deconstruct that position.

Peter McCormack: Well, I think another argument for why it's been able to survive is that I don't think people fully understand it.  I think a lot of people don't understand where government money comes from, I don't think they understand government debt, I don't think they understand the connection between government debt and inflation, and how governments who continue to overspend and live beyond their means are actually enforcing this, well we say it's like a hidden tax.  I heard recently somebody said, "No, tax is an extraction of your money and inflation is theft of your money".

Lyn Alden: I think that's a reasonable way of looking at it, especially if you don't know what's going on.  Even the people that talked about inflation originally, Keynes for example, would point out that it partially works because people don't know what's happening.  In some ways, if for example a government had a 2% inflation target and they met that reliably and it was actually reliably measured, you could say that it's not theft in the sense that it's transparent, it's just a type of tax that exists out there that if you hold money, you're slowly going to lose some of its value to this type of inflation dilution tax.  But the fact that inflation happens in a bumpy way that's not properly measured, it's hard to even properly measure period, and that in certain regions happens very quickly, makes it in many cases effectively a type of theft, especially when it happens in such a centralised way. 

An example is, in 2016, Egypt just cut its currency in half overnight basically compared to the dollar.  And so, every single Egyptian, not only were their savings devalued, but their wages were now devalued on a global scale.  And now, the burden of work is on them to try to negotiate higher wages.  And if they came to their employer the next day and say, "Hey, the currency is cut in half, so I need 100% wage increase, which is not because I'm twice as good as yesterday, I'm just trying to get my prior dollar-based wage back", the employer would laugh them out of the room.  They'd be like, "You're not going to get a 100% increase, I'll give you a 10% increase".  And so basically, their wages in a global purchasing power dynamic got devalued.  And it was partially, and that's one specific story, but that happens over and over and over again in dozens of different countries.  Sometimes it's because that country messes up something with their ledger, and other times it's because the IMF comes in and says, "Hey, if you want to keep playing with our system, you have to devalue your currency", and that's actually part of what happened in Egypt's case.

Peter McCormack: And, "Give us your resources".

Lyn Alden: Yeah, I mean, that's a common tactic.  And in Egypt's case, it's less about resources, but it's more about playing with the rules.  And in many other more commodity rich countries, the resources end up being a much bigger component of that, which of course Alex Gladstein's covered in great detail.

Peter McCormack: Well, I'm talking about it over and over because I only got back last week, but my experience in Argentina was fascinating in that they've devalued the money so much that more and more people are being pushed into poverty.  It's now something like, I think it's 42% of people now in Argentina are living in poverty.  But also, that is a large voting bloc, and so the more conservative politicians who think they need a more responsible economic policy, they need to perhaps not subsidise energy so much and they want to curb inflation, they're up against the other politicians who are saying, "No, we will keep the subsidy there for energy, we will keep providing you with higher wages, we will keep supporting you".  So, it's become this kind of vicious cycle where more people are pushed into poverty, but those people are actually voting for more pain because the politicians who are seeking their vote are offering them the same problem that got them there, which is increase in money printing.  It's this horrible, vicious cycle.

Lyn Alden: Yeah, and that's the challenge.  And part of why it's a challenge is because there's not a clear alternative for them to turn to.  And so, for example, they historically try to turn to dollars, but basically you're getting diluted without the interest.  And dollars are often hard to get, they're easy for the banks to try to control.  If you're using dollars without being able to trust your banks, it's a much less good form of money because you get all the physicality and the privacy of it, but you don't get the convenience of it, and so that's a challenge.  And then now there's things like Bitcoin, but of course, Bitcoin is volatile.  So, at least in this stage of its development, it doesn't fulfil everyone's immediate needs for money. 

That's why these systems can, in some way, stick around longer than we'd expect.  When the US went off the gold standard, went off the Bretton Woods system over 50 years ago, for example, many people thought it would only last a decade or more.  They thought by the end of the 1970s, it would all just hyperinflate away.  But they managed to keep the wheels on the cart for quite a long time.  And, of course, they've had tremendous devaluation, they've had tremendous issues, but there's just not been a better alternative that's as fast and as convenient.  And you find that similar thing in all these countries that fail quicker, which is that even though they turn to things like the dollar, they turn to Bitcoin, they turn to stablecoins, whatever the case may be, nothing quite fills that void.  And so, the local currency issuer still has some degree of workableness.  It's not completely wasted money, and it's still able to devalue at, say, a double-digit pace, or in some cases triple-digit pace, rather than just a seven-figure pace right away, because there's still some of that residual value there, at least until I think Bitcoin matures and starts solving more purposes. 

Peter McCormack: Yeah, great.  Well, listen, I think we've covered the history of money.  Anyone listening, go and buy Lyn's book.  We'll link it in the show notes, definitely buy it.  And you and I are going to chat in a couple of days.  We're going to talk about how money actually broke, how we've gotten to this weird situation we're in now, the things I've seen in Argentina or the things we've seen around the world, even here in the UK or in the US.  So, yeah, come back for part two.  Lyn, do you want to send anyone anywhere?  Is there a specific website for this book you want to send them to?

Lyn Alden: They can check out Broken Money on Amazon, they can go to lynalden.com/broken-money to hear more.  But yeah, I think they should pick it up.

Peter McCormack: By the way, have you done an audio book?

Lyn Alden: I'm looking into it.  It won't be at launch in the way that the other formats will be.

Peter McCormack: Okay.  Are you going to narrate it though?

Lyn Alden: I would hire someone who's a better narrator than me.

Peter McCormack: Guy Swann.  Right, okay, Lyn, thank you so much, I owe so much to you.  Thank you for this.  We will chat again later in the week. 

Lyn Alden: Thank you for having me.