All righty, here we go. So Lucas and I are back for another Bitcoin study session. We are currently working through Lynn Alden's broken money, why our financial system is failing us and how we can make it better.
so we did the introduction chapters one and two last time the thesis kind of broadly writ of this
book its mission as lynn alden states in the introduction is that at its core money is a ledger
commodity money serves as a ledger governed by nature bank money serves as a ledger governed by
nation states open source money serves as a ledger governed by users this book explores the evolution
of technology, how that changes the prevailing power structures and incentives surrounding
money from era to era.
So we saw some of that development last time.
We did chapter one, ledgers as the foundation of money.
So I guess first, I'll do a brief summary of chapters three and four, which we're going
to talk about today.
And then Lucas and I will add some hashing power to this, hash it all out.
I'll do just a little run up into chapters three and four to get everybody situated and
then into three and four and then into the conversation. So again, chapter one was ledgers
as the foundation of money. Lynn began with, Alden began with a little bit of anthropology
or history in this book. Money began not as coins, but as a ledger, which can be written
or oral or based in memory. And the ledger is just this abstract thing, a summary of transactions
that is used to keep track of who owns what. The whole concept or the thing of money itself
arises later as a ledger that is maintained by nature. That's kind of the first instantiation
of money we get in chapter two, the evolution of commodities as money. So the ledger as maintained
by nature depends most essentially on scarcity. When we have the ledger maintained through a
thing we call commodity money, we determine what is the most scarce asset that we value,
and that becomes a form of money. We then learn that one way to hack or debase, or the only way
rather to hack or debase nature's ledger is through new technology, such as, for example,
if beads are used as money, then a technology that allows for the super efficient production of
beads will give one party the upper hand and allow them to dilute the wealth and transfer it to
themselves. So chapter three, that's what we're first talking about today, how gold won the
commodity war. So again, scarcity determines essentially, along with some other characteristics,
but primarily scarcity determines what commodity arises as money. And then technology then will
invalidate the use of certain commodities, prevent them from being used as monies.
So how did gold win the commodity war? Well, first, we see that gold and silver do survive the filtering function that technology provides for in filtering out through determining what commodities are not scarce. Gold and silver, they come to the top. Less scarce money falls out of the equation.
Gold and silver have a high stock-to-flow ratio.
There's a low stock coming into production per the amount of gold in existence, so it's not suffering from terminal inflation.
Gold and silver are able to survive their monetary premium through, as Alden frames it, a sort of ongoing difficulty adjustment.
But as surface deposits are mined, it gets more and more difficult to get at other sources of gold and silver.
Even as our technology in mining and extraction increases, there is that quote-unquote kind of ongoing difficulty adjustment provided by the difficulty in accessing new sources of gold.
So gold and silver arise as the champion commodity monies.
We then have an innovation, or one of the reasons they arise, too, is we have this innovation of coinage, legal tender coinage, which further enhances gold and silver as money.
So coins, that's simply when an authority specifies a standard unit size, weight, and quality.
We, of course, know what a coin is, that circular disk that has those standardized qualities.
They also, this authority will also then specify that that is legal tender, that it be used as currency, which gives gold and silver as legal tender coinage three layers of value in Alden's estimation.
First is the content of the precious metal itself.
But second is also a verifiability and convenience.
It's verifiable.
Each coin is stamped perhaps with the leader or emperor's face,
authenticating it.
And there's also ridges on the sides to prevent shaving.
Also convenience, you don't have,
that provides, that verifiability provides for a sort of convenience.
You don't have to retest to determine if it is real gold.
You don't have to reweigh it each time the transaction.
So that's the second layer of value. The content of the metal itself is the first layer of value. The second layer is the verifiability and convenience of having a coin. The third layer of value added by legal tender coinage onto precious metals is a sort of liquidity that's provided, a liquidity premium that's provided by the wide and mandated acceptance of this coin. If it's mandated, then it's going to be sort of universally accepted by merchants.
So we have this gold and silver rising to the top as commodities used as money, and we have legal tender coinage kind of abetting that.
But then legal tender coinage allows for debasement.
When debasement occurs, when these coins that are supposed to be standardized are now the authority that prints them, then begins to mix in other less valuable metals with them.
So the debasement occurs now because people have this kind of abstract unit in their head of coin. And so once it's debased, people are – they kind of gradually realize that, hey, these new unit of coin that are supposedly standardized are actually less valuable because they have less of the precious metal in them, which is that first layer of value.
it's also a gradual debasement again because people do have the presumption that coins are
not debased and there also is the fact that they're legal tender coined so they in fact
may be mandated to use them so as these new as leaders begin to debase
gold and silver as currencies by mixing in less precious metals people begin to hoard the coins
that do have the pure content and people from outside jurisdictions, in fact, who don't have
to abide by the mandated usage will simply extract the more valuable coins and get away
with those. So legal tender coinage does allow for debasement. I've mentioned how gold and silver
rose to the top of commodities to become the commodity money that is used due to their scarcity
and ability to survive technological innovation, then gold wins over silver.
This is for two reasons Alvin mentions.
The first is a sort of historical contingency, just the fact that England set their standard
a certain way and did begin to use gold.
England had this kind of dominant empire.
Its network effects then kind of led to gold being used more and more dominantly.
The second reason is simply that the best money wins.
gold's drawback is kind of a lack of, not a lack, but a not, it kind of lacks a certain
divisibility because gold is so valuable. It's tough to divide it off into a small enough portion
that you can get like a slice of bread or whatever. So people would use silver in a
bimetallic standard to supplement gold. Silver is less valuable, so you can use that for more
daily exchanges. But with the emergence of banking, then people begin to are able to
divide their gold into smaller units by depositing it with a bank and making paper claims against it.
So gold has higher stock to flow than silver.
And now that banking emerges, it also has more divisibility.
And so gold rises above silver and wins as the best commodity money.
So there's these two reasons.
Again, the historical contingent reason of England's usage of gold
and the second reason of gold being the best money.
Alden agrees with both,
kind of says that the second reason
is a little bit more deeper in explanation and better,
but synthesizes both saying that
banknotes made gold more divisible
and thus the harder money won over time,
but network effects from political decision
can impact the timing and specific geographic spread
of these sorts of changes.
And I wanted to mention that synthesis
because that's what Alden's going to be doing
in these two chapters we're looking at
is kind of synthesizing two perspectives, and she's really good at that.
So the end of this chapter, chapter three, gold wins.
It's still monetary, even though we begin to have paper claims against it,
but it's kind of mainly as a store of value.
And gold wins again because it's the most saleable.
And we can still see, even though gold at this point becomes the gold standard,
kind of paper claims being made against gold,
you could still load, you could still, you know, wear your gold on your person. It's portable. You
could go to another jurisdiction and wherever you go, you could likely find somebody else who would
buy the gold off you. Chapter four is a unified theory of money. So we've primarily got sort of
a historical or anthropological account in chapters one and two, and even chapter three,
until now. And now we're going to get kind of a theoretic perspective on money before we got
how money actually did arise, how it was used, why certain monies became better monies, etc.
The two theoretical camps regarding the definition and origin of money, first is the commodity theory.
The commodity theory is that money at its core is a commodity, and the best commodity wins. And so
Alden says, quote, the primary concept presented by this theory of money is that barter is
inefficient due to needing to satisfy the double coincidence of wants and therefore a highly
saleable good that is resistant to debasement, for example, gold or silver, naturally arises
in a society as a unit of account, medium of exchange, and a store of value to reduce the
frictions of commerce. So that's the commodity theory of the nature of money, that a commodity
that is scarce, the most scarce, and therefore, and has these other qualities make it the most
saleable, rises to the top and becomes what is used as money. A key aspect of this theory is that
money is kind of therefore independent of the state, it emerges naturally to satisfy
the economic necessity of having an efficient means of exchange. So that's the commodity theory
of money. A separate theory, the other theory is then the credit theory. The credit theory is that
credit, not commodities, is at the core of what money is. So credit then, the credit theory says
that a sale is an exchange of a good, not for a commodity, but for a credit, a favor or a promise
of future payment. So the credit system is then in more complex societies through banks, debts and
credits of a community are centralized, and the right to payment for the credit is not just against
the person, but against others in the community who also owe debts. That's kind of the more complex
elaboration. And the less complex elaboration, it's just that you do me a favor, I do you,
or you give me something I need, and I promise to do something for you in the future. A favor
is offered and tendered, and then you accept that credit. So that's the credit theory. Money is credit.
You may have sensed here in the elaboration of both of these that there is a political angle to these, and Alden acknowledges that.
The commodity theorists tend to favor small government. Money is an emergent phenomena outside of government. Simply whatever commodity has the qualities that are going to make it the most saleable, that is going to rise to the top and be used as money by people as a sort of emergent solution like the Stone of Jordan example from last time.
It's simply people will arrive at the thing they're going to use as money. The government does not top down impose what money is.
Commodity theorists also believe that government printed money to the extent it exists should be backed with the best emergent commodity money.
So that's the commodity theorists in a sort of politicized way.
The credit theorists in a sort of politicized way is that they have this presumption maybe for a larger role for government where money is a top-down thing.
It's a social product tied to a specific sociopolitical organization.
It's not like a natural real-world piece of gold.
It's simply however that a society is going to enforce and define obligation amongst parties, this idea of credit.
And the credit theorists tended to also believe that the state should issue currency to achieve its goals and not be bound by the scarcity that a commodity is bound by, by virtue of its nature.
so
Alden again is having a unified
theory between these two theories
she's synthesizing and
we look back at her anthropology and history
and we've seen previously that
both of these visions have value that
hunter-gatherers had both the concept
of proto-money like shells
and things like that that were commodities
and they also had the concept of credit
of this oral and memory-based
ledger of doing favors
amongst each other
so both are in the historical record and then alden looks at what both theories do right and
wrong before she proposes how to unify the theories so the commodity theorists what they do right
the hardest money does in fact tend to emerge she gave us the history of gold in the previous chapter
how it did arise to the top to be used as the commodity money because of the physical qualities
it had. What is incorrect, though, about the commodity theorists, Alden says, is that they
kind of premise their whole theory on the idea that historically, the problem of barter is what
stimulated the need for money, that there was the double coincidence of wants where I have
spears to trade, but you have nothing I want. And so there's a failed transaction. But Alden says
The anthropology, the actual history of the situation shows us that social credit did actually solve the problem of barter for small-scale human societies.
In fact, even predated humans with apes reciprocally picking mites off each other's backs in a sort of credit system.
Humans then simply elaborated and make this reciprocation, that is, credit, more complex and extensive.
so that's what's good and bad about the commodity theory that brings us then to the social credit
the the credit theorists rather um what they got right then is exactly that anthropology or history
alden says quote human interaction is at its very core a series of formal or informal credits and
debits to others and is organized by rituals and rules that are tied to our evolutionary instincts
our earliest religions, and our earliest governing structures. So again, it's essentially a human
thing that we did and are capable of using credit as a sort of money. But that's what credit
theorists get right about credit is money. What they get wrong, though, all the notes,
deficiencies that credit has as a form of money. First is that credit still needs a unit of account.
It still needs a way to kind of denominate the value of credit in other terms so that people are able to actually use it.
the way that we denominate the value of it needs to stay constant when you
denominate it in terms of wheat or gold or something,
because if it's just,
I have a favor or credit for three cases of beer and one steak,
it's still just,
then I have to barter those credits.
We're right back at the barter problem.
So barter credit still needs a unit of account.
Second,
another deficiency is what if you leave the community credit is really tied to
the community you're in.
You have done favors and been offered credit by and offered credit to the people, your friends and kin who are around you.
And if you go to another community, we need something that's more universally recognized that they will accept in the other community.
Third, the third problem or deficiency with the credit theorists, their idea of the definition and origin of money is that it doesn't scale.
Sure in a small trust society where everybody knows everybody you can have credit as a form of money But once we get beyond that and here a quote from Alden I really love quote honor as a concept is incredibly
important for human interactions, but does not scale well in an impersonal bureaucracy. So
credit kind of depends on this honor-based system. I'm going to, in the future, actually fulfill the
debt I have to you, the credit I've extended. But again, in impersonal bureaucracies,
in nation states with millions of people, we can't really count on that trust-based credit
to maintain its value.
Which brings us to kind of the overarching problem with credit systems that Alden mentions.
Devaluation, the debasement of currency seems to be a universal aspect of credit-based systems
that attempt to scale beyond local communities into greater nation states.
the credit theorists basically rely on unwarranted assumptions to believe that credit will retain its value once we begin to have these bigger, more complex societies.
First, they assume highly competent and altruistic leaders that are going to maintain the strength and viability of these credits we extend.
And however, Alden points out that history shows that debts are often discharged, devalued, and defaulted.
Societies crumble. Classes are given debt jubilees.
So the credits and debts just don't retain their value.
Historically, abstract credit has been one of the worst performing assets to hold.
You should always prefer to hold something material.
Gold, for example, has done much better historically.
As governments rise and fall, again, a commodity has been a much better thing to hold when centralized custodians are not to be trusted. The assumption, again, that leaders will be highly competent and altruistic has not been borne out by history.
The other unwarranted assumption that credit theorists make as to why currency will not be devalued if it is maintained as credit by a centralized authority is that credit theorists, some of them argue that debasement only occurs in response to war, plague, and other disasters when a centralized authority has to pivot to take care of something that they didn't expect to happen.
All the encounters, though, that historically it appears debasement actually preceded and led to war.
She says, quote,
However, what Mitchell Inez missed, he's a credit theorist, I contend, was that the ability to debase the money contributes to the likelihood of war and several other forms of damaged productivity occurring in the first place.
The temptation for a ruler to debase coinage is too great to overcome because it's usually the path of least resistance when faced with a problem.
so all the notes maybe you know oftentimes we could avoid a war if rulers had to explicitly
tax people which tends to be very unpopular instead of being able to secretly tax people
through debasing the currency so credit actually leads to war not um it's not a response to it all
the notes so those are the again the good things and the bad things about the commodity theory and
the credit theory. Alden then gives us a unified theory of money. She synthesizes these two
theories. She says, quote, she says that the ledger is the key, quote, rather than adhere to
the commodity theory of money or the credit theory of money to the exclusion of the other,
a more complete theory must find the underlying logic or foundation that both theories share.
And what they share is that they both represent ways to maintain a ledger,
but with different maintainers of the ledger. So credit theorists posit that the maintainer
of the ledger is a human, a centralized authority who is going to maintain the ledger of credit in
the society. This maybe works in small groups when it's done informally through friend and kin,
but for large groups, centralized administrative states, it tends to not work well. Commodity
theorists hold that the maintainer of the ledger is nature itself. The ledger of a physical
commodity is settled by physical exchanges between parties on the spot, not deferred as credit,
of a thing that's highly saleable based on its physical qualities. So social ledgers may be
convenient and efficient, but they're prone to debasement. Commodity ledgers are relatively
inconvenient and inefficient, but they're not prone to debasement. The concluding concept,
though, is, again, that what's key is ledger. I'll give a final quote because this sums up
the theory that Alden has arrived at based on synthesizing commodity and credit theories.
Quote, a ledger theory of money, that's the theory she's arrived at, observes that most
forms of exchange are improved by having a saleable unit of account that can be held and
transferred over both time and space, and that this unit of account applies the existence of a ledger,
either literally, which would be commodities, or in the abstract, which is credit. These monetary
units and the ledger that defines them rely either on human administrators, credit, or on natural
laws, commodities, to maintain their stability across time and space. So that is the unified
theory of money. Money is not essentially a commodity and not essentially a credit.
It is essentially a ledger, a summary of transactions that is used to keep track of
who owns what. So that's the summary of chapters three and four. And so Lucas, to kick it back to
you, I got kind of a methodological question. You can, we can just not swing at the wiffle ball,
or you can take it. The question is, is the importance, is it important to have an abstract
definition of money in this way? Like, oh, what is money? Going back to the essentials that
underlying both commodities and credits as money, there's this more abstract concept of a ledger.
I mean, do you think it's important that we have a theory like that, that tries to unify these
things that she's at all as all that is done i would say i think it's important i'm not
entirely certain it's useful and this came out this is something i've been thinking about over
the last couple of days after reading this and especially after hearing you summarize it
which is credit and the abstract ledger that it represents,
I believe could be the oldest example of abstraction that humans have created.
Because even before having any sort of language or hand signals or writing or anything,
the I groom you, you groom me type of thing does exist.
And so I got to thinking about that.
And so she has them.
And so we're kind of jumping into chapter four with this,
but I like where you're going because this has kind of been the thought that's
been hanging on my head, which is that.
So she defines two theories of money, credit and commodity,
and then kind of takes from them in order to come up with a unified theory of money.
But when I look at it, what I actually see is that money is a technology.
Abstract money, the social credit score, social credit system, social credit ledger, flexible social ledger, was the first money.
and commodity money was the second money and commodity money existed because credit money
didn't work and or sorry commodity money existed because it did the job better than yeah and i
think about a problem it had yeah exactly so i i think about i don't think of them really as two
competing theories. I think of them as one and then the other. I think of credit as the four-way
tire iron. And I think of commodity money as the impact wrench. The impact wrench has not been
around nearly as long, but it does the job better. And therefore, it is dominant within
the realm of changing tires. So yeah, that's kind of what I thought.
I mean, I think that's what the Austrian economic school says as well. Like they just go forward with the commodity theory of money. And then the credit theorists tend to be, Alden mentions in this chapter, modern monetary theory, Keynesians. And then also she mentions the anthropologist David Graeber's work, The Book Debt, which I've read like a third of that. It's actually a phenomenal book.
um so alden isn't just wholeheartedly full-throatedly or whatever embracing austrian economics
um as you kind of as a lot of bitcoiners do and as you indicate that you see that as an advance
and it makes sense um i think that's because i don't so rhetorically i guess i like it because
it is an olive branch reaching out to credit theorists they do still exist yeah it is like
Like, right, fiat, people who do like look at fiat money might say, you know, it's not perfect, but it is what we have.
And it has, quote unquote, worked.
I mean, a bitcoiner say, no, it hasn't for these reasons.
But, you know, it is a powerful school, I guess.
And so if Alden says, OK, yeah, hold still one second.
Some of the things you guys say are OK and some of the things the commodity theorist says is OK.
You're saying the same thing, though.
Like what matters is this underlying idea of the ledger. And so, I mean, like, and I think maybe this is what you kind of meant by it's important, but not, I forget what you said, important, but not useful. It is, it's like the idea of the ledger is so foundational. It's like, seems important, but it becomes so abstract.
One wonders what the practical use of this wholly abstract ledger concept underlying both schools is if it's not to adjudicate between them and say commodity theorists are better than of what use is this kind of ghostly abstract idea of a ledger.
And, you know, maybe we haven't got that yet. Like, that's where Alden is going to go with. Like, I think she says an open source ledger is where she's going to go for the future of money with Bitcoin. And so we'll see if she gets there. But on this front, I think you hit like a really interesting thing here. And I want to throw one thing back to you because this is a point I noted. Maybe there are some things that credit theorists get right. So here is Mitchell and Ness describing abstract credits.
as the perfect form of money. Why credit is important, why credits are good money,
Ines says, Michelin says, is no corporeal existence, no weight, takes up no room,
easily transferred with no formality required, movable at will through small cost, the telegram,
can store it with little expense, and you can use it to pay for anything you need.
That sounds like qualities of another thing that we like.
Sounds like Bitcoin.
Sounds like Bitcoin, right?
That sounds exactly like Bitcoin.
Yeah.
And so, I mean, maybe credit theorists don't realize that why credit is good is actually why Bitcoin is good, too.
Maybe there is something that can be extracted from the credit theory to help credit theorists see what the Austrian economists have tended to see with more foresight.
that's interesting that so so credit theorists
are effectively treating credit as a bearer instrument like the holder of the debt
essentially they're trying to say owns whatever that debt um whatever that debt can be repaid with
like it's kind of because bitcoin is a bearer instrument yeah yeah yet it yet it perfectly
satisfies all the qualities of credit money what makes those good things about credit i do think
that like maybe credit is not perfectly a bearer asset because at the end of the day it is like an
obligation enforced by a third party you do need that centralized authority yeah right so yeah
Yeah. And so like, first, I want to say I do believe that Lynn Alden is being incredibly magnanimous and kind by giving so much credence and offering a seat at the table to credit money.
and she's kind when you see her interact.
She's funny, really funny, but has good clapbacks
and really, I think, is kind of a unifying force.
But, yeah, I think bringing it to the table
and giving it some legitimacy, to me,
I can see how if you're very new to the concept of considering what money is, I can see how that's really beneficial to be like, okay, we're going to put these two things on a scale and we're going to kind of compare them and we're going to see what sort of shakes out.
But yeah, I guess to me, and it was her writing that clarified it too.
To me, it was just this very simple thing of like, oh, there's a horse and then there's a car.
Or there's a milkman and then there's a refrigerator.
Like just one came before the other and the other did not need to exist but for the fact that the one before it had faults.
There's something I had a thought that I wanted to throw at you.
So she talks about, so I want to first define gold.
The third chapter is about gold emerging as the dominant commodity money.
I want to first redefine that as a rose by any other name and just get rid of the idea that gold is somehow special.
It just turns out that it is relatively the best at satisfying the certain characteristics of money that lead to a natural inclination to use it.
This goes back to kind of how I view and I hope this might be useful for other people to view money, which is to say I'm drafting for a football team.
I'm drafting a quarterback. I need to get touchdowns. I don't want interceptions.
I need yards and I, you know, and I don't, I want to avoid sacks or something like that.
So those are like the, those are like the purposes of money.
And Alden talks about the three purposes of money.
There's actually a fourth one that I saw somebody else talk about online, which I thought was
brilliant, which was a means of payment.
So you've got, you've got the unit of account, the medium of exchange and the store of value.
so like dollars are a means are there we think of them as as a means of payment as well but that's
not actually true the means of payment would be like cash check credit card debit card okay yeah
like it's how how do you transfer the medium of exchange which is yeah um so anyways um so
think about drafting your quarterback and those are the things those are the touchdowns the yards
the sacks, the interceptions, et cetera. Those are the statistics that you want to show up on
the back of their football card. And then you have to go to the NFL combine and you have to
look at all these, here's their hand grip. They're like, here's their hand strength.
Here's how many times they do 225. Here's how fast they run. Like these are those characteristics
that she talks about that lead to what good money are divisibility, portability, recognizability,
verifiability um you know there's some i think there's some that she doesn't mention but i think
there's also some that she doesn't mention because they are really kind of exclusive only to bitcoin
which would be like immutability and incorruptibility like that does not exist otherwise
because those are things you don't find in any physical commodity so the the commodity theory of
money like here are physical characteristics it's nature's ledger you are physical things about a
thing in the world. Yeah. Yes. Yes. Yes, absolutely. Absolutely. But anyway, okay. So
the very extended, the super long intro for me to ask you this question was, so she talks about
how gold led to effectively credit money or led to gold certificates being issued to be redeemable
for gold because of the fact that she says that divisibility was an issue with gold.
And I want to push back on that because I think that it not divisibility because silver is actually gold is actually more divisible than silver It softer It easier to divide What we talking about is density
And it's the fact that the value is so great per unit that it's difficult to divide it into units small enough to use on a daily basis.
And I would say that we need to redefine that and say that it's not the divisibility.
the divisibility is easy.
It's the density,
which is actually the problem,
which is that value per unit is so high
that it renders it useless to be used as money,
which is, I think, fascinating
because what is the solution to that?
Which is to have infinite value per unit,
which is to have matterless, massless.
You know, Bitcoin,
you can have a trillion dollars nowhere.
everywhere without weight without space it's not taking up room you don't have to carry it anywhere
um so anyways i wanted to throw that at you to see if uh do you think i'm thinking along the
right the right lines here when i say that it's actually density value density that leads us to
select a money and that that density of value as it approaches greater and greater densities,
as it becomes more and more dense per unit of value, actually creates more and more problem
because it leads to what we saw with gold, which is so dense that you can't divide it to use it
every day, which means that we're going to centralize it and issue certificates against it.
And once we centralize it, we have the problem with any sort of centralization, which is that we have a trusted authority, and therefore we have opportunity for rambunctiousness to occur.
Yeah. So yeah, I see what you're saying about density being the issue and not divisibility. I think what Alden might say is that divisibility is just a broader character. Maybe it's what you're saying too. Divisibility is a broader category. The subcategories of divisibility problems, one is the density problem. Another one might be like the literally not physically dividable problem, like an artwork is not divisible.
You can't cut off the corner of it and have that be the fractional value of that piece of art or whatever.
So, but yeah, regardless, divisibility, so density perhaps as a subcategory or type of divisibility problem.
And then, so the thought is that that leads to gold needing to be held by a centralized custodian, which then leads to all of the subsequent shenanigans where it is debased essentially against the paper slips that are issued against it.
Is that the, like density is what leads to centralization?
I think that's a precise way to say it.
Um, so because if that's the case, I mean, I agree, like a physical commodity occupying physical space, um, is going to have problems in an age of transnational interactions.
so in the in the section on the emergence of banking we're going to get this in much greater
depth i assume um chapter or part two which we're going to begin next time is called the birth of
banks um in chapter eight is called the speed of transactions versus the speed of settlements
i think we're going to get much more into this but alvin does mention provisionally in this chapter
that banking emerged to solve the divisibility problem of gold.
And she mentions the telecommunications aspect of it.
So banks solved the density problem of gold, too,
as matter that needs to be transported through space
to finally settle a transaction by making it denseless
through the form of the telecommunications abstraction.
So paper slips of money abstract the divisibility concern away in our person-to-person interactions, and then transnationally, great distances, telecommunication further abstracts away the density problem, the physicality problem of gold to allow it to be a monetary standard.
But each layer of abstraction is always a layer of potential abuse by a centralized authority.
Paperslips of money and telecommunication, it just gives control to a centralized custodian to determine how these things are going to go down.
And Alden is like Lowry in software and to this extent where she just gestures towards the history that Mitchell and Ness, this credit theorist, says, you know, everything works fine for credit when you assume highly altruistic and competent authorities.
And Alden's like, what an assumption to make, right?
Like, just like what a worse, what worse assumption could we make if you look at the history and how things have actually panned out?
If you have any basic consideration of human nature, that is not an assumption you want to make.
So, no, I agree.
The density problem, I think it does lead to centralization.
And then that banking emerges as a form of abstraction that then gives power to a centralized custodian.
Yeah, it's a lesson in unintended consequences.
Yeah, it all is, definitely.
You know, you centralize the gold because you have a telecommunications network that exceeds the speed at which you can transfer the gold.
And you want to be able to do business and settle business at the same speed.
You want to be able to buy something and pay for it at the same, you know, lay a claim and pay for it and settle.
Yeah.
And so, yeah, we create this abstraction after centralizing the money.
And what does it do is that it opens this Pandora's box of abuse that is, I would say, arguably far, far, far, far, far, far, far worse for humanity overall.
But it takes back to the concept of concentrated benefits and diffuse harms, where the harm of that, the harm of debasement, it hits every single person that holds that dollar.
And the concentrated benefit means that it is easier for the trusted authorities to centralize their power.
Otherwise, they would have to figure out how to protect the gold or whatever they're using as the bearer instrument to settle.
They would have to figure out how to protect it.
They would have to figure out how to get it there faster.
They would have to figure out how to divide it.
They would have to innovate.
They would have to do something better. And instead of having to do something better, what this allows the system to do is simply spread the harm over all of the participants in the network while making the role a little easier for the role.
And also, you know, by the way, making them stagnant, making it so that they have an imperfect system that they are not thus trying to make better, which I think is an interesting – I just think that's interesting to consider is that I circle back whenever I talk about Bitcoin.
I circle back to how it incentivizes innovation and decentivizes growth as a driver.
And so I find that to be a really valuable kind of mindset to take.
But I think that that does, for me, help me understand why the credit theorist camp is taken more seriously at this historic juncture.
So prior to Bitcoin, considering what the nature of money is, you can look at it and say the commodity theorists are more correct because a physical commodity is protected against debasement as long as technologically we haven't found a way to do it, as in with gold, in a way that credit is not.
But then, I mean, actually, like, at this historical juncture, where we don't have Bitcoin, but we need a way to abstract away the physical density of gold. I mean, we're going to have to rely on some sort of credit, like, like, it's a problem with gold, like, it requires that centralization, or it tends historically to lead to that centralization, where people deposit it with an authority to transmute it into a paper slip they can carry around.
And those centralized authorities then, when they need to settle at large distances, it's a hassle to bring a caravan of gold from one centralized bank to another. Telecommunications seems to solve that as long as we accept the credit of transfer in lieu of the actual transfer.
And so credit theorists, we have like a hybrid system before Bitcoin where at least back when it was a gold standard, where the standard it was redeemable in gold or whatever. So there seemed to be a commodity underlying it. And yet that commodity had been in practice. So its physical qualities had already been abstracted away in ways that were being abused.
And so to give the credit theorists camp credit, they seem to have solved the historical problem of how do we transport gold, how do we teleport it at the speed of light without something like Bitcoin.
Credit allows us to do that, so we'll have a centralized system where banks extend credits to each other rather than settle transactions physically.
So again, I just want to – that's just to say that I don't think that credit theorists are completely ridiculous and that Alden is just rhetorically paying them homage for whatever reason.
I think that she's acknowledging that maybe with the emergence of banking to take care of the density and divisibility problem, we at least did have credit seeming to be a viable source of money.
And again, her abstracting away from that and saying, no, no, no, what's valuable in that is only the ledger. And again, that's also what's essential to the physical commodity is the ledger. And I think that's going to prove to be a very smart step when we do get into the future, which is the present, and talk about Bitcoin as a way to resolve and solve the problems of the centralization of gold.
I think of
I think credit theorists
get legitimacy
right now
because
people that rode horses
got legitimacy
for the first five or ten years
after the car was invented
I think it is just merely
not recognizing
that a superior technology
exists and thus, um, but is the car in this analogy gold or is it Bitcoin?
It would be Bitcoin.
Yeah.
Because, um, so like no credit money can exist.
Like no fiat money has ever existed that did not start as backed by something.
So like credit in its truest nature, um, the way that it's described here, it, it's not
that it doesn't have an underlying commodity money it's that it turns everything into an
underlying commodity money where every single good and service is monetized as debt um so that
you can settle with your credit of yeah of said debt right and so what does that do well that
creates the instance where you are pricing things like everything has to be priced in terms of
everything else. It's just wholly inefficient. It, um, it's, it involves what's called
combinatorial explosion, which means that it's, there's just too much. Um, it's, it's just too
complex, too complicated, I guess, maybe, um, to be useful. Um, so yeah, I, I think that credit
theorists, so basically I think that credit theorists get a buy right now because there are
kind of like two types of people existing in this world right now, which are
credit theorists and people who have learned about Bitcoin. And all of those people used to
be credit theorists. Like that's what it was before. Basically. I mean, that's what I was
before. I was a master's in economics. And so I thought that you were supposed to
metal and pull levers and adjust rates and increase supply and, and, and, and fiddle here
and fiddle there so that, uh, you can, you can level the growth and, you know, and, and so, yeah.
Um, I just truly think there's like, you know, there's like people that ride horses and there's
people that have had one ride in a car and they're like, Oh, way better. Like, um, the, the, the
quote from Sherlock Holmes in the second movie that Robert Downey was in. I can't remember what
the movie's called, but he says like, horses are crafty at both ends and dangerous in the middle.
And that to me just perfectly describes what a credit system is, what a fiat system is,
because it does, you know, just like riding a horse requires trust in a horse, and you have
no idea what the horse is going to do, but you do know that it's going to prioritize itself
over you. That is exactly, I guess, how I would think about credit theorists. So, I mean, I'm not
knocking Lynn Alden at all. I just think that the way that she framed it gave me an opportunity to
look at this and just to say, you know, this is literally just a lesson in recognizing an
advancement in technology. And by the way, it's hard to recognize. This is what Michael Saylor
is doing right now is he is utterly destroying people that have no idea what he is doing.
And the reason he's doing it is because he recognized that diversification is an indication
that you have not solved the problem.
Like, it means that you're not sure.
Like, that's why he's like, you know, when they talk about like, oh, you know, what's
your recommended allocation for Bitcoin?
He's like, well, it's the best idea.
Yeah.
And like, yeah, so does that mean you recommend the allocation of 1%, 5%?
And he's like, it's the best idea.
So you go with the best idea until it's no longer the best idea.
The problem is that prior to Bitcoin, there was no best idea that existed.
There were all kinds of, that's why we had to have bimetallic monetary systems.
systems because Gresham's law existed because the reason I would argue, so Gresham's law is that bad
money pushes out good so that the good money goes out of circulation and the bad money is what is
used to transact on a daily basis, right? Right. So if you have the impure coins issued by the
centralized authority, people are going to want to get rid of those, use those and hoard the pure
coins. Exactly. And, but the same thing right now that, that, that happens right now is that
people want to transact in cash or dollars. They don't want to transact in Bitcoin. Like
look on the, um, you can look on what's called the HODL wave, which shows like how long coins
have been held. And it's like 50% of all Bitcoin has been held for like seven years or longer.
I think that's what it is. Or maybe it's fine. But like, you don't have dollars that you've
held on to that long. Like not really like they're your retirement account, but it's just your
retirement account. And what's your retirement account? It's mutual funds that are constantly
every single day making different decisions. Oh, I've, I've got, I own pieces of 12,000 different
stocks and bonds and real estate investment trusts and et cetera, et cetera. And every single day
they're rebalancing. Why? Because they don't know which one's the best idea. Because today,
real estate's a better idea. Tomorrow, gold is a better idea, et cetera, et cetera. And I think
that's why it's so shocking and it's so hard to recognize because there has never before existed
a best idea when it comes to money. There was always a fault with the dominant natural commodity
money. Gold's fault was the density, which led to the divisibility problem, which led to
centralization, which led to certificates being issued against it, which meant that trust was
required in a higher authority, which meant that we were going to lose us. It made me think of how
Shaq couldn't shoot free throws. Shaq would have been the greatest player in NBA history if he
could have shot free throws And because he couldn shoot free throws that meant that there was a way to take Shaq out of circulation So just like gold was taken out of circulation and the gold certificates were transacted
the strategy in basketball became the hack-a-Shaq strategy,
which was to take Shaq out of circulation by putting him on the line
and thus making other players beat you.
But that was my metaphor for that.
I thought it was interesting.
I think it's interesting.
I got to throw Shaq into it.
I know.
I was going to say the way that your mind works is very interesting.
My mind does not have a node that is Shaq that connects to monetary theory, but it now
does have one of those.
You're welcome.
I was an excellent exposition of Bitcoin as an idea and the value of ideas because that
answers the question, the wiffle ball that I tossed that you read at the beginning, which I was
sincerely curious about, which is, is the importance of an abstract definition of money
in this way important? Like, that we get like, oh, we arrive at ledger as a theory of money.
That kind of, yeah, we're taking account history, but we're really like abstracting from two
existing theoretical frameworks to arrive at a framework that unifies both of them. And we get
the idea of money as a ledger. Like, why is that important? And it is important because,
as you mentioned, like, Saylor has infinity conviction, because he has an idea, and he
understands this idea. And that idea entails the way that he should act. And if you have,
you have to walk people to Bitcoin to help them see that it is money. And you need a theoretical
framework to do that. And maybe the commodity framework is not the best one. The credit one
is definitely not the best one. So what is the framework that's going to help people germinate
this idea that's going to give them this sailor level of conviction that Bitcoin is money? And so
a ledger theory, I can see where all is going with this. This is a good way to walk people
into the future through an abstract idea, which again, is necessary for the sort of conviction
that one actually has to have for Bitcoin to have any value. If Bitcoin, if you have no underlying
idea undergirding your belief about why you're holding Bitcoin, if it's just number go up
completely, you're going to get rid of it, you're going to panic sell all of these things.
Bitcoin is one of the few areas in life where the more knowledge you have, literally more material
wealth is going to come your way. Like conviction is based on knowledge. Knowledge is based on an
underlying theoretical framework. And the more you know about Bitcoin, the more you kind of
bolster this theoretical framework and the more that your conviction is thereby going to be
bolstered. And so, I mean, I think it's just, I just love that. I mean, here we are talking about
ideas. Ideas, we often wonder, do they have value? We're sitting here talking about abstract idea
of money, but absolutely it has value for humans who have to have some sort of understanding of
the, you know, in order to have any sort of conviction. Yeah. Knowledge is power. Bitcoin
is power yeah um knowledge in action is wisdom um and the wise thing to do is to take your power
and project it in what you think is the most advantageous direction um so what you're doing
as you deepen your knowledge is that you are further refining and intensifying the way that
you project your power. And it does make sense that you might come upon something very similar
in design, which is Bitcoin, which is a, I love Jason Lowry's definition of it as a power
projection technology. It really, yeah, it really, I think has value even in this context.
I wanted to talk about, so in chapter four, Alden talks about the ways effectively that a
commodity money falls out of flight. So the stock to flow is kind of the determinant. It's not the
determinant, but it's like of the things that can be used for money, the stock to flow is the
determinant. But there's other things that she mentions that have higher stock to flow ratios,
but they are less useful as money because of other things. And she notes some other things.
So basically, it breaks down to innovation, consumption and discovery. So innovation would
be like a technological advancement that allows you to make more of that money.
Consumption would be that the utility of that money is high enough that it has a utility
value that exceeds its monetary value such that people are going to use it and consume
it and take it out of supply and necessitate more.
And then discovery.
So you could just simply discover more of it.
And I think about this because there's, I guess, El Salvador just discovered a $3 trillion deposit of gold.
So, you know, what is gold's market cap?
I think it's like $10 trillion.
So they just discovered 30% more of something that historically, you know, was not increasing in supply at all.
I just think it's interesting to see acted out this thing that like we,
we know that gold is not good money.
And the reason we know gold is not good money is that fiat money exists.
Like fiat money doesn't exist, but to solve a problem that,
that gold has. Yeah. And, and it's,
it's just an evolution in that process and just, but just to see it, you know,
So I don't know what that'll take gold stock to flow ratio to, but I know right now it's like she's a gold gold stock to flow ratio has historically been around 50.
Sometimes it's been down to like 25 up to 100.
So this means that if there's if stock to flow is 100, that means that there's 100 tons that exist.
And each year, one more ton is added to that and increasing by that just for for people that don't understand.
Bitcoin stock to flow right now is like 87 point something.
And every four years, the stock to flow doubles.
So it already exceeds gold.
And it is it is going to get even harder to produce more of it.
And so I think that's why we're seeing right now.
I do believe that we're on kind of the edge of this hyper Bitcoinization where the game
theory plays out where it is now recognized that it is the hardest money. And we move further and
further in that direction. So anyways, that was, that was again, just a, it's not an advertisement
for Bitcoin. It's just that I can't help but go there. I mean, that's what we see in this chapter.
We like, we get the pros and cons of each form of money. And it's hard not to read into the con
stated for each that Bitcoin is the solution to that thing. I mean, it's, it is not debasable.
So it solves the credit theorists problem with their proposed currency. And it's, you know,
not physical. And so it has all these properties, of course, that physical gold that tend, as you
mentioned, tend to lead to centralization, the emergence of banking, the emergence of fiat.
So yeah, just Bitcoin, if you know anything about it, immediately advertises itself as the solution once you see the problems described in detail with historical examples.
Yeah, I've got a question for you.
So there's three layers of value premium.
The utility, the second layer is the convenience and verification.
The third layer is the liquidity.
Does Bitcoin have utility?
because i guess i i remember thinking about this in like terms of gold so like
i i heard that i think 90 of the market cap of gold of the value of gold's market cap is
monetary value and 10 is utility value so like 10 of it is gold being used for what it's actually
useful for which is like a conductor and um you know this this metal that is easily malleable and
cannot decay and yeah but so um so there's utility even to go and and i would argue that
the reason why gold has a high stock to flow ratio is that it
i feel like it has less utility than silver i don't know if that's true but i i think so
because like gold's so soft that you can't really do a whole lot of stuff with it um
I think it tarnishes less, maybe.
It doesn't tarnish at all.
Yeah.
So like in certain like electrical, like computer or something applications, maybe it has higher utility, but I don't know.
But anyway, so I guess my question is, does Bitcoin have utility?
Or is everything convenience and verification, liquidity, you know, all that?
Yeah, yeah.
Because I think that actually might be true.
Three points on that.
First, like those three layers of value arise in the context of gold as legal tender coinage.
So that legal tender coinage in a certain respect introduces a bit of abstraction to gold itself.
These are standards imposed by a centralized authority.
So Bitcoin does not have any extra and it need not have any extra layer of abstraction specified by an authority in order to make it standard in size, weight, quality, etc.
So that's actually like an advantage. It doesn't have utility in that way, which is an advantage.
Whether it does have utility is an interesting question. I think that's part of the software thesis is that maybe the military application or as an alternative potential infrastructure for cyberspace that is tied to the real world. These are forms of utility that it might have.
um i don't think this is yeah contemplated with so that's one but another one i don't think this
is contemplated within this consideration of utility but if you say utility as money right
i mean like the fact that it's teleportable low fees instantaneous i mean i don't think
i think you want your money to only have utility as money as money as an insulator or uh or a
Yeah, something like that.
Yeah, yeah.
So maybe, I mean, there might be software alternatives.
And once we branch out and begin to consider whether Bitcoin coin is a metaphor, that's actually, you know, we can consider Bitcoin as other things that might have value.
Maybe it has utility then as spam protection or something like that.
But yeah, no, I think generally it's good that money not have utility and instead just be an absolutely pristine store of value.
I've been rethinking about like since Jason's reclassification of Bitcoin as bit power.
I think in my head, I just think of little cyber soldiers, like little cyber master chiefs from from Halo.
And it's like that's what every little bit is.
It's like it's all I get why I get why Saylor describes it as a as a, you know, a cyber cyber cyber hornets, an army or a swarm of cyber hornets.
It makes perfect sense to me.
I think those metaphors are important too.
That's why I posed a question to you in one of the conversations.
What is the piece of sci-fi literature or cinema that helps us conceptualize Bitcoin as BitPower?
And you mentioned Tron, which I think – I want to go back and watch Tron now through that lens.
There's also – is it William Gibson who has – I think – is it Neuromancer?
It's where you get this, we get this one of the really kind of proto ideas of cyberspace.
There's all these, there's lots of potential things out there.
And I do want to go back and revisit these pieces of science fiction, art, literature, cinema, and just have in my mind Bitcoin while I'm reading them in order to gain conceptual clarity of what something like power might be.
And I think there's value in that. I hope that people begin to consciously produce art where they represent an ethereal concept like Bitcoin as a material, tractable, character based personality ridden thing to help our ape minds get traction on it.
there's another one that has Justin Timberlake in it.
I think it's called out of time,
but I'm not certain or might just be some sort of time derivative in the
title,
but it's a,
it's set in the future and everybody has these little watch things that has
their credits of how much time they have.
And when they run out of time,
they die.
And so,
and so they're constantly like,
you know,
like he's working two jobs so he can get home to get,
give his mom some time so that she can continue living. Um, and then people bet with their time
by doing this, uh, this ritual of a, of a arm wrestling thing where you're basically like
trying to suck the time out of the other person. It's very interesting. Um, that would be a good,
that would be a good one. But yeah, I think Tron, I think Tron's my best as far as, uh,
Bitcoin is BitPower.
No, no, I haven't.
Have you found anything else?
I have not.
I want to – you also mentioned this last time and your mention of this, what I'm assuming is very fine, Justin Timberlake Cinema.
The idea that –
Good actor.
Fantastic.
The idea is that to have something be about Bitcoin, it can also be about the nature of time as money, just about the nature of money, and to help us understand what money is, that will also help us understand what Bitcoin is.
And like, again, this back to the purpose of this chapter, very abstract consideration that this idea of the ledger underlies the existing theories of money.
Why is that valuable? It's, again, going to help us get traction on something like Bitcoin.
That is a new thing. And we need new models to understand it.
Yet today, the most useful metaphor for what money is, I think, is what Saylor talks about, which is that it's like Jack Mallers to a bunch of people, I think, have kind of adopted this approach, I think probably because it makes sense.
but just that money is literally energy. It's life. It's life force.
It is the way that you store what you expend your time, effort and skill towards.
And it's an abstraction of that as valued jointly by everyone.
And I think thinking of it as, you know, like you think of Bitcoin as the container into which you put your life force,
into which you put your energy.
And it just happens to be that it's the only container that doesn't leak.
It's the only boat that doesn't sink.
And it turns out that that's really important when it comes to a container
that you're storing your life force and your energy.
Yeah, yeah.
It might turn out that that's just an abstract ledger.
That's just what the ledger is in its most abstract consideration,
is a perfect container once you've taken away all real-world contingency and frictions.
Yeah, the perfect handbag.
Yeah, you got like a, did some very comfy heater turn on in your house?
Yes, the heater just turned on.
I can feel the comfort viscerally in the air of that hot air blowing.
That's good.
I'm getting ready to take off.
I am turning the Tesla into a deer blind tonight,
so I am walking out of here and going to go kill a deer in the morning.
But yeah, yeah, we got a lot of action going on right now.
Yeah, yeah.
No, that's fantastic.
I hope you'll apprise us as to what happens via Twitter or some other way to see if this is successful, if this is the future right here.
If nothing else, it'll be an interesting adventure to go throw a 270 in the back of Tesla and see if I can shoot out of it.
It'll be fun.
Yeah, another great one.
I think we have had a good stopping point, are you?
Yeah, I think so.
That's what I have, man.
Awesome.
Well, I want to thank everybody for joining us.
Again, Grant is at the whole frame on X and I am Lucas Maddy on X.
And next time we will go over.
So this has been chapters three and four of Broken Money.
Next time we will go over four and five.
And yeah, we appreciate everybody.
Right on.
Thanks.
Appreciate it.
Thanks, guys.
Have a good one.
Bye.