WBD704 Audio Transcription

Part 2: How Money Broke with Lyn Alden

Release date: Friday 1st September

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. This interview is the second of three shows where we discuss Lyn’s amazing new book: Broken Money. In this show, we explore the concept of hard money, the ascendancy of paper money and the transition from gold-backed currency to fiat currency. We talk about the birth of banks, fractional reserve lending, central banks, the flaws of the Bretton Woods system, and the impact of the petrodollar.

“The amount of games and shenanigans and corruption that goes on in all these…different currencies, from the big ones and especially the small ones, it’s remarkable; and, it’s largely technological limitation that got us to this point.”

— Lyn Alden

Interview Transcription

Peter McCormack: Hi Lyn, how are you? 

Lyn Alden: Good, how are you? 

Peter McCormack: I'm good.  Part two of three, we hope.  We had a slight suspicion preparing for this one, it might even get to a point where we need four, but we should be good.  Anyone listening, if you didn't listen to part one, this is a three-part series about Lyn's incredible book, Broken Money.  If you haven't listened to part one, go and check that out.  We will have released it a couple of days ago, so it will be there in the feed.  In that one, we discussed the history of money, what makes good money, and we found ourselves at the point of paper money being introduced to solve some of the limitations of gold, which is a point me and Danny actually brought up when we were preparing, Lyn, in that historically hard money has this kind of thesis around the quality of the money itself, but outside of the hardness of the money, there is this utility of the money, how you use the money.  And whilst paper money isn't considered particularly a hard money, it became a dominant form of money because of its utility.

How do you think about that with regards to a hardness of money, because when you think about utility you don't think about that naturally with regards to hardness?

Lyn Alden: Yeah, it's a good set of questions.  And I think one way to simplify it is by saying that speed is a variable in money.  It's a type of portability.  And so, I think if you summarise most commodity money history, the general pattern is you keep increasing towards more and more hardness as humans met each other around the world.  As our technology improved, we settled on gold as basically being the hardest.  And I think we can argue that fiat currency, the introduction of fiat currency, is the first time where a softer money won out on a worldwide basis over a harder money, and it's because speed was such a big variable. 

You can almost describe the history of banking as the history of people struggling with gold and how to make it faster and more convenient, because even though it scores very well on all the traits of money, it doesn't score perfectly on all of those traits.  And so even in terms of physical coinage, coins won't be fully identical.  They'll get worn down over time.  It's funny, as part of the research, I was reading William Stanley Jevons 1875 book, Money and the Mechanism of Exchange, and he would go into detail, like all the imperfections with coinage and then all these layers of banking.  Everything is about trying to make gold basically move faster without actually moving faster.  So, you're making it more divisible, you're making it more auditable.  It's easier to audit a certain certificate than it is to audit a physical bar of gold.  And so the whole kind of the shortcoming that existed there opened this window for faster and more convenient money to come around. 

When you combine that with government legal tender laws, and you combine it with taxes on other assets that basically makes everything that's not defined as money a taxable event, it's been this kind of wild success story, you could say, it's had all sorts of consequences.  But it's pretty remarkable how dominant fiat currency became over this past century, and it was through all those layers of extraction because they were just always struggling with the properties of gold.

Peter McCormack: Is there another weird factor within this that we don't normally consider?  We talk about the properties of money and the hardness of money, but that can be infected by the greed of man, the ability for people to distort money, to abuse money, and therefore that path to the best form of money gets distorted because there's these perversions that exist within certain forms of money.

Lyn Alden: Yeah, and so the speed arbitrage gave basically a lot more window to mess around with that.  And so the history of money, when you look at coinage and debasement, there's always been kind of a small window of controlling things or kind of putting your will onto things and putting the numbers in your favour.  But that speed arbitrage and the amount of abstraction we've been in ever since the invention of the telegraph, this whole century and a half, the window now for messing around is much larger.  And we see it in developed countries, but then we even see it even more in many developing countries.  So, when you have this whole field laid out in front of us of like 160 different currencies, the amount of games and shenanigans and corruption that goes on in all these different pockets of different currencies, from the big ones and especially the smaller ones, it's remarkable and it's just it's largely a technological limitation that got us to this point.

Peter McCormack: Yeah, I don't want to get ahead of ourselves because we're definitely going to cover this in part three, but when you talk about people wanting to improve gold, I wonder if we needed this perversion of fiat money in order to get the Bitcoin that we got.

Lyn Alden: I think you could argue that, and I think kind of a theme I have in the book is one of technological determinism, which is kind of a way of saying that it ended up pretty much the way it had to, and if you were to rerun this, it would end up similarly multiple times, more often than not.  And an analogy is that, for example, if you were to look at the history of human inventions, the bicycle would almost always come before the car because the car uses the same technology as the bicycle, but then also more; same thing with the plane.  And so, once we invented the way to do transactions very quickly, that's a much easier invention than doing settlements quickly, because settlements require, with the Bitcoin, you need all this computation, all this bandwidth, it's a much more complex process.  And even the final pieces of it, like the types of encryptions that were used, were invented in like the decade prior to Bitcoin's launch.  And so, it pretty much came as quickly as it could have. 

So, in this window that existed, where we sped up transactions but not settlements, I think if we were to rerun this multiple times, we would keep erring towards fiat currency, at least for this window of time, because when something fails so completely and ubiquitously everywhere, that's a sign of something, that's a sign that there's almost an inevitability to it.  So, it's not like some countries went off the gold standard and other ones are still there.  It's no, they pretty much all failed in the early 20th century.  No government was able to keep itself on a gold standard.  So, it's not that gold failed as a savings asset, but it wasn't powerful enough to assert its will and make government stick to it.  And so, every government around the world just decided, "Well, we're going to make our own ledger and we're going to go in this different direction".  And I think that Bitcoin closes that gap, but I would basically agree with you that I think that we wouldn't even get to Bitcoin without going through this period and seeing the challenges with it, and just from a sheer technological standpoint.

Peter McCormack: So, there's an inevitability to Bitcoin itself then, which is it's an interesting way that you can start to rationalise this yourself.  But as you talk about these fiat currencies in any jurisdiction starting to fail, one of the most interesting charts, and I miss it, was LocalBitcoins.  Whenever there was a currency crisis, whichever country, you would see a Bitcoin spike.  So, its inevitability or its design being a solution to those problems of fiat currency was always proven, but we're getting ahead of ourselves here, we're covering part three.  So, I'm going to take a step back. 

In this episode, in this show, we want to talk about how we destroyed money.  And I'll say we, but how money has been destroyed, how fiat currencies led ultimately to Bitcoin.  So, we left the last show getting to the point of fiat currencies, paper money, and we just want to get into the world of banking.  So, can you talk to me about the birth of banks; where did it start; where did we first get the banks from?

Lyn Alden: So, the early proto banks go back literally thousands of years and the two primary functions are the provision of credit, so basically the manipulation of money over time, or just the ability to move money easier, so it's increasing the portability of money.  And so you can find, for example, bills of exchange that were used on the Silk Road, so 1,500 years ago, and there'd be someone sending money from Uzbekistan to China and instead of bringing the gold with them, they're basically transferring a slip that could be exchanged for it later.  And so, whether you look at, Babylon was a really early sign, a period of some degree of banking, basic interest and loans and things like that.  And so most of those systems started to coalesce, but the banks, as we think of them in the modern form, didn't really come around into Europe over the past several centuries. 

So, in that period, as communication got a little bit quicker, as civilisation got a little bit more developed, we went from this channel-based proto-banking environment to these more banking institutions.  And one way I characterise that in the book is to talk about increasing levels of negotiability.  So, in the early proto banking, before you get to the full banking stage, it's like you'd have a piece of paper that says, "Peter McCormack is entitled to five ounces of gold redeemed", and it would be between you and the issuer.  And that's a non-negotiable instrument, meaning that if Danny somehow gets the paper, he can't go and get the gold.  Now, over time, negotiability started to increase.  So, institutions became more flexible, where you could sign it over to Danny, and then Danny could then retrieve it for the gold.  And then eventually, there were such institutions that were large enough in a region, like they were known enough, that they could issue a bearer asset, like a banknote, that says, "Whoever holds this can redeem this for a certain amount of gold". 

It's almost like watching the internet build, if you look at those graphs over time in the early decades, it was kind of like that in analogue form, as these different institutions would connect to each other, as some of them would grow and extend their influence, and you got more and more connectivity.  And a lot of it was around, from this channel-based, proto-banking environment to this more institution, you can almost call it a broadcast base.  When banknotes are out there and they're being able to use back, you're basically broadcasting the brand of the bank, the reputation of the bank, compared to doing business on these networks of channels.  So, in banking, it's almost like Lightning came before Bitcoin, whereas of course in Bitcoin world, the base layer came first and Lightning was built on top of it.

Peter McCormack: So really, banking came originally because people wanted to have somewhere safe to store their gold because they didn't want to store it at their house, somebody would have a vault and protect it for them; and then these paper claims became the promises for the ownership, which then became notes which you could use for trade; is that what you're basically saying?

Lyn Alden: Well, so custody was a big early part of it, but then also the transfer.  So, having someone where they're in a city, they're a money changer, they know certain connections in other cities, and if you want to send money to those other cities, you go to your local money changer and they're part of this network.  So, you can give your goal to them, not necessarily because you want to store with them long term, but because they can now basically transfer it quicker than you could physically and safer.  So, it's both the custody aspect and it's these different networks for trying to send value more quickly.  And when those come together, you started to get the development of banking.

Peter McCormack: And so this paper money, what was really certificates rather than -- and I guess the different banks would have their own certificates.  It wasn't like a uniform money, just different certificates at different levels of trust, depending on how much you trust the institution that held it?

Lyn Alden: Yeah, there were different environments for that.  That's generally considered -- it's called a free banking environment and that's where there's no centrally issued bank note, but instead banks, their gold is their money, and they have various certificates or claims that can be retrieved for gold, and larger more well-known ones, their note would be accepted at a further distance; whereas smaller ones, or ones with weaker reputations, might trade at a discount if they go too far away, or they might not be accepted at different levels of acceptability.  But at the end of the day, they were all basically certificates for the retrieval of either gold or silver or similar.

Peter McCormack: I remember Nic Carter wrote about this era of free banking and if my memory serves me, there were more bank runs.  I think this is why we got the central banks because individual banks had issues, but you would end up protecting yourself by holding reserves with different banks.

Lyn Alden: Yeah, they were heavily intertwined.  And so, one of the challenges, and that's kind of how this whole complexity started, is that the people that were custodying the gold, so that particular form of banking, they realised that no more than like 30% of people ever want their gold back at once.  And so they would say, "Well, we could do something with the gold instead of just hold 100% of it".  So, there are a lot of things that we deal with today that are still full-reserve custody environments for us.  So, for example, if you have an ETF, they're holding a bunch of stocks and they're managing the inflows and outflows of those stocks in this basket.  And it's a full-reserve vehicle and you're paying a small fee for the administrator to do that.  The same is true if you vault gold somewhere today, you'll pay a small fee for that.  If you have a safe deposit box, obviously they're not doing anything with your assets while you're holding them in safe custody at the bank. 

But back then, because gold's fungible, so you don't have to get the same gold that you put in, unlike say things you put in your safe deposit box, the combination of fungibility and the fact that because gold is somewhat inconvenient, people didn't really want to retrieve it too often, they'd prefer to have it in the bank and be able to move around by signing something or by going to their banker.  And so, they realised that people don't withdraw it, and so they could start issuing either more claims than the amount of gold they had, or more specifically, they could start lending out some of that gold and trying to generate an income, which then allows them to eliminate the fee that depositors have to pay, which makes it a more attractive product for them. 

But then it becomes an issue of risk because then you have an environment where there's more claims floating around.  And I think that that's how we can describe this initial path towards fiat currency, which is that gold's slow speed made a lot of people want to put in a bank and centralise it, use these claims instead, and then that allowed for the proliferation of claims relative to gold.  And whenever push came to shove, whenever that system would be tested or would break, in the early times you'd have to just collapse back down towards the amount of gold in the system.  But as this got so prolific where there's just claims everywhere, whenever there's a problem, you'd instead err towards making the claims whole, even if it means breaking a gold peg or centralising things more and more. 

So, it initially started out that central banks were formed because they always had these crashes, this inherent fractional-reserve instability problem, and then these central banks would come around and purport to solve the problem.  But then they actually, over time, just further abstracted us more and more from gold until we just kind of lifted off and it detached entirely. 

Peter McCormack: Isn't it funny, that it doesn't matter whether it's one of these very early banking institutions which is taking your gold and offering some form of custody, or whether it's Prime Trust with Bitcoin, the issues with fake claims or over claims or the incentives for people to issue more claims for what they hold exist.  There's this perversion.  It doesn't matter what the form of money is, it just exists for whatever form of money that is being custodied.

Lyn Alden: Yeah, it's been a remarkable trend of human history, that whenever you have custody of something that's fungible, games get played with it.  If you're storing non-custodial things, it's much harder for the people running it to mess around.  But when the system is fungible and it's not being tested very regularly, it allows these problems to build up until they're exposed.  And it literally goes back to earliest history.

Peter McCormack: Yeah, and then that's again -- I'm jumping ahead to the next episode; sorry, Danny, he's going to be shaking his head at me, but that's why the ability to self-custody with Bitcoin is such a revolutionary part of the evolution of money.

Lyn Alden: Yeah, because historically, throughout all these eras, you could self-custody gold, but generally you wouldn't want to do it in large amounts.  And so people weren't forced to put their money into banks, but many of them happily did because they wanted professionals to be able to custody of that in a way that they can't, and they expect it to be safe.  And what's powerful about Bitcoin is it's the first asset where you can really rake ownership of that asset up and spread it around, not in a legal sense, but in a literal sense.  So, by having like multisig, for example, or collaborative custody, you can have it so that even fairly large amounts, you can still custody safely and inexpensively.

Peter McCormack: Okay, can we talk about the advent of double-entry bookkeeping.  How did that actually change the game with banking?

Lyn Alden: So, it allowed for more complex financial arrangements.  So, instead of just these channel-based, proto banking, the banker would have this elaborate set of assets and liabilities and that would allow them to basically do more complex financial arrangements, mainly that while fractional-reserve lending model that they would do.  And when you go back and look at the history of European banking, it's really this development of very detailed notetaking, very intricate records, and that's what was a fairly new thing. 

Now, obviously, records have gone back very far.  If you go back to ancient Babylon, for example, you'd have those clay ledgers.  And even speaking about custody, they had laws around custody and things like that, that's kind of the earliest line to this stuff.  So, in some sense, it stretches back forever, but that's the single-entry bookkeeping.  And so, when you get to that more modern era of having two sets of books that reconcile, it just allows for more complex arrangements.  And that's part of what allowed the European financial system to flourish.  Because until that period, Europe was kind of a financial backwater.  Most of the financial innovation was happening, in large part, throughout the Muslim world because that was more centred around the Silk Road type of environment.  So, in ancient times, it was along the Silk Road and then it was during the golden age of Islam.  And then, Europe was this financial backwater.  And as Muslim traders would interact with them over time, some of that brushed off, but then they made certain advancements once they actually caught up to speed and they proliferated this modern type of banking.

Peter McCormack: But did that also lead to this explosion of fractional-reserve lending?

Lyn Alden: Yes, because that's what enables these games to be played at a much larger scale.  So, you'd always have, prior to then, challenges of custody.  It's not like they invented problems of custody, but they institutionalised it and they allowed for this more structural proliferation of claims relative to the amount of underlying, because it's like you're juggling all the time, you're keeping multiple balls in the air.  You have this complex set of books and it's based on probabilities that most people are not going to want to pull their money out at once.

Peter McCormack: Our mutual friend, Caitlin Long, she wants to and has been trying desperately to establish a full-reserve bank and we know that she's come up against challenges for that, which seems crazy, but we know why she wants to do it.  But at the same time, having put this book together, what is your opinion now on having fractional-reserve banking?  Because there are people who will defend it; they'll say, well two versions, they'll say that it is good, it is required as long as you operate with good risk models, it's absolutely fine; and others say, I think it's Nic Carter said, "You can't stop it anyway".  Even if you wanted to, you will have people who create leverage within systems.  But what's your view now, having written this book, on fractional-reserve lending?

Lyn Alden: So, I'm parked in the camp that you can't really stop it, is the problem.  The incentives were clearly too strong because full-reserve banking, I think another way of just describing it is proper duration-matching.  You know, when people hear full reserve, that can be a little bit misleading.  It doesn't mean that banks don't do any lending, it just means that the lending that they do is with capital that is not simultaneously promised to be liquid to someone else.  So, if a bank makes a loan, say a two-year loan, that'll be supported by someone had basically deposited a time deposit, so it's a two-year certificate of deposit or longer, and so they're putting their money in, they understand that they can't get their money, or at least can't easily get their money for the next two years, and that's being lent out in the meantime. 

Fractional-reserve banking ultimately is, you have these demand deposits, so people think they can get their money back any time, and on a one-on-one basis they can, but the money's not all there, it's lent out in these more liquid arrangements.  And so, I think on one hand, I'm firmly in the camp that duration-matching makes sense, that if you're running a financial institution, that duration-matching would ideally make sense.  But when we see that it's not what developed in basically any country, any time this arose, they'd instead end up doing fractional reserve and then regulating around fractional reserve, and sometimes not even allowing, in this case, full-reserve banks to exist, I think it's one of those things where, again, if we were to rerun this multiple times, you probably would end up with fractional-reserve banking multiple times, because the tendency and the incentives point towards that.

I think, especially in this current era, so I think if you had, for example, going back to, I guess, part three, but if you had a Bitcoin world, if there's less abstraction and if the underlying is convenient to move around, then the incentives for fractional-reserve banking are much, much weaker.  But in this environment where gold is slow and therefore people want the claim for it, they want the abstraction of it, or in this world where the underlying unit, the fiat currency unit, is inherently flexible, so you can always print more if you need it, both of those types of money seem to err toward fractional-reserve banking over and over again, wherever they pop up.

Peter McCormack: Right, okay.  Let's move on to the birth of central banks.  Where was the first central bank and why did it happen?

Lyn Alden: So, the earliest ones were in places like Amsterdam and then Sweden and Bank of England.  Those are some of the earlier central banks.  The Federal Reserve is one of the later modern ones among the developed world.  They would start out basically as a consortium of bankers.  They would get together and say, "Hey, we could use a central clearing or we could use a central hub", and so they would form in that way.  In the United States, we actually had three different central banks over the course of our history.  We had these early two, they weren't really full central banks, you could almost call them official banks, where there'd be an official Bank of the United States that serves as the banker for the government.  They would operate on these 20-year terms and expire. 

Then we had a period where we just didn't have any central bank or any official bank.  And you kind of, in that environment, trend towards whatever the bigger bankers are end up being the central bank.  So, in the United States, that was like JPMorgan, and he would serve as the de facto central bank.  But as the systems became more centralised over time, throughout the world, centralisation was that natural force.  And I think a lot of it had to do with this increased speed of communication.  So, as telegraphs were invented, as communication could move over long distances pretty quickly, and as leaders could see the chessboard more easily, you have less fog of war when the world's more connected and especially across your country it's all connected, they trended towards centralisation.  So they say, "Okay, every bank now has to hold their gold in the central bank and you just have a claim for it". 

So, you start adding these layers to it and usually at any time it's welcome, because usually it's during these financial crises or these wars where you're able to make these permanent changes to what are inherently temporary problems.  And so, you'd have either a bank run or you'd have a war, and so there'd be a set of new laws to centralise stuff.  But then even when that's addressed and the war is over, that centralisation is now in place.  And so that's been this trend where central banks would pop up and pop up and spread throughout the whole world. 

Danny Knowles: With those first two central banks, what was their mandate? 

Lyn Alden: Basically, they would just serve as the bank, like a checking and deposit type of work for the central government, so the federal government.  So, they would serve and they wouldn't be this backbone for the whole system.  So, right now, the main mandate of a central bank is that they're operating the ledger that all the other banks use as their definition of money, reserves and bank notes.  You didn't have it back then, and it was different than the mint.  So, there was the mint where they'd actually make the coins, but then separate from that, you had this very limited scope bank.  Basically, the founders were, in many ways, pretty sceptical of banking as an establishment, and so they wanted very strict limits on it.  And so really, what it would do is operate almost like any other bank, except its primary customer was the United States federal government. 

Danny Knowles: So, they had no input in terms of employment or anything like that?

Lyn Alden: Yeah, they didn't have the type of sweeping mandates that they have today.  They were just there to serve an administrative function, more or less, and then they'd be allowed to expire and they'd be restarted again and it was a much more limited environment.

Peter McCormack: So, the original central banks, really were they private institutions?

Lyn Alden: In a way, yes.  They basically would be this consortium of banks that they would form like this hub and then they would get some degree of official recognition.  But yeah, a lot of them were that private model.  And in the modern era, most of them are public now, but the Federal Reserve's this weird public-private hybrid, where technically the banks themselves are not owned by the government, the central bank.  But on the board of directors, the main overseers are appointed by the Senate and the President to oversee it.  So, you have that weird hybrid model.

Peter McCormack: Is that a hybrid model where they get the benefits of both sides of this equation?  They get the benefits of being private, but they get the benefits of government protection should they require.

Lyn Alden: Yeah, and a lot of that came around because of negotiations at the time.  So, if you're trying to pass something, you have to get it through the banks, basically.  And so the bank said, "We want to be a part of this".  And so, when they formed that, that was one of the steps to make it workable to all the parties involved, is to have that that hybrid model where there's certain things that the banks have control over, they have certain inputs, but then the federal government still wants their share.  And of course, the way it's structured is that on the highest level of the Fed, the public appointees have 7 out of 12 of the slots. 

Peter McCormack: So, are you saying that basically the people who created the rules of the central bank are the people that benefited most from the rules that were created? 

Lyn Alden: That's largely the case and that tends to be how history goes. 

Peter McCormack: At what point did their mandate grow to almost become this like wing of the government setting broad economic policy, interest rates, employment targets, such that they were the guiding light for economic growth? 

Lyn Alden: So, it depended on the country, but in general, the World War era.  So, in World War I, central banks took a large role in financing the spending.  That was one of their initial expansion of mandates.  And then, especially during and after World War II, a lot of them focused a lot more heavily on this domestic administration role that they didn't previously have.  Even in the Bank of England's case, one of the earliest reasons for the bank to exist was to finance the government, so that's not a particularly new phenomenon.  But as technology changed over time and as it all changed towards fiat, that became a much, much larger role.  But the actual micromanaging of the domestic economy didn't really become a thing until during after that that World War period. 

Peter McCormack: Right, okay.  So, this role in financing war, me and Danny were talking beforehand about war bonds, is it a bit of a myth that war bonds themselves were popular? 

Lyn Alden: It depends on the country.  So, they were more popular in the United States, you know, there was a decent amount of buying among the public, but especially in the United Kingdom and elsewhere, they were not terribly popular.  So, the story that I talk about in the book is that basically during World War I, England tried to issue these war bonds and say -- because the war is not on their shore, they're getting involved in this Eastern European conflict.  The idea of a world war was not on their minds at the time.  And so they say, "Hey, we want to issue money, a very large amount relative to GDP, something like equivalent to 100% of GDP", it's like today issuing trillions of pounds, and saying, "We want to go fight this war".  And the public was like, "I don't know".  Even though they were offering slightly higher yields than the normal government bonds, they just weren't able to raise enough capital at the rates that they wanted to, like a reasonable, payable rate.  So instead, the central bank just financed it.  And so, that was the earliest signs of basically quantitative easing to finance unpayable debts. 

The result from that was that rather than abstract, like pulling capital from the country and then redirecting it towards the war, you just spent into the war without having pulled that capital in.  So, you just dramatically increased the money supply.  And in England's case, because they were the world reserve currency, it didn't just hurt people in Britain, it hurt all these countries around the world that were all holding these various abstracted claims for value.  So, they basically were able to drain value from across the colonised world and channel it towards war in Europe.  And that power was one of those things that was, once it became known, they never wanted to stop using it.  So, it had been there for decades; the whole late 1800s, this was always a possibility that could have been happening, but there was relative peace.  But as soon as things got a lot more intense, they resorted to that power and then never wanted to give it up.

Peter McCormack: Yeah, it feels like there's a strong history between central banks, money printing and wars, and that it accelerated that perversion of the money.  And I do wonder if, you know, because I would consider these war bonds, it's like you have to make a decision, "Okay, do I want to profit from war?"  Is that one of the reasons maybe they weren't popular?

Lyn Alden: I mean, I think you'd have to do a really deep dive into the politics of the era.  You know, I studied more of the quantitative outcome of that.  So basically, they were only able to fill about a third of them.  I guess the rates were just not attractive enough to people.  It's possibly an ethical view as well.  Generally, if a war is popular enough, people will finance it.  That's why, for example, if you look at American history, we were pretty isolationist in the run-up to the World Wars, and the idea of going to war was very unpopular.  But if you look at polls, for example, after Pearl Harbor and World War II, that swung, it changed very dramatically. 

So, at the time, because this war was not even -- people didn't see how it's going to change.  Whoever wins this war over in Europe, how's it going to change the lives of people just living and working in Britain?  And the answer was they didn't see how it would.  So, it just wasn't a very attractive offer to them.

Peter McCormack: "Bank of England covered up Failed First World War bond sale".  It's unlike our government to lie to us!

Danny Knowles: You obviously brought this up in the book then, but I thought it was really interesting that the Financial Times had to issue a 103-year-old apology, because basically the Bank of England lied to everyone!

Peter McCormack: They did?

Lyn Alden: And the Financial Times was partially responsible for helping to amplify and broadcast the idea that the war bonds were successful.  And it's funny how for literally a century, this went unaddressed.

Peter McCormack: So, they apologised, when was that, about 2017?

Lyn Alden: 2017.  Yeah, basically the Bank of England released these old records of what happened and then, like a chain of dominoes, the Financial Times came out and said, "Well, based on this new information, we're happy to correct our article from 1914".

Peter McCormack: Damn, it's a bit like what happened with the Iraq War.  I still think there's some institutions, there's some media companies, who owe us an apology there.  Can you talk about how the UK tried to repeg to gold after the war?

Lyn Alden: Yeah, so after World War I, they had dramatically increased the money supply.  They had suspended gold redemption.  But up to that point, they had stayed on the gold standard for centuries.  They took pride in the soundness of their currency.  They were the centre hub, financial hub, for the world at that time.  They had pretty much doubled the money supply; they certainly didn't double their gold.  If anything, they had to pay a lot of their gold to America and elsewhere to help finance the war.  So, you have less gold, more money in circulation.  And the problem is, if you try to repeg it at the same level, it doesn't really make sense.  And even like sound money advocates at the time, like Mises was saying that, "You can't just repeg the same number and pretend that didn't happen.  You've already debased the currency.  You have to settle with the fact that this number is a much bigger number now and repeg it at a proper rate". 

So, the challenge is that if money supply is doubled, if wages are doubled, if the cost of everything is doubled, but then you still claim that every currency unit is redeemable for the same amount of gold, it basically means that all those wage workers, for example, in theory are making twice as much gold per hour, which would be great if it actually was true.  But the problem was that it just wasn't true.  And so, they would try to repeg it and the numbers didn't make sense.  And so you would contribute to the UK not being competitive labour-wise, because the money was trying to be artificially too strong relative to the amount that was created.  So, their attempts to repeg it were ultimately unsuccessful.

Peter McCormack: Well, again, jumping forward, this is why Bitcoin is so interesting, because rather than a nation state trying to repeg us to a hard global reserve currency, we ourselves can peg our currency to Bitcoin.  And that's why it's super-interesting with things like when I bought this house, for example, I did the calculations in Bitcoin, and then I naturally took out the biggest mortgage I could over the longest period, because the calculations I made is over the 25-year duration, that that would be the best way for me to utilise my money, proven correct so far with the 10% inflation, maybe even higher we've had in the UK.  So, we can, as individuals with Bitcoin, we can repeg ourselves.  We can actually make those calculations, whereas the government can't do that.

Lyn Alden: Well, I mean, pegging in that environment is a specific term.  Basically, it's saying that they're equating a dollar or a pound with a certain amount of gold and deciding what that is.  I think that really goes down to the aspect of abstraction, because precious metals don't come in natural units, right, other than atoms, which are obviously too small for us to interact with.  So, they come in these amounts that are ill-defined.  And so, since the early history of coinage, we've been adding a layer of abstraction to it, and paper just further abstracted that.  So, we kept more and more abstracting the unit.  And what that allows is for basically flexibility of the unit and usually not for a good reason. 

Basically, a Bitcoin is a Bitcoin, it just is a Bitcoin.  Bitcoin comes with its own units.  Now people can argue, "How should we mentally use the units?  Should we use bits or sats?"  That's that whole debate that's been going on for a while. 

Peter McCormack: Stupid debate; it's sats!

Lyn Alden: I agree it's sats too.  But ultimately, it's a divisible unit and it is just what it is.  Whereas because other types of money didn't have that, you have this artificial unit placed on top of it, which then allowed for different politicians or segments of the public to debate among themselves, what should this unit be?  And that happened in every country that went through this.  So, the United Kingdom was trying to figure out, can we repeg at the prior rate, even though we expanded our money supply?  And in the United States, they were debating, should we stay by metallic standard; should we only have gold as our money?  And you'd have different groups that would be harmed or hurt by which direction that would go in.  And so they're basically debating with each other what that unit should be.

Peter McCormack: Well, I find having my own private peg with Bitcoin super-useful.  It's changed the way I view my money, financial transactions I make, because I don't see a world where we go back to a hard money standard that's going to come from a government, because that would make them have to be honest and I don't think we're going to get that.  Can we talk about Bretton Woods?  We've all heard about it, there's a very famous book that covers what happened there.  I think you've also been to a conference there, am I right?

Lyn Alden: I have, yes.  I've been to the hotel.

Peter McCormack: Is it amazing? 

Lyn Alden: It's gorgeous, it's in New Hampshire and it's this very like -- it looks like a castle and you're in this beautiful, mountainous environment, rolling hills.  And so, yeah, they had been there for, I think the initial conference was 19 days or something like that, where they were sequestered at this hotel trying to negotiate with each other what the global financial system would look like. 

Peter McCormack: So, what happened with Bretton Woods; what did we get? 

Lyn Alden: So, that's where the two main debates at the time were between the United States and the United Kingdom, and it kind of represented the switchover of world reserve currency status.  The UK had a vision where countries around the world should get together and have this super-sovereign unit, called a bancor. 

Peter McCormack: It was the bancor, yeah.

Lyn Alden: And that would be something that they can all peg their currencies to and that will be used for global settlement.  The downside of that structure is that it was it would require a lot of cooperation and be pretty fragile, because they have to all agree on this abstract unit.  The United States said, "No, we'll just peg the dollar to gold and use the dollar as that centrepiece.  All the other currencies can peg themselves to the dollar, the dollar's pegged to gold, it's redeemable in gold for those official foreign creditors", even though it was no longer redeemable for domestic Americans, it was still redeemable for these international linkages.  And the idea was that they'd have this stable monetary environment.  And again, it's an increasing level of abstraction. 

So, you go from banks hold the gold, to central banks hold the gold and banks use the central bank ledger, to the United States holds all the gold or most of the gold, other countries peg themselves to the dollar.  You basically have this increasing chain of abstractions, and Bretton Woods was that last attempt to still have gold at the bottom of that layer of abstractions.  And I think that one of the biggest misconceptions is that the problems started in 1971.  Whereas, I argue in the book, and I am not the first one to make this observation, that it was just flawed from the start, it was just not a well-designed system, and so it was inevitable that would break. 

You had this system where banks were not constrained by the amount of gold.  They weren't even auditing the amount of gold over in Fort Knox.  All that gold was not a factor in bank lending decisions, either domestically or in the offshore eurodollar market.  So, you had this proliferation of more and more claims in the system for gold, and you had a falling amount of gold.  And the inevitable happened where around the margins, countries would slowly redeem dollars for gold.  So, you had the amount of gold in the United States going down, you had the number of claims for gold continually rising until it reached comical levels and broke. 

Peter McCormack: So, WTF Happened in 1971? isn't true, we just need WTF Happened?  Maybe that should have been the name of your book, Lyn, WTF Happened?!  Okay, can you talk to me about the petrodollar?

Lyn Alden: So, the Bretton Woods system, it's funny because people think of it as coming into place in 1944, but really it came into place in the late-1950s.  That first decade and a half is really about laying the framework and preparation for it, but the full system was implemented in the late-1950s and the amount of gold just went straight down from there.  The system was just inherently unstable, so a little over a decade into that, it just broke.  Then, that's the first time that the whole world found, it had centralised itself more and more, and that central piece broke.  So, suddenly the world's awash in none of our currencies are backed by anything, except for like Switzerland still had a gold standard.  But most countries, their currencies are flailing in the wind now.  And you can still mandate acceptance of that currency in the country, but it's hard for a country to go to another country and say, "Hey, take my random pieces of paper or my arbitrary bank ledger that's redeemable for nothing and sell me oil".  They're going to slap you. 

In that environment, you had a breakout of inflation across the developed world.  But the United States, even though they broke that, they defaulted on that promise, they still had a very large amount of economic and military clout.  So, they instead said, "Well, let's just put the dollar and the Treasury itself at the heart of the system", and basically, it's been the most sophisticated attempt at a fiat currency as possible, because they went to Saudi Arabia and other members of OPEC and said, "Hey, I know it's not backed for gold anymore, but we're going to have pretty tight policy, fiscal and monetary, and we can sell you a significant amount of arms, we can protect your region, but let us do it in dollars, and then take your dollars and buy and hold some of our Treasuries as savings.  So, instead of stacking gold, stack Treasuries".  And obviously that came with risks to those countries because it's not as sound as gold, but then it came with all these added perks, these trade relationships and these protector relationships. 

So, basically the United States had enough economic and military clout to replace gold.  They put their ledger at the heart of the whole world ledger.  And previously it was through abstraction, and now it was just direct, just the dollar itself was the global unit of account.  And I think we can argue that we're still in that era.  I mean, it's slowly now fraying around the margins, but this era that we've been in is still the structure of how the system works.  And what's remarkable is that Bretton Woods was a very short-lived system.  It's actually remarkable how long this petrodollar system has existed.  It's been about 50 years. 

Peter McCormack: Do you think the petrodollar itself has contributed to an increase in war globally?

Lyn Alden: I think it certainly increases the background ability to do war that's separate from what the people want.  So, the percentage of people that die in war is low today globally, but I think the main function that it has is that war is financed very different than it used to be.  So, if you look at say earlier wars in American history or elsewhere, they'd have to tax for it or issue debt, then get repaid for it.  Whereas, over time, as we've been in this fiat currency system longer and longer, wars are just financed by money printing essentially, or you issue debt and do quantitative easing later.  So, that dilutive effect has allowed for a lot more background constant military engagement at a lower level than, it's not like an all-out war that everyone knows about.  It's that you can just have this perpetual war always happening around the margins, and it doesn't really matter if the public buys into it or not because as far as they can tell, they're divorced from the financial consequences of it, even though they aren't.

Peter McCormack: This ability for the US to be the controller of the world global reserve currency, it feels like it's led to its own perversions.  Well, it doesn't feel like it, we know it has.  Alex Gladstein's covered this in a book he recently wrote, and we've covered this with him on the show, in that the US has been able to use the dollar to essentially carry on a global form of colonialism, like economic colonialism, on smaller nations.

Lyn Alden: Yeah, I think he's brought a lot of coverage to that and I think he's right to show how for institutions that are central to the global monetary order, they get surprising little coverage in press.  And so, I think it was important for him to publish his work and I cited it as well in my book.  And that predates the petrodollar system, that's part of the Bretton Woods arrangement.  You set up the IMF, you set up the World Bank and these are entities that basically serve as the guardrails for the system, and they're mostly controlled by Americans and Europeans. 

The challenge is that then the United States defines the unit of account that most of the world uses, and then these institutions, they get to dictate the terms for how countries might be able to access the unit of account.  And so, that combination is extraordinarily powerful.  And really, it's an extension of what the United Kingdom did as well, because when the United Kingdom was the global empire, they had enough clout to say, "Hey, hold these bonds instead of gold for your reserves", which then allowed them to rug pull later during World War I.  And the United States has been in a situation that's similar where they say, "Okay, hold our dollars.  There's nothing better that you can turn to, so just use our dollars".  And then these guardrails keep the system in place, because if it was such a bad system that it would break quickly, we'd go on to something else. 

So, it's like you have to keep it so that it's stable enough, these automatic stabilisers kick in, and that's what those functions serve as.  But then you have a situation where a relatively small number of countries are able to dictate monetary policy for most countries.  And obviously, there's a risk if some of the economic prescriptions they're giving are not the right ones, because whenever a country finds itself indebted, let's say it's Egypt or something, if they want to do financing, they often have to do it in dollars; then they get a problem where they have too much dollar-denominated debt; then they have to go to these centralised guardians of the dollar.  They have to go to the central hub of the system and say, "Hey, we need another dollar loan to fix this".  And then those hubs can say, "Well, we'll give you the loan, but you have to do these, say, ten set of things to your country". 

Every country that goes through this gets a similar set of policies that they have to go through.  So, it's like, "Okay, devalue your currency, reduce energy subsidies, shift more towards exports".  They do these series of things, and it's this economic experiment that's being repeated almost cookie cutter-like to different countries.  And if that ends up, say in history, you look back and say that was actually a bad set of economic prescriptions, the risk is that it's been done everywhere.  It's not like different countries all doing their own thing, it's this one cookie cutter approach that's applied elsewhere. 

I think one of the overall harshest things around this era is not necessarily war, it's the stalling of development, the inability for people to build capital in many of these regions.  If you're in an environment where the current itself is very weak and it's very flexible and you're always getting rug pulled, it's hard to build significant capital; you ploughed into illiquid things, you basically have all those frictions.  And so you don't actually see almost any cases of emerging markets, markets that are classified as emerging markets, becoming developed markets, it's actually extraordinarily rare.  And really the handful of success stories are mostly in Asia; there's been enough economic mass there to make it work.  But the success rate in this dollar environment, from going from developing or middle income to advanced income, is like threading a needle because it's so hard to build capital under this arrangement.

Peter McCormack: I mean, look, I've seen it up close in this last couple of weeks when I've been out in Argentina.  And it was a really strange thing because I went out, I actually flew down from Texas and I had like an 11-hour flight, so I downloaded just a couple of documentaries to watch and news reports, you know, this 140% inflation and I've been to high-inflation environments.  When I went to Venezuela, I mean it was a desperately horrible experience, you saw extreme poverty up close.  And I was coming to Argentina expecting not the same, but a harsh environment.  When I got there, I went into Buenos Aires, the streets were packed, the shops were full, we went out to dinner, the restaurants were full and I said to the people I was with, I said, "I was surprised to see this.  I understand this harsh economic environment" and he said, "There is no point saving".  There's like this resignation that their money will be worthless in the future.  I mean, they're experiencing 10% month-to-month inflation. 

So he said, "So, all we do is we just spend it straightaway, and we go out to dinner, we enjoy our lives from day to day".  They do it knowing there's this horrible, slow decline in standards and opportunity, but they said there's no point trying to hold on to your capital because it's melting away.  So, it was this really weird experience where everything felt vibrant under this harsh economic environment.

Lyn Alden: Yeah, it's amazing how people are able to adapt to it or otherwise.  Basically, they've been robbed of their ability to save money easily.  When we think about it, all the countries that are labelled "developed" today, they developed under what was essentially a hard money environment.  They had gold and silver as money, they developed, they built capital, and then even as they transitioned to fiat currency, they already had the benefits of that development.  Whereas, what we see today under this roughly 50 years of petrodollar system, is that you don't see that same type of development, you don't see that capital accumulation. 

Now, you still obviously have better technology and better access to energy, so it's not as though development doesn't happen.  It just happens in a much, I would say, more just slowed down or artificial way, because all these countries, the people in the countries, the companies in the countries, they're robbed of their ability to easily accumulate capital.  Now you can still accumulate illiquid capital, you can accumulate foreign capital, many of them do that, but that real organisation, that real development comes from the saving of domestic liquid capital, and that's much harder for them to do. 

Peter McCormack: Going back to this global reserve dollar, what was the negative impact on the US?  Because obviously, there's lots of benefits to the US, but there has been this erosion of the industrial base. 

Lyn Alden: Yeah, I think it mirrors a lot what happened under the Bretton Woods system.  So, under the Bretton Woods system, the downside was that our gold reserves started depleting quickly, when we were the fulcrum of this whole global gold standard.  And under the petrodollar system, it's not that our gold depletes, it's that our industrial base depletes.  And so basically, all these systems at their core have a certain instability to them.  So, Bretton Woods was unstable in terms of how many claims for gold would exist compared to gold; and the instability of the petrodollar system is that there's all this artificial extra global demand for dollars.  We've monetised the dollar more than we monetise, ironically, other currencies, because the whole world does it instead of just their own currency. 

The result of that is that our currency is always a little bit stronger than it should be, which would normally be a good thing.  So, if it's normal market forces making a strong currency, that's good.  But when you have an imbalance in the system, that's where you get these ripple effects that go out.  And so, what happens is that the unit of account is stronger than it should be, and so American labour tends to be less competitive than even other developed market peers, let alone emerging market peers.  And so, it's much harder to do lower-margin business in the United States, it's harder to make physical things and ship them to the world, for example. 

So, we were pushed more towards abandoning those heavier types of industry and shifting more towards the higher margin industries, which up to a certain point can be good, we've gone up the value chain in some regards.  But if you bring that to its logical conclusion, you hollow out the industrial price pretty significantly.  That obviously opens up national security issues, it weakens your ability to maintain your own military, it results in populism because a lot of the people that had those jobs have lost those jobs, and entire towns that were based around those jobs, even if you work in a restaurant that was serving that town, it would affect you as well.  And so as we hollowed out arguably the centre of the country and all that industrial base goes to China and elsewhere, it results in a lot of resentment.  So, yeah, we've had to basically draw down our industrial base in order to maintain the privilege of having the system. 

People often think that having a world reserve currency is good for Americans, but I would say that it's good for a very small number of Americans.  It's good for Washington DC, it's good for New York, it's good for those types of entities, but it's not good for the average steelmaker in Pennsylvania or elsewhere that is not really seeing a lot of the benefits from this arrangement.  And you can see that manifest in, if you look at life expectancy between the median American and median people in other developed countries, you also see it even in terms of wealth.  If you look at average wealth, America is one of the richest per capita.  But when you look at median wealth, so what is the actual middle 50% person like, the median American has less wealth than the median British person or the median Japanese person.  The average person is hollowed out by this and a lot of that capital accumulates specifically in DC and in New York and hubs of the system.

Peter McCormack: Yeah, it does though feel like we're starting to see this dollar reserve challenged, or the early stages of it crumbling.  Obviously we have this decentralised alternative in Bitcoin, but I mean we have to be honest, it's very small.  We have seen this rise of the BRICS nations, but having them agree to what they're going to use as their reserve currency, I've heard them discuss bringing back a gold standard.  It's difficult.  I also think it'll be very challenging for a lot of nations to trust using the yuan, although we know some smaller developing nations, I think more because they have to, are using it, but we are starting to see that fraying.  Do you feel like we are in the early stages of the end of the US dollar being the global reserve currency?

Lyn Alden: I think so.  And people assume that one country's currency has to be at the heart of the whole system, but really that's only been the case for the past two systems.  So, the United States, both the petrodollar part of it and the Bretton Woods part of it, our currency was at the centre of it, and prior to that Britain's currency was at the centre of it.  But when you go back before then, it was really precious metals ultimately at the heart of it.  Even though you'd have certain coinage or certain banknotes would be more widely accepted globally than other ones, it was really precious metals that were at the heart of it. 

So, in this environment of where we're a number of decades into the system, which is normally when these types of arrangements break down, basically whenever you have something develop, there's a natural entropy to it, almost like a lifespan to it.  And so, as these instabilities keep growing, it's not just this linear system that resets every time, these things are growing structurally, so the hollowing out grows structurally, the structural trade deficits just keep adding and accumulating into a deeper and deeper net international investment position.  And so, as that builds up to unworkable degrees, I think that's basically a measure of health of the system.  And I think if you measure it like that, I'm not going to say that three years from now, the whole world looks different.  But I think that we're in the later stages of this multi-decade system that transfers to a more multipolar world.

I think if you didn't have Bitcoin, the natural way it gravitates is towards either back to gold being a settlement asset and less reliance on one country's issuance of a currency.  But obviously, with the invention of Bitcoin, now there's more fun paths that the world might go down because now there's this other liquid money that's competing.  And I think the concept that money wants to be won, so money tends to have a natural network effect to it, we see that with the dollar; and if you get large and big and liquid enough, it almost feeds on itself.  Basically the bigger, more liquid and more open your currency is, the better.  And so much like how when you rank commodities by their monetary properties, you can rank current monies by their properties. 

You can look at gold, you can look at the dollar, you can look at Bitcoin, you can look at the yuan, and they each have certain scores that they're a little bit better or worse at.  The yuan, for example, the issue there is that it's the most closed out of the major monies.  It's not necessarily degrading any faster than the dollar, but it's got that closed aspect to it that makes it less attractive.  And so, I think naturally we are gravitating towards a somewhat more decentralised situation.

Peter McCormack: Well, that feels a perfect way to end it, ready for part three, where we will be discussing that decentralised alternative.  Lyn, amazing.  We'll do this on every one.  Tell people what the book is and where they can get it.

Lyn Alden: So, Broken Money, available on Amazon and eventually elsewhere.  And check it out; basically it's about the past, present, and future of money and monetary technologies and how those changes shape culture.

Peter McCormack: Amazing, okay, we will chat soon, in a couple of days, we'll make part three.  Thank you, and I will see you soon. 

Lyn Alden: Bye.