Forget Everything You Know About Money

fund management companies. Crucially, he's also an author of a book called Money, The Unauthorized Biography, and that's in part what we're going to talk about today. It was published more than ten years ago, but I'm afraid it is more relevant than ever today. We talk about that, we

talk about modern monetary systems, ancient monetary systems. We don't have time to go into everything I would have liked to, so where I really would urge you to get the book and when you get it, read the story of the Money of Yapp and definitely read about the Bank of England and Tally Stones. We are going to talk about a variety of other things, Felix, welcome to Merin talks Money.

you've ever thought of. So I think what I want to do, Felix, is start by asking you what exactly it is that money is, and what is the big mistake that people make when they think about the nature of money? Going through your book through the way that you think, there are two things to think about money, what money actually is and who should control money, manage money,

manipulate money, and for whose benefit? Right, So there's two parts to the story of money, but you can't talk about the second unless you've really got a good grip of the first.

more comprehensive version. And I'll give here the basic story which I try to tell in the book, which I think is very important, is that what I call a conventional view of money and its history, this is the one that you can find in every sort of children's book, and it's the one that's sort of ingrained in people's minds, is wrong. That conventional story is that in the beginning there wasn't any money, and people just started with each other.

You know, I had fish and you had corn, and in order to exchange with one another, you had to want my fish and I had to want your corn, and in fact we had more than the same time as well, what economists call a double coincidence of wants, and otherwise no trade could take place. And that's all

terribly inefficient. And therefore, at some point in the distant past, probably a different times, in different places, somebody come up with a bright idea, which is, why don't we choose one particular sort of commodity to serve as a so called medium of exchange, that is to say, something which people don't want for its own sake, but just so that it can be used to settle and liquidate exchange.

And that basically was the invention of money. And typically it was precious metals that were chosen for this use because they've got lots of nice properties when they last for a long time, and so and so forth. That was the invention of coinage. And then people had an even better idea, which is why didn't we start lending and borrowing this money commodity? And that was the invention

of credit. And then even later in that there were institutions that were built up which specialized in organizing credit, and those were banks. That was the invention of banking. That's the kind of conventional history that you find throughout literal money, and it's the way that a lot of people think about it, but it basically has it all completely the wrong way round. In reality, money is a system of ideas. It is the institution of credits and debts.

It is the various technologies which have been developed and deployed for recording credits and debts and for transferring credits and debts from one person or one company to another. It's therefore basically a set of ideas and institutions. I don't mean that in a sort of wooly sense. There are very specific ideas which are extremely important in the development of money and which really constitute what it is

to live in a monetary society. The most important one of these is the monetary standard, the standard unit economic value. Monetary value is the key concept in money. It hasn't always existed in human history. It is an idea, a concept of value, which was invented at a certain point in time and has been developed. Most concepts of value don't have standard units. So esthetic value or religious value, all kinds of different measures of value that we talk about,

but they don't have standard units. You can't enumerate the esthetic value or the religious value of something. But the monetary value, the economic value of things, what distinguishes it has a standard unit. Just like physical concepts like length and weight and so on, they have standard units kilogram, a meter and so on, and this is what The standard unit in money is, something like a dollar or

a pound or a euro. And that's incredibly important and the key questions around which all of monetary history revolve, and you alluded to this at the beginning, are what is that monetary unit, what does it actually mean in real terms, what do you get for it? And who gets to decide today? The answers to those questions for something like the pound sterling are that we define a pound sterling according to the rate of change of prices

for a particular basket of goods and services. So we don't have, say a gold standard, which is where you define what a pound is by reference to one particular commodity, gold and a particular weight of it. We do it with the whole basket of goods and services, the so called CPI basket, and we do it with the rate of change of prices. So we say we want prices to go up at two percent a year. In other words, we want the pound sterling, this abstract monetary unit, to

depreciate in real terms by two percent a year. So that's the answer to the first question, what is the monetary standard today for the pound sterling? And then the answer to the second question, who gets to decide that in our current version of the monetary system, Well, that's actually the Chancellor of the Excheque. He actually, I was sure she sets what that standard is, but of course it's it's implemented and operationalized by the Bank of England, which sits under democratic control.

that means coins, for example. But we actually know that in many past societies a great deal of monetary credit and debt and financial balances and transactions were not of course represented by coinage, and transactions weren't settled in coins. They were very often settled by entries in ledgers, for example. But the ledgers don't exist anymore. And there'll be a whole lot of other transactions and balances which were recorded simply by word of mouth or in other formats, and

they don't exist. So that can definitely skew and has skewed the perception of things. But let me take it back a step. I think in a sense it's sort of simpler than that. The curious thing about money as an institution is that from the bottom up, when you as an individual are interacting with the monetary system, certainly in the pre digital age, when notes and coins were the primary form of representation of money, from the bottom up, of course, money does look like this real thing that

is what you deal with every day. It's only when you look from the top down, as it were, and you try to understand the system as a whole, it becomes completely obvious that notes and coins are just physical representations tokens, and there are lots of different kinds of tokens up of an underlying system of credits and debts which is much larger, much less substantial, and essentially abstract.

I hope that allami just say, there's another important reason, which I go into in my book, as to sort of historically in Europe, and in Britain in particular, which was the financial innovator at the time. Why it is that this conventional view held sway in the face of the fact that the economy became much more financialized, banks became much more important. And even today, you know, when we live in this digital world where I think from to mas people is pretty obvious that money is an

abstract thing. And it's because people don't use you know, coins and notes anymore. Why did it hold such sway? And there I tell the story of a very important debate that happened right back immediately after the founding of the Bank of England, which was a pretty epochal moment in monetary history generally and certainly in Britain, there was a genuine huge debate over this very question which we began with of what the monetary standard should be, How

should a pound sterling be defined? Because with the creation of this new Bank of England, money was henceforth going to be issued not by the sovereign and the Mint as it always had been, but by this bunch of private in those days, private bankers, the Bank of England.

So this question was crucially important and it all played into an existing political debate about the constitutional changes that have been going on in Britain and the shift towards what we would now call a constitutional monarchy, so political power being taken away from the absolute monarch into a

system where it was shared with parliament. And as a result of that, there was a big debate between one of the most famous philosophers in British history, John Locke, the great father of political liberalism, and his sort of Tory opponents, And as a result of that, Locke made a fateful intervention in which he came down hard on the side of the conventional view of money, but for political reasons. It's a big question in my mind whether

he actually believed what he was saying philosophically. But he made the argument that listened, a pound sterling just is a certain weight of silver. In those days they were talking about silver, not gold. That's what it is, that's what it means. No one can change what that weight is. Anyone who tries to change what that weight is is effectively lying, defrauding the public. So he was arguing very strongly for a fixed precious metal standard, for the idea

that money is a real physical thing. But he was doing it basically for political reasons, because he wanted to tie the hands of this new institution, the Bank of England, which he thought would otherwise fall into the hands of revolutionaries and the whole republic would fall to pieces.

that a hasn't worked for a while. And be that you have taken issue with along the way. And there is a bit in your book about the financial crisis, about how it happened where you point out that everything else was ignored, ignored completely in pursuit of this idea that

nothing mattered except stable inflation. So booming house prices, a drastic underpricing of liquidity, and as it markets, the emergence of the shadow banking system that declines in lending standards, bank capital and liquidity ratios were not given the priority they merited because unlike low and stable and inflation there was simply not identified as being relevant. So I don't think very many people would accuse central banks of being

wedded to sound money. But this is what it is, is the idea that money must be stable, and if you put that above everything else in a modern monecary system, you can run into all sorts of trouble.

patron saint of stable money for a moment. I mean, of course, the paradox is that the monetary standard does have to be stable over time and across space, so within particular jurisdiction for it to be useful. I mean that obviously is true to some degree, but one also has to remember that because it is the unit that you're using to denominate credit and debt, and because credit and debt can grow and can go in all kinds of funny directions, and can become very inequitable, and can

become become very inefficient. And we've seen that over and over again throughout monetary history. It's the nature of financial capitalism that can happen. The devaluation of the monetary unit is also an absolutely crucial escape valve for when things become unsustainable. Caines John Maynard Knes. He has a great passage where he talks about this and says, the real

parents of revolution are the absolutists of contract. In other words, it's people who obsess to the exclusion of everything else about this important truth that money must be kept stable to be useful. That are the real people that end up creating revolutions. Because debt becomes completely unsustainable, one half of the population is i think he puts, it becomes enslaved to the other and so on and so forth. Now this is all a bit hyperbolic, and so and

so forth. But what is totally obvious and what only becomes clear when you have a clear view of money as a system of credit and debt rather than as some sort of physical thing, is that one of the primary economic forces, and therefore one of the most important decisions that any government or central bank can make is over the value of the monetary unit because of its distributional consequences. It's distributional consequences, and that's what gets missed and has been i think missed in a lot of

the last thirty years thinking about these things. It was certainly what was missed in the lead up to financial crisis. If you're focusing solely upon keeping the value of money stable in order to make transactions efficient, you lose sight of the fact that this is the most important distributional tool that the government.

of results of a fiscal policy might have have. So if that is the case, and it is particularly we saw that during the Quey period, etc. Is it reasonable that a central bank should be independent of government.

I mean, the central banks are the most important example, but a lot of other examples in the modern system of governance. The principle is that you're not delegating these crucial top level political distributional decisions. Those should be made by the political authorities, legitimate political authorities, and it's the operational aspects that should be delegated to the central bank. And that is the principle of it. And as I

was just describing a few minutes ago. The monetary standard the inflation type, which is inflation targeting, a two percent inflation target. In the case of the UK, for example, it is set by the chancellor. It's not set by the central bank. They can't choose their own target. So that would be the defense of central bankers, and it is legit, but up to a point, because these things do get a bit fuzzy inevitably in practice.

And what he's talking about is the tendency of systems economies societies and so on to adapt, of course, around targets, to game targets so that they cease being useful. An inflation target is of course an absolutely primary example of that.

So what you were describing and what I write about in my book in that part about the way that the focus on inflation targeting and your parentscept not a parent, I mean the success in targeting inflation for whatever reasons we can debate those prior to the financial crisis meant that the system adapted around it, and all the kind of imbalances which genuine economic and social imbalances which the inflation target was intended to measure and tame, in fact

just emerge in all kinds of other places. It was a phenomenon that had been predicted and written about many years earlier by the American economist Simon Minsky. He said,

stability breeds instability. It's the same idea. So yes, it's the system as a whole, and not just the particular system of inflation targeting, but the idea that you can choose a particular metric and you can then design policy around that particular metric, using it as a target, and that that is a sensible, effective way of trying to govern a complicated modern economy. That's where the problem lies.

a university and vice chancellor. Wasn't quite as well paid by the way as it is these days being a vice chanceer. So but nevertheless he'd been a sort of in there.

a situation now. The reality was that at the same time that when they were making all these complaints, they were sitting in their own great, big houses in lovely university towns in England, which they had bought actually at the very beginning of the seventies. And my father used to tell me the story about how when he'd had this, they'd had their third child, me, and they outgrown their house and they went to look around bigger houses. And he'd gone around looking around with the burster of one

of the colleges in Oxford where he lived. He was fretting, way, I can't afford this big house, he said in the bust, and don't worry, you know, just go ahead and buy it. You know, it'll all be fine. And he bought it and was terrified by the size of the mortgage and all this. But of course, by the end of the seventies this mortgage was worth a pittance in real terms. Now, the point about this story is where I haven't explained to every well. But the point is, of course these

things were two sides of exactly the same coin. If you were of my grandfather's generation and you had retired in nineteen seventy with your handsome pension from your vice chancellorial job that you'd accumulated, and it.

So this inflation over the course of the decade was fantastic because they bought some house for a few thousand quid and by the end of the decade it was worth one hundred thousand quid and the mortgage of course had shriveled away because it hadn't gone gone hung value. Now what was going on a big transfer of wealth from my grandparents' generation to my parents' generation. So in fact, my mother and her sisters need not have complained because

they did get this inheritance. It just didn't come down through being passed down through the family. It came through this macroeconomic shift. Now you will spot it that that is very different from what most people understand by inheritance. And of course it is a matter of chance. Now, I mean there's different kind of chance that operates through inheritance through families. It's just where the other lucky to be born into a family with money, or who happened

to accumulate some money. And this is a different kind of chance, where if my parents hadn't bought a nice, big house and stretch themselves and so on at the beginning of the seventies, well they wouldn't have received the benefits of this macroeconomic wealth transfer. So it's a different kind of complete chance involved. But of course the transfer did happen. But in that case, and this is coming to your question, it happened through the action or inaction

of monetary policy. That was what led to this great inflation in the seventies. So it's a really important thing to keep in mind because it is what has it's what the focus on inflation targeting, for example, has successfully ruled out over the last thirty years, that particular kind

of transfer of wealth. But you just alluded to the fact that nonetheless it appears that you can point the finger at monetary policy or financial policy more generally for all kinds of other transfers or accumulation of wealth, which many people would see as being rather unfair, being bast cross generations anyway, I come back to Kane's point. The issue is manatory policy is very powerful at affecting macroeconomic distributional changes, either by accident, by amission, or by by commission.

We have to focus on that, and one has to have a deliberate policy about it.

to maybe three percent or something like that. But it does seem that there isn't any way out for deeply indebted Western nations at the moment. I mean, look what's happening in the bond markets across Japan, the US, and in Europe. At the moment. We see that these locations beginning had happened in the bond market, there isn't any obvious way out. Oh I mean either except genny false growth, which at this point looks relatively unlikely, or a decade of inflation.

people would really think of. They are because of the way that money is conceived of in mainstream economic theory. They are costs to do with frictions, like there's more uncertainty about what the price is when you go to people have to look around more so called shoe leather. In other words, they wear out the leather on their

shoes walking around finding alternative prices for things. Menu costs, you know, restaurants have to update their many I mean, people will think I'm making this up, but these are actually genuinely in the mainstream economic theories. The main costs ascribed to inflation, and you set those against what we were just describing, which are the big macroeconomic distributional effects of inflation, which might be costly or they might be beneficial.

And of course you're suggesting these imbalances into generation or whatever. They might be a very unhealthy and inefficient and they are risk constraining economic growth and innovation, and therefore presumably inflation, which would be a means of alleviating these would be a positive thing. Now, that's huge, huge resistance to that.

If you ever talked to anyone from the generation above us, people who remember the seventies, despite what I just said, which is that actually it was in some ways very beneficial for lab Well, it didn't. You know again, I've got a stress that there's a lot of luck involved. Like I said, you know, so the story I just told you, my parents they were lucky because it just affected actually within the family what might have happened anyway. But of course many people wait to have been in

that situation. So that's where there's a problem on that front. But they're very very.

so there's a big challenge there. And it is true that inflating away debt so devaluing it in real terms, would seem to be a much less painful way of doing things than outright defaulting on debt, which seems highly unlikely and would be very, very disruptive. So that makes a lot of sense. I think that's right. And you know, we're not talking about hyperinflation, you're talking about a slightly

higher inflation target, just like you mentioned. However, one of the important niggles is that we live in a very financially globalized system today and there are large imbalances between countries. Famously, of course, the US is an enormous international debtor and runs a big character counter deficit, and the same it's true on a smaller scale for the UK, and then within the Eurozone, for example, there's a lot of imbalances

of that sort. And that's important because back in the seventies, what we were just talking about that was much much less true, and therefore the imbalances and their correction and the redistribution was essentially within a particular political jurisdiction within the UK, let's say, or within the US, whereas today there is a big international aspect to it, and there will be impact on exchange rates and there will be

well geopolitical impact. The whole origin of the massive flare up in geopolitical tensions and the connections with economics that we've seen this year is precisely to do with this issue of international imbalances and the fact that America wants effectively to extricate itself and to impose some sort of losses on people who've lent its money. It's not quite as simple as it might have been in the puzzle.

market itself. And new used as a wonderful phrase where people say that bill markets rarely die of old age, but this one actually might.

every year. The famous Schiller cape cyclically adjusted price earnings ration. It hit its low in nineteen eighty two seven and it went up to forty four by the end of nineteen ninety nine. And a lot of people connected this and they said, well, well, hang on a minute. The reason why this is happening is because the Baby Boom generation is such a historical anomaly. This is true, much larger than the generation before it and the generation Gen X,

that's our generation which came after it. And they said, well, I mean, obviously what's going on is they've hit their peak earnings. They're piling money into the US equity market, and this is pussing up valuations and that's all great, but obviously there's going to be a huge problem when they come into their retirement and decumulation phase, because they're going to be trying to offload all these assets onto

the much smaller generation X. And this is important. The whole thesis relies only on the size of the generations. People argue a lot, correctly in my view, about whether it's really true that flows drive prices and all kind of stuff, but this argument is quite simple. It's just that the next generation is so much smaller, so naturally than demand must be lower. Anyway, it rose to an absolute height of panic. But the funny thing was, of course in the two thousands, there wasn't any big crash,

and the whole sort of panic went away. There was a crash, of course, from the heights of nineteen ninety nine, but that just made everyone think, oh, well, it was all to do with the iggression of abzuber. It's everything to do with demographics. It was just a sort of classic bubble. And then it all recovered and started marching

on again. And then there were lots of interesting changes, like defined contribution pensions started to take off, and that seemed to provide a sort of new supplemental source of inflows. And the boomer generation themselves they turned out to live much longer, and they were much healthier, and they didn't actually accumulate nearly as quickly as everyone said. So the whole sort of panic went away for a long, long, long type. But but meren, you're bringing it back for

the purposes of my column. I went and I ferreted away in the Z one flur of funds of the United States Federal Reserve, and I've discovered a horrifying fact, which is that bang on Q, it is actually true that the US private pension system, just in the last couple of years has gone into decumulation. It is no longer a net by of assets. It's gone into net

selling territory. And of course it's just as true as it ever was that gen X is indeed much much smaller than gen Y. So if you look at the so called old age dependency ratio or the inverse of it, you know it was the case in nineteen ninety that there were five and a half or six working age people for every retire and it's now about thirty or forty percent lower than that. So all the conditions are actually there in place. It is in fact happening just

as was predicted. And then there's a couple of other problems which people hadn't spotted in the nineties. One is that, of course these international inflows, all this globalization, and the fact that in the two thousands, when people thought this was going to start, what actually happened was this so called global savings galut appeared. You know, there was all the Chinese and the Europeans when they were saving up in the Japanese and they were piled into the American market.

So they sort of bailed out, you know, the boomers then. But unfortunately they're all in exactly the same or even worse demographic position now than the US, so you can't rely on them anymore. And as we know, capital flows are reversing from the US, they're all starting to seek back out again, So that's a big problem. And then the icing on the cake. The icing on the cake is the following It is that the Boomers, this big generation, of course, they didn't just have economic power. What it

gave them was political clout. They were for the longest period of any generation, they were the largest voting cohort in the US system. So they were the biggest block of US voters and that also has just changed. About ten years ago came the crossover point, and Maren, I'm sorry to tell you it's not our generation that have displaced them, because we're the small gen X. It is the millennials and younger.

they're not interested. That's why they're railing back all this stuff like globalization. They don't care that the compan these and Europeans and the Chinese no longer want to buy the US stock market. They're actively trying to stop it. Half the time.

to our millennials. It's private currencies. The way we've been discussing money is as though it's always a power of the state and instrument of policy, etc. But given the way that you've described money as a system rather than a token, it's far from the case that money should be something that is state sponsored. And there's a huge history of private money, is back to the Endless Siege, moneies and built of sale. There's so much, there's so

much private money. But now we have a private money that is beyond the scale of any previous private money because of the way it crosses borders. Right, So previous private money has been limited to particular societies, particular groups. They've always been physically limited. But bitcoin and the other

cryptocurrencies are a private money that has no border. And this is a very interesting dynamic, right, And one of the makes that I've made for years now is to assume that governments would not allow a private currency to become so widely spread that they would interfere at somebody. Hasn't happened. What do you think is going on here and would you be a buyer of bitcoin.

uses of money, of private currencies and cryptocurrencies. They are quite right to be so concerned because if you look at the history of many emerging markets, for example, these are countries which have long experience of only limited control grip on the franchise of money by the state. I mean, the most obvious example is in many emerging markets, as any listener who's ever been to one will know, over the last thirty years, you will find that US dollars

circulate alongside the national currency. And there's a prime example. Okay, that's another state currency in that case, but it's a prime example of where you know, the state in question doesn't have full control over the institution of money, and you've got another competitor in there, and that makes managing

targeting inflation or managing the distributional content. Any of these aspects of monetary policy we've been describing much more difficult, because whilst you might control the issuance of your own currency and the regulation of it, you don't control the issuance and regulation of the US dollar. So that's why they are worried about all of that, and their right to be worried about it. Clearly, the novel aspect of cryptocurrencies, exactly as you said, is not the fact that they

are private moneies. It's not the fact that these are private monetary units operating on their own. Monetary standards define them in lots of different ways. It can be a very hard monetary standard like bitcoins, where you've got a set number that can ever be issued and you're going to assimpate towards set over time. But they're all kinds of rather in principle of any old kind of standard that you could use and specify for these private crypteircurrencies.

It's not that private aspect of it, which is new, existed all throughout history, like you said. No, No, it's the technology, of course. It's the technology of recording these things on a digital ledger, and the fact that you've got the Internet, which is global, which is twenty four to seven, three hundred and sixty five days a year, and therefore can facilitate transactions all that time. And the fact of course that it displaces operates outside of doesn't

use the conventional banking system. So that's what's new about it. And it's like everything else to do with the Internet. You know, you can have a very small proportionate constituency who are interested and want to use something, and it's massive in absolute terms, in absolute numbers, because that's the nature of the Internet. The key thing to say, however, is in terms of the use of money for transactions, to settle trade, commerce, trade in assets, and so on

and so forth. It is still the case that most of these cryptocurrencies are of only limited use and are rather constrained, so mostly they are used for speculative purposes. The killer app, I think, which has been identified and seems to me people are correct about in this area for transactions is stable coins. That is to say, that's just essentially a particular type of cryptocurrency for which the standard is an existing fiat currency. So most of them

are pegged to the dollar. But there's no reason why in principle you couldn't have one that was pegged to the Sterling or the EU or the All that's doing is it's marrying together that incredibly useful digital technology available twenty four, seven, three and sixty five days a year wherever you are in the world, two the existing national currency units. And I think that's a very powerful marriage. And obviously I'm not alone in thinking that everyone thinks that it is.

This is dollar denominated liabilities which are issued by banks and institutions which are not under the jurisdiction of the US federal reserves, so they are a bit like stable. They're dollars dollar denominated instruments, but they're not real dollars in the sense that you're deposit in the US banking system is. But the question you're effectively asking when you say, or the hypothesis you're putting forward, is that the existence of the eurodollar market does not have any real blowback

onto monetary management by the FED. And yeah, that's not quite right. I mean, it does, unfortunately have a bit of a blowback because when when the crisis happens, usually the central banks have to bail out half of these shadow banking systems, and that would be the worry about stable coins. I would have thought from the central bank side.

real asset, but you know, goals Wilf by some convenient ify one knows that is going to be a pretty good bet.

by me Maren'sumset Web. It was produced by Somersidi and Moses and sound designed by Blake Maples and special thanks of course to Felix Martin.