[00:02:59] Lyn Alden: And the reason I waited a while was because I didn’t want to write a book for the sake of writing a book. Just over the course of years of writing and researching, eventually a couple key pieces or themes or structures fell into my head. And the book kind of organized itself. And once that framework existed, I was like, okay, well now I have to write it.

[00:03:18] Lyn Alden: And now there’s actually a book there. I’m not going to force a book to exist. Instead the book foundation, kind of, as I kind of just a couple key themes that I thought were under described in literature and not covered enough, and that I had a unique angle. And so I appreciate that you guys think it stands out or at least is like, memorable in a certain way because that delay of actually, not writing a book until an actual book exists, I think is a way to go.

[00:03:45] Stig Brodersen: So Lyn, I want to set the premise for today’s episode and I want to borrow a paragraph from your absolutely wonderful book. This is not a gold book, not a banking book, not a bitcoin book, and not a political book. Instead, it’s an exploration of monetary technologies in the myriad forms in the past, present, and future, and touches on all these topics and more so that we might better understand where we came from and what path we may take going forward. So this is just so well written. So with that said, why did you call your book Broken Money?

[00:04:18] Lyn Alden: I think because even though the book covers a very long span of history, and then into the future, the emphasis is on the present. So it’s not just a, an academic book that says, okay, here’s the layout of history.

[00:04:32] Lyn Alden: It says we have a current problem, and how did we get to that problem? And then how could we potentially fix that problem? And then of course, it, it defines the problem and goes into details around the problem. And the way I would describe it essentially is that money’s broken in a global scale. And those of us in the United States and Europe might not notice it as much, although I think we still notice it.

[00:04:52] Lyn Alden: But, throughout the developing world it’s always been a lot more obvious. And, in one sense, the past 50 years or so, humanity has flourished in a lot of ways. We have way more technology, way more energy standard of livings hasn’t been improving. So, but when you look at all of our major systems, I generally would argue that money has been the slowest change, that it’s still one of the bottlenecks that’s a lot less efficient than some of the other improvements we’ve made.

[00:05:16] Lyn Alden: I mean, money’s more similar to how it was 50 years ago than how we interact with technology, how we communicate, how much energy we have, especially in the developing world, that kind of stuff. And I think one thing that summarizes the problem is that there are about a hundred different, 160 different fiat currencies in the world, each with a local monopoly over their own jurisdiction, and then virtually no acceptance outside of their own jurisdiction, unless you’re the dollar or maybe the Euro.

[00:05:41] Lyn Alden: And so you have these, like all these different kinds of bubbles, these little isolated areas. And if you happen to be born in the top 20, it’s workable enough. Your money devalues slowly, but you have plenty of investment options. Your money’s easy to exchange, it’s liquid. But if you’re born in the long tail of other currencies, you have this currency that’s.

[00:05:59] Lyn Alden: There’s been multiple dozens of hyperinflations within our lifetime. So just since the 1980s, there’s been multiple hyperinflations, dozens. There’s been many other triple digit inflations. There’s been constant double digit inflations. Many countries don’t have rule of law and have authoritarian tendencies of money can just be arbitrarily frozen with no real recourse.

[00:06:18] Lyn Alden: And so really, where you’re born affects how easy it is to accumulate liquid capital, which is a foundation of growth. And it also impacts your ability to transact with other participants in the world, right? Because instead of just sending money to someone for their good or service, if we’re in different countries, not only do we interact, but we also have to go through this big banking apparatus around ourselves.

[00:06:43] Lyn Alden: I have to convert my currency to your currency, buy your good and get it back here. And it’s just this whole series of bottlenecks and inefficiencies. It hasn’t, it’s only marginally improved really over the past 50 years. The way this works. So I think that essentially for multiple ways, some obvious and some subtle, our monetary system is outdated and problematic.

[00:07:03] Lyn Alden: And at a, it’s at a big kind of piece of the puzzle for why we see growing populism in the developed world. I think it explains a lot, not all, but a lot of the problems that we see in developing countries, why they have such big booms and bust cycles and why it’s so hard for them to develop. Another factor is that if you look at the M S C I, like, developed markets versus emerging markets, in the past 50 years, the percentage of developing countries that have developed is strikingly low.

[00:07:32] Lyn Alden: A handful in Asia have arguably done it, but outside of that, there’s very few examples of a country going from developing to developed. And I would argue that the way the money system’s been structured plays a significant role in that because it makes it hard for the middle class in those countries to accumulate liquid capital and kind of keeps them tethered in the system.

[00:07:52] Stig Brodersen: One of the things we can see whenever we look back in history and you are right eloquently about that and the financial history of money and, humans and small kinships and friendship groups don’t need money. But whenever we start trading with other groups, all of a sudden, we don’t trust them. We don’t know them. We need money and traditionally we’ve done that with commodity money. Could you please elaborate on what is commodity money and why is commodity money really a story about technological progress?

[00:08:23] Lyn Alden: Sure. So yeah, the book starts out basically going back to the earliest known history. So, what did hunter gatherers use as money?

[00:08:30] Lyn Alden: What did the earliest civilization with writing uses money and those types of questions. And so it, it touches on various studies by anthropologists and different research into how people handle this. And I think the foundational problem is the double coincidence of wants, meaning that, if I want to trade with you, And, I might have a surplus of something and a de a deficiency of something else, and you have a surplus of something else and a deficiency of something.

[00:08:53] Lyn Alden: In order for us to trade successfully, my surplus has to match your deficiency at the same time. And there’s more combinations that fail than succeed. And certain types of goods are even hard to just carry for long periods of time. I mean, if I, if all I do is make apples and you build homes, how do I accumulate enough apples to, exchange for the home, right?

[00:09:13] Lyn Alden: So the problem becomes that we need an abstraction to translate my value to your value and lubricate this trade. And there are two main ways to do it. We can either defer it over time. So that’s the first one. And that’s why small groups don’t really need money because they know each other and therefore they can defer it over time.

[00:09:33] Lyn Alden: We see this from studying hunter gatherers, and we also see it in our own lives. Like I use the example that, when I was an engineer, a bunch of us would go out to lunch all the time together. We kind of loosely kept track of who drove, and so it’s like, well, you drove last time, you drove this, you drive this time.

[00:09:48] Lyn Alden: And it’s like, hey, I drove three times last week. Okay, he doesn’t have to drive, the next week. And that kind of ledger, that mental ledger that we’re keeping track of is the same way that, in, in a family, you keep track of chores in a group of 60 people you can keep track of roughly what’s going on.

[00:10:02] Lyn Alden: So when you know each other, you can defer things over time. And a one of the subsets of that is gifts. So let’s say you’re deficient in something and I’m in pretty good shape. I’ve lucky or something, I don’t really have any needs right now. But you have a need. I could help you, I could give you some of my surplus to help you through your need.

[00:10:21] Lyn Alden: Because I’m now basically banking some insurance in our group so that I know in the future there’s a good chance that all need something. And if you or Preston or others are, someone I’ve maybe helped in the past in this kind of hypothetical kin example, then you’d be able to help me later.

[00:10:37] Lyn Alden: Right? And so basically that’s the one way to solve the double coincidence of wants is by deferment over time. It’s a type of credit. Really the problem is that only works with people you know well or have some sort of legal structure in place in more advanced societies. So the other way to do it is with spot trading, but you need something that’s more universally desired.

[00:10:57] Lyn Alden: So not everybody needs spears. They’re big and bulky. If you have a spear, maybe a backup spear, you don’t need eight more spears. You can’t, you’re not going to save your wealth and spears or giant bulky furs or things that rod or things like that. And so what we generally see in societies that objects that are small, scarce, portable, long-lasting divisible, they tend to be recurring pop up as ways to lubricate trade.

[00:11:24] Lyn Alden: And so at Hunter Gatherer Society, it was as often shells or teeth, but you know, shells are shell like objects where they would put some of their surplus time and energy when they have a period of abundance into making various ornamentation. So shell bead bracelets, for example, takes a ton of work. It’s intrinsically enjoyable for people wearing it and seeing it.

[00:11:45] Lyn Alden: It’s a way of displaying your status and your past period of abundance. But then it’s also a, you can store a lot of value in a small way that you don’t have to carry. And should you ever need something more utilitarian in the future, you now have this rare object that you can potentially trade even to a stranger for it or to other members of your group that are maybe not as close and it represents final savings.

[00:12:10] Lyn Alden: Like, they don’t have to remember that there’s a favor there. It’s a way of final settling, even among people you might know. And so that’s the what the evidence shows. And I point to a lot of literature showing that. Hunter gatherers and then early civilizations, commodity money would develop and it started with shells and it would other things.

[00:12:28] Lyn Alden: It could be cocoa beans, it could be grains, it could be silver, eventually gold, we moved up the technological ladder. But they are a way to, to solve the double coincidence of wants. When you can’t rely on time, you can’t rely on time and trust.

[00:12:43] Stig Brodersen: So Lyn, thank you for teeing up my next question here. As humans group encounter each other over time, you have the number of commodity money dwindled down just to a few. And every time a commodity money encounter gold and silver in the competition for money, gold and silver won out. Now, I guess there, there are two questions I would like to ask you to that, why was that so? But why would even superior money you’d like gold and silver eventually run into issues?

[00:13:11] Lyn Alden: So basically, it’s going up the technological ladder. When people in early civilizations were in different parts of the world, obviously they have different, environments around them. So you might have cocoa, you might have grains, you might, different types of things.

[00:13:23] Lyn Alden: And so they use different types of money. But as civilizations would encounter each other, if an industrial society encounters a non-industrial society, they can quickly make a lot more of the non-industrial money, whereas the reverse is not true. And then if two, pseudo industrialized countries come to come into place, it’s easy to make more copper, for example.

[00:13:43] Lyn Alden: And it’s to make more gold. And so over time, the scars commodities, one. And in this sense, the scarcity doesn’t mean it’s super rare. It’s not like meteorites or rhodium or something. It’s something that’s still sufficiently liquid and fungible. And people identify and they have it and they know what it is, but it’s very hard to increase the supply on a percentage basis.

[00:14:04] Lyn Alden: So basically, for lack of a better word, the stock to flow ratio. How much exists? What is the stock of the total amount of that commodity in that region versus how much is produced per year or how much could be produced per year, even if you tried really hard. So, if you’re using tobacco as money, which some places did, it’s pretty easy to make a lot more tobacco.

[00:14:24] Lyn Alden: If tobacco is being overvalued because so many people are holding it and giving it a monetary premium, it’s easy to go out and plant a ton more tobacco. Whereas if gold is heavily used, it’s really hard to go out and meaningfully increase the amount of gold in the system on a rapid basis.

[00:14:40] Lyn Alden: And so the short answer is that as civilizations found each other, they moved up the ladder to the scarcest monies that were still liquid and fungible and divisible and recompilable. And so that ended up being gold and silver. Now, eventually, they even ran into problems when we started to abstract money.

[00:14:59] Lyn Alden: So even though they are divisible and recompilable and identifiable, they’re not easily doing so. So especially if you’re moving large amounts of gold, along the Silk Road or something like that’s very dangerous. It’s very burdensome. And so in many ways it’s, we started to develop these proto banking systems, even before, modern banking of, like Italy before then, you’d have like Islamic traders along the Silk Road, a thousand years ago.

[00:15:26] Lyn Alden: And it’s like, okay, how do we transport value safely and efficiency over long distances? And well, the answer was abstraction. So, instead of bringing gold long distance, there’s networks of people that know each other. Merchants. And I could go to one city exchange gold for a piece of paper that’s just like all identifiable.

[00:15:44] Lyn Alden: When I, my caravan travels along the Silk Road and I wind up in another city that recognizes that other merchant, I can then exchange that paper for gold. And that merchant knows that he now owes the other merchant at some future time. And so you have early rudimentary credit early rudimentary bills of exchange in order to grease the efficiency of trade.

[00:16:05] Lyn Alden: And that really got a big jump when the telegraph was invented and then deployed. So throughout the 1850s and sixties, it started to be meaningfully deployed across Europe. And then 1866 you connected across Atlantic. And so now you could send information, rough of the speed of light, whereas all throughout history before then, there’s virtually no way to send information more quickly than humans could move around other than like, fire signals in the distance or, but there’s very few ways to send information quickly.

[00:16:38] Lyn Alden: But once we had the telegraph, we could send information around the world very quickly, and then by extension we could send transactions around the world very quickly. We can communicate over remorse code between New York and London virtually in real time and say, okay, this bank X, Y, Z owes other bank A, B, c money.

[00:16:56] Lyn Alden: We’re doing this transaction and that gold settlement can happen weeks, or months, or never later. And the problem was that, that gap grew very significantly. And so gold and silver had to be increasingly abstracted in order to keep up. And so gold and silver were increasingly marginalized, and it was, silver was marginalized first because, one of the reason gold and silver were often used together in a bio-metallic standard was because gold is not as divisible.

[00:17:27] Lyn Alden: Even a tiny gold coin is often worth more than labor would make in a day or a week of work. And so they said, okay, well silver is money for like normal people, and gold is money for like kings, merchants, large settlements, that kind of stuff. But once you were no longer directly interacting with the metals, for the most part you were using bank notes and abstractions.

[00:17:46] Lyn Alden: These things made them more divisible. And then silver became less important because the key limitation of divisibility was solved by this bank note abstraction or this ledger abstraction. And so gold started to push out silver and kind of be the last commodity standing.

[00:18:04] Stig Brodersen: Going to chapter four in your book is just, it’s just such a powerful chapter and you outline these two primarily economic camps. One camp is commodity theory of money and the posing is the great theory of money. And what I think you do so well then, because whenever we talk about, like these academics say this and the like. What I think you do so well in this book is that you make it way more digestible. It’s so easy to understand for us, and it doesn’t, it’s not as daunting as it sometimes can be whenever you’re reading those big dusty economics books. So could you please talk about both of those theories, but also how you so beautifully are reconciling the two different theories?

[00:18:43] Lyn Alden: Sure, so going back to the earlier conversation, the two ways to solve the double coincidence of wants, it’s either a highly saleable good or it’s deferment over time.

[00:18:51] Lyn Alden: And so when you look at the major economic literature where people try to figure out what money is and define. What money is, there’s this kind of, these two silos that a lot of these theories tend to gravitate around. And so one of them is the commodity theory of money. And that goes back to Aristotle and then, Adam Smith, in the modern times, kind of revitalize that.

[00:19:11] Lyn Alden: And then the auction school, really built upon that. And so the idea there is that a money, the most saleable commodity naturally emerges in societies. And that is what’s used as money as a form of spot trading. It doesn’t need any sort of like state backing. It just kind of naturally emerges over and over again.

[00:19:29] Lyn Alden: And of course states can do things like make coinage and define the unit of account and authenticate it, that, they can play a role in that sense, but the commodities themselves become money. They just naturally become used as money. If you’re going to store something, if you’re going to store your value, if you’re an apple farmer and you’ve harvested your apples, You want to sell your apples and you want to hold it in a scarce liquid, highly accepted unit of account that you can then, pay for things throughout the rest of the year as you need them.

[00:19:55] Lyn Alden: So that, that’s like, that’s camp one. Camp two said, well, it’s not necessarily commodities per se. And they would argue that instead, credit is at the root of money. So, if you sell me something and I don’t have money on me, or what I make, you don’t need right now, I could give you a claim for stuff I produce.

[00:20:15] Lyn Alden: So, if you’re a brewer and I am a butcher and I want some beer, I can give you a claim slip that says, okay, this is now redeemable for, half a pound of beef and you could either redeem it at a future time even though you don’t need beef right now.

[00:20:31] Lyn Alden: Or you could give that to someone else for something that they have of value. The idea was it’s about obligations. It’s about credit. That’s the foundation of what money is. It’s about the fact that someone owes something else. And so what I try to do is look through these and see how they contrast and how they’re related.

[00:20:48] Lyn Alden: And so, so my argument, I’m not the first one to say, there’s other people have said that money’s the best ledger. And so what my book does is really take that to its logical conclusion and explore all the ways where money is a ledger. And so what I argue is that in the abstract, all these types of money are basically ledgers.

[00:21:06] Lyn Alden: So in credit, it’s a more literal ledger. If we are friends or we are hunter gatherers, the ledger is a mental one. We keep track of roughly who is pulling their weight, who’s falling behind, who’s over contributing, and who has built up social insurance, who hasn’t, that kind of thing.

[00:21:23] Lyn Alden: Whereas in a more complex society, you have a more of like an administrative state. So for example, in Babylon, you’d have the temples keeping track of extensive ledgers in clay tablets, it’s one of the earliest writings, and it’s one of the earliest kind of formal monetary systems. So these are extensive credit based systems, whereas commodity money is interesting because it’s an abstract ledger.

[00:21:47] Lyn Alden: It’s saying, okay, instead of humans running the ledger, we’re going to let nature run the ledger. So if there’s a region filled with hunter gatherers and they have shells, nobody knows how many shells exist, but they roughly know the properties of how hard it’s to make a shell. Especially like a strand of shell beads.

[00:22:02] Lyn Alden: They look at others, they see, they can roughly see how common they see them. And then by exchanging it with someone else physically exchanging it, that updates the status of the ledger. So if look at this from like a God view, you see the whole field, you can see the whole ledger of who owned these shells, how many shells are there.

[00:22:19] Lyn Alden: And so no participant necessarily sees the whole ledger. No humans maintaining the ledger, but the properties of nature and the collective human action are maintaining this ledger. And, one thing I explore when rec, when reconciling these, different conceptions of money, is that generally in times or contexts of high trust, people tend to defer more towards credit money.

[00:22:41] Lyn Alden: So if it’s your friends and family, you defer with credit. You say, okay, well, I’m doing this favor, or here’s a gift, and that’s just how that’s kept track of. Similarly, in a highly organized state, let’s say Babylon of its era, or of course the modern day with, central banks and stuff, we often, again defer to credit.

[00:22:58] Lyn Alden: It just it’s workable enough it’s highly convenient. Sometimes it’s mandated and we defer to credit. Whereas in societies where things have broken down or we’re dealing with strangers where we don’t have the same, we’re not from the same system, then the commodity money tend to take over because that’s where you don’t have trust.

[00:23:16] Lyn Alden: You don’t have the luxury of time deferred settlement. And so you say no, I’ll give you this if you give me this at the same time. And so, during wars, during defaults, things like that, people then gravitate towards those harder commodity monies. Even if they’re less convenient to deal with on a, transaction by track transaction basis because it’s a method of defense and kind of getting down to the root layer of what value is on the spot.

[00:23:42] Stig Brodersen: Now, Lyn, one of the things we talked about here on the show a few times is how the human brain tends to think very linearly and that we all also have a recency bias. Now, what I love about your book is that you look back at financial history for literally thousands of years, and if we look back at the 20th century, the current system as we know today it’s really the exception and not the rule.

[00:24:08] Stig Brodersen: Could you please outline the fractional banking reserve system and why you compare it to a game of musical chairs, a system that functions for a while, but it’s, if something stops the music, it can all fall apart quickly.

[00:24:23] Lyn Alden: Yeah. So as humanity began abstracting money. We didn’t want to deal with the gold and silver directly.

[00:24:29] Lyn Alden: We’d rather have someone else hold them for us. And we have various paper receipts or ledger entries that we can more easily give to others in exchange for goods and services. You then have a kind of a foundational issue. If someone’s holding all the gold and they’re issuing all the claims for gold, and then they see that at any given time, very few people ever redeem the gold and it’s just sitting there and they say, well, I could lend some, I could lend a small percentage of it out and it won’t matter because most people never redeem the gold anyway.

[00:24:57] Lyn Alden: And so even as long as I leave a buffer, it should be fine. And then of course, you push it until you’ve actually let out most of the gold. And there’s really, there’s two ways to handle lending and a practice. Only one of them tends to be used. So there’s fractional reserve banking and full reserve banking.

[00:25:12] Lyn Alden: So full reserve banking. Another way of calling it is duration matching banking. Which is that if I deposit money in a bank and I have the right to pull it out at any time, then they should have all that money there. On the other hand, if I want to buy a certificate of deposit, I could lock up money for two years and then now the bank can make loans with that money for up to two years durations or less.

[00:25:37] Lyn Alden: Right? So they’ve duration matched their liabilities and their assets. The far more common type of banking, basically ubiquitous, is fractional reserve banking, where they make two promises at the same time that are, during times of stress, not reconcilable, and then they hope through probabilities that occurs rarely.

[00:25:55] Lyn Alden: So I deposit money that they tell me, you can pull this out at any time. It’s a demand deposit. You can pull it at any time during normal banking hours. But then they go out and lend most of that in illiquid loans. And so at any given time, no more than five or 10% of people can come in and pull their money out.

[00:26:15] Lyn Alden: Even though all of them are promised that they could, if they wanted to, and the bank relies on the probability, what are the chances that more than five or 10% of people are going to want their money back at the same time? And that, that works for years, it worked for decades, but eventually the system gets so over levered, so it would look like a liquidity mismatched that a small problem.

[00:26:34] Lyn Alden: It could be a natural disaster, it could be a war, it could, any sort of like significant event or even just…it can fall from its own, just leverage, eventually hit the system. And then the problem is everybody realizes that there’s far more claims for gold or money than there is underlying gold or money.

[00:26:51] Lyn Alden: And so you get massive defaults, you get massive problems. It’s this huge cascading issue. And so I, that’s kind of the, one of the hearts of the modern financial system is that pretty much anything you can do, you will do. And so basically because fraction reserve banking can be done, It tends to be done everywhere, and it tends to be legally sanctioned as something you can do, even though in some sense you’re kind of making a claim that you can’t really back up when, stuff hits the fan.

[00:27:20] Lyn Alden: And so that’s kind of the heart of modern banking. And of course, as those types of crises inevitably happen every few years or decades, you’d have various ways to try to mitigate them. And, the formation of central banks, you can argue really is two main purposes. One was to fund war. So the Bank of England really was created to, to finance war.

[00:27:40] Lyn Alden: So that’s number one. And number two is central banks were created to try to say, okay, during these rare occurrences where this game of musical chairs stops, so people have far more claims than there is underlying gold that works most of the time. Kinda like how the musical chairs, if there’s, eight kids and there’s seven chairs and they keep walking around the chairs and as long as music’s going, it’s fine.

[00:28:01] Lyn Alden: But every once in a while when the music stops, one kid’s not going to get their chair. Now if you have a ga, if you have a game of musical chairs with like a hundred kids and 10 chairs and the music stops, you can have absolutely mayhem. And so the question becomes is there something you can make as a backstop?

[00:28:16] Lyn Alden: And so one of the solutions that multiple different societies kind of landed on was a central bank. This is, okay, we can come out and kind of create more base claims to bail out these banks that run into liquidity problems all at the same time. And also, one of the answers that commonly came up was peg breaks.

[00:28:34] Lyn Alden: So they’d say, okay, well I know that claim was worth an ounce of gold, but you know, times are tough. So now all these claims are only worth half an ounce of gold. And so everybody kind of gets a haircut to deleverage the system of claims versus base metal. And so that, that kind of dilemma, the way that we do banking, has been at the source of how these kind of rolling crisis work and why the system is somewhat become more centralized over time in these recent centuries.

[00:29:04] Stig Brodersen: Let’s talk about the last century. Let’s talk about Bretton Woods that was poorly designed from misconception in 1944, and looking back, it was destined to fall inevitably. Now, as you also out loud in your book, the system that we have now is also poorly designed and it’s also on track to be replaced eventually. What is the catalyst that you are looking forward to, to see the fall of the existing order and the rise of a new?

[00:29:32] Lyn Alden: To answer that question, I’ll actually go back a little bit further. So I think we can de divide this into kind of three modern eras or three eras within the telecommunication era, which starts from the invention and deployment of the telegraph.

[00:29:43] Lyn Alden: So the first one was the classical gold standard, where the major developed countries were on a gold standard, and their central banks would communicate with each other and their correspondent banks would communicate with each other. And so you had these claims for gold. They’re just ledger entries or paper entries and there’s amount of underlying gold.

[00:30:02] Lyn Alden: And I cite a book from 1875 from Jevons, Money and the Mechanism of Exchange, where he examines the leverage of the system of the day and some of the kind of the pros and cons of how that was working. So basically telegraphs and paper instruments made that system so efficient that all these claims would cycle with very high velocity and gold itself would rarely move.

[00:30:23] Lyn Alden: And that allowed for tons and tons of claims to be built on top of that relatively small gold base. Something like 20 to one. And the way he put it, like he, it was funny because he is describing it both like excitedly. He’s like, look how efficient the system is. We barely ever have to move gold. And yet it works so wonderfully.

[00:30:41] Lyn Alden: And yet he was also fully cognizant of how bad the system could get. If people forget that all these claims are redeemable for gold, and he is like, we must not forget the disaster that could happen if you don’t make sure you treat these claims like they’re actually gold because they are they’re redeemable for it.

[00:30:57] Lyn Alden: And that system ran into a wall in World War I, because, you know what started out as like a small regional conflict, quickly turned into a war across all of Europe. And it was in large part because all of these countries could just sever their gold pegs, drain their citizens’ value and channel it towards war.

[00:31:16] Lyn Alden: So if you go back to war, the way it used to work, going back to your prior comment about debasement stake, you’d have a physical gold coin or a physical silver coin and there’s layers of a, of value on top of it. So there’s the raw monetary value, then it’s stamped with the king’s face to help, kind of verify that this is the amount of gold it is, this is the appropriate fineness.

[00:31:36] Lyn Alden: Then you’d have a legal tender or other liquidity enhancement that if you’re using your local coin, it is generally easier and you’ll generally pay a monetary premium to have your local coin rather than some foreign coin that might not be accepted. And Kings would routinely, kind of abuse that, where they would say, okay, well, times are tough.

[00:31:54] Lyn Alden: I need to spend more, but I can’t tax less because I don’t want like a revolution. So I’m going to like, the tax of coins I bring in, I’m going to melt them down, make them a little bit less precious metal and then pay them back out at the same unit of account. So that was a debasement, but of course you could only do that so quickly.

[00:32:11] Lyn Alden: People are physically holding the coins. You have to tax them back, spend them back into circulation. Whereas once we hit the modern era where our money’s abstracted, we’re all in this like telegraph based system, bank based system. We hold bank notes, we literally paper and we hold ledger entries in our bank.

[00:32:31] Lyn Alden: This represents our money, and the banks and the central banks are the ones hold the gold. Well then the king or the president or the Congress with a stroke of a pen at the middle of a Sunday night, they can just say, well, okay, all this papers are redeemable for half as much gold as they used to be. So they can just siphon all the money, as much money as they want without raising taxes and without any sort of like transparency.

[00:32:54] Lyn Alden: And then they can spend that on soldiers, they can spend that on equipment and they can go fight war. And so it really speeds up the state’s ability to kind of, rug pull their citizens. And in the UK’s case for World War I, not only did they rug pull their own citizens, but even they were the global reserve currency.

[00:33:10] Lyn Alden: So multiple other countries stored their surplus value in UK banking system or debt instruments or bank, different types of abstractions. And so all of that was rug pooled from those countries around the world and channeled towards war in Europe. So that was system one. It broke because it got highly levered.

[00:33:27] Lyn Alden: It got highly abstracted and it ran into war. And then after the wars, the Bretton wood system formed where the United States emerged as this hyper power. It had tons of gold. And then other countries had sent their gold to the United States for safekeeping in case the Nazis overrun you. It’s like, okay, well, at least the gold’s stored in, in New York.

[00:33:46] Lyn Alden: And we had, other than Pearl Harbor, we were largely unattacked. We had the biggest industrial base and so the United States was in a position to basically set the rules and so the Bretton Woods system was, the dollar is backed by gold and redeemable for gold to foreign creditors and other currencies will peg themselves to the dollar.

[00:34:05] Lyn Alden: And so that’s a system that we’re going to operate under. And the problem there was that, again, because of fractions, their banking, the number of dollars kept proliferating compared to the amount of gold that, that the US Treasury had to redeem. And so people often think of it as going from 1944 to 1971. In reality, I mean 1944 Bretton Woods conference was just when the system was like basically designed and roughly agreed upon.

[00:34:30] Lyn Alden: It didn’t really go into effect until the late 1950s. And so there was only like a 13 year period where the Bretton Woods system was in full force. And when you look at that period, American Gold Reserves went straight down because the amount of claims for gold was growing, the amount of gold was falling and literally 13 years of just gold down every single year, they eventually like, okay, we can’t do this anymore.

[00:34:52] Lyn Alden: It’s not redeemable for gold. And they broke the system. So the cost of the Bretton Woods system was, it only lasted as long as basically participants were willing to hold these claims and until Americas didn’t have enough gold to, to obviously support it, then they transitioned to the current system, the Euro dollar system or the petrol dollar system, whatever you want to call it, where the dollar itself is at the heart of the global financial order where you know, the United States has enough economic military power, especially back in the seventies.

[00:35:19] Lyn Alden: And they made deals with all these OPEC nations and they said, look, only sell your oil in dollars and then take a lot of those surpluses and buy us treasuries with them. So store your monetary premium in the dollar and in exchange we’ll give you military protection. We’ll give you good arms deals. And so that kind of helped maintain that network effect.

[00:35:38] Lyn Alden: And so in this modern system, instead of gold being at the heart of the system, the dollar is at the heart of the system. And all these countries around the world hold dollar denominate assets as their reserves that they can use to backstop their currencies. When they need to defend them and they do not peg the dollar.

[00:35:57] Lyn Alden: Well, some of them are, but the other ones are more floating, but they’re managed relative to the dollar. And the downside of that system is that the dollar gets this extra monetary premium that has nothing to do with our, export competitiveness or things like that. The dollar’s just so it’s the most saleable good among via currencies.

[00:36:16] Lyn Alden: So it, it achieves this monetary premium that the other ones don’t have, and that makes it very challenging to produce things in the United States. We basically run this structural trade deficit to send out dollars to the world because that’s the global money. And so the downside of this system, we get all these benefits from the system, obviously we United States is, our unit of account is basically the unit of account of global trade.

[00:36:40] Lyn Alden: 90% of currency exchange is happening with dollars on at least one side of the trade. It’s the heart of the whole system. We can sanction any country. We issue debt in our own currency. Other countries issue debt in our currency, especially developing countries. And so it’s a very privileged position, especially for, the military and especially for, from a geopolitical standpoint.

[00:37:02] Lyn Alden: But the downside of the system is that our industrial base is increasingly uncompetitive. We have this kind of extra uncompetitiveness built onto our industrial base. And so when you look at. United States’ trade balance, before the system, for a period of time we were running a surplus and then it was kind of balanced.

[00:37:19] Lyn Alden: But after the system came in place, we started to run a structural trade deficit. We pretty much have to in order to support the system. And that over time that means a deeply negative net international investment position. It means that our industrial base, especially over the past two decades has stagnated.

[00:37:34] Lyn Alden: And so we become very services oriented and we become kind of this hollowed out shell that has a lot of geopolitical reach around the whole world. Even as at home, our industrial base suffers, our infrastructure suffers. It’s ironic when you go to a developed country and their airports are better than the airports in like the empire country.

[00:37:56] Lyn Alden: Right? Imagine the world of Rome where, you know, like other countries had better infrastructure than Rome. That would be interesting. Right? So that’s kind of the environment we find ourselves in now where. United States has all this geopolitical power. It’s good for Washington, it’s good for New York, but it’s been really bad for kind of flyover country where you want to make physical things, but it’s much harder for you to do so and that’s been the cost of this current system.

[00:38:20] Stig Brodersen: I wanted to go back even more in history. That’s one of the wonderful things about interviewing Lyn is that we can jump back and forth in, in history. And I want to go all the way back to the 1 860 because everything is, there was a red threat to everything we talked about when we were talking about financial history.

[00:38:35] Stig Brodersen: And I wanted to talk about the American Civil War and President Lincoln and how he began to centralize the banking system. This was at the time whenever the US Federal government issues the issue, the famous greenbacks as fear currency. And that also allowed them to absolve from the population as long as they could retain that credibility and reputation.

[00:38:56] Stig Brodersen: Now you also had the confederate states of America. They also issued via currency to channel people savings toward the war. Basically what you were saying before in the 20th century, like we saw also that the sense before and that currency for the Confederate states high inflated whenever they lost the war.

[00:39:12] Stig Brodersen: So I guess with order that, as a backdrop to my question, how important is the strength of the US military today, whenever we talk about the strength of the US dollar?

[00:39:20] Lyn Alden: Yeah, that’s a good question. And to touch on that initially, again, the 1860s are interesting because in addition to, the Civil War and all that, you had the telegraph system recently deployed, right?

[00:39:32] Lyn Alden: So that telegraph system in the United States is partially what allowed a centralization of the banking system to occur in the first place. It’s hard to centralize something if you can’t even rapidly communicate across that large area. And so again it’s, that’s why I focus so heavily on technology.

[00:39:46] Lyn Alden: As a driver of what money is or what the layers on top of money are, because with, without, the foundational variable, it’s hard to have the derivatives of that. So it, it’s interesting timing how that worked out. I’m not saying obviously telegraph caused the war. I’m saying that, the bank is, was centralized in part for the war, but it could only be centralized to that degree because a telegraph had been deployed to various degrees, or at least it made it far easier to do it.

[00:40:11] Lyn Alden: So, to answer your question, I would say that a, the credibility of a currency is largely tied to that country’s economic size, rule of law, and then ability to define itself for protect itself. Right. So if I, like I have Thai bot and Egyptian pounds and Norwegian kroner in the drawer next to me, and they’re not very saleable where I am in New Jersey, even though in particularly the Norwegian currency is quite strong.

[00:40:36] Lyn Alden: Yeah. It’s like the richest country per cap or one of the richest countries per capita. It’s a small country and that currency is just not very saleable outside of Norway. People don’t even know what they would do with it. So I, I’d have to probably trade at a discount to get it off my hands so someone could figure out what they want to do with it.

[00:40:53] Lyn Alden: Whereas the dollar, because it’s a claim tied to the world’s, top two economy along with China, but also, combination of rule of law, openness and all these things like that, the dollar is far more widely recognized. And so it’s far easier to get the dollars and spend them for something in countries around the world than smaller and less saleable or less open currencies.

[00:41:15] Lyn Alden: Now the military plays a role in that because if, if a country can’t defend itself and can’t defend its own rule of law then that whole structure degrades. But I think there’s a feedback loop as well because, a military can only be strong if the underlying economy is strong and it’s harder for economy to be strong unless they’re monetary institutions are reasonably robust.

[00:41:34] Lyn Alden: And so one of the ironic. Problems of the current Eurodollar petrol dollar system is that as the United States has lost its industrial base, it also impedes our ability to do war in a way. So the United States is, we have the most global Navy projection that’s kind of the source of the United States is differential.

[00:41:54] Lyn Alden: And of course, the nuclear arsenal that the United States and a handful of other countries have, but our ability to exert physical force in a distant location is now somewhat impaired by the fact that our industrial base is so weak. It’s like, we have to buy parts from China if we ever have a conflict with China.

[00:42:11] Lyn Alden: It’s like, that’s how we kind of found ourselves because we’ve de-industrialized our heartland. And so I think while a military is important for backing a currency, it’s obviously not the only variable. Otherwise, China’s currency would be more accepted than it is now. Maybe not more accepted than the dollar, but it would. You’d think it would be.

[00:42:29] Lyn Alden: A third of the global reach. The dollar has, but it’s not it’s a, single digit percentage of the global reach that the dollar has, because there’s a lot more that goes into currency acceptance than just military, even though the military is a variable.

[00:42:42] Stig Brodersen: Thank you for clarifying that, Lyn. I think that’s so important to understand in historical perspective. If we can continue on that thread here. You outlined the gold standard really well in your book. And we can roughly say, just to put some numbers on that, the era of the gold standard, of the more modern gold standard began the 1870s.

[00:43:01] Stig Brodersen: Depending on also which country you’re looking at. The United States increasingly joined that you had the accordance act in 1873. Then you had the Gold Standard Act in 1900, and today we almost had 200 countries in the world and no one is using the gold standard. We had the shift in 1971 with Nixon that we talked about quite a few times here, in here in the show took the US.

[00:43:22] Stig Brodersen: More or less the world of the gold standard. There were a few exceptions, including Switzerland, that was the last remaining country in 1999. Talk about a small country with very little military power that still plays a role compared to its size. What you also talked about before that was that the gold standard became highly inconvenient to, to run in, in 1971 and also the years before because there was this disconnect between like the dollars out there and the gold system.

[00:43:50] Stig Brodersen: There was just a disconnect there. And I wanted to use that as an example and talk about the British there been on and off the gold standard and leading up to the first World War. The United Kingdom was the dominant global power. And in 1914, they issued war bonds to raise capital from the public to fight the war.

[00:44:11] Stig Brodersen: And I should say luckily for the United Kingdom, the bonds were massively or subscribed, but unluckily, the story just wasn’t true. And you explained that so well, that story. So I would kindly ask you to tell that story and share that with the audience what happened at the time and what can we learn from a history about currency debasement from the world’s superpower, which presumably were backed by gold at the time.

[00:44:34] Lyn Alden: Sure. And it touched on the classical gold standard individual countries could be on a standard, but what makes a global monetary order work is that you need technology to make it work, and you need some degree of peace or hierarchy in order for like agreement global agreements to happen. And so the reason that the Global Gold standard existed from the early 1870s until World War I was combination of one technology.

[00:44:57] Lyn Alden: So the telegraph was deployed across Europe and then across the Atlantic. And so, not the Pacific yet, but that whole kind of quote unquote western world was connected. And that allowed central banks to communicate with each other quickly. And so that was one piece of what made it work.

[00:45:12] Lyn Alden: And then two, Geopolitical and order. So the Franco Prussian war ended in, in 1871. And so that kind of marked an end of a period of war in the beginning of a period of a pretty significant peace across Europe. And so that combination of peace cooperation order and the technology to make it work is what gave us the classical gold standard.

[00:45:33] Lyn Alden: And the problem, as I described before, was that during that period, very quickly, like already in the 1870s, let alone the subsequent decades, you just had far more claims of gold than actual gold, because why not? It’s like, no one ever redeems these things. Who wants to hold physical gold?

[00:45:49] Lyn Alden: So all these claims are moving around. They have very high velocity and, there are a couple people sounding the alarm, but it worked well enough as long as there’s no problem. Of course, humanity filled with problems. And so when they ran into World War I, you start out this like, it’s an Eastern European conflict.

[00:46:06] Lyn Alden: I mean, at its surface it didn’t involve the UK at all. And so you had kind of these pre-existing military alliances, all these countries started getting involved. And once Germany got involved, the UK became concerned because Germany was a rising power to UK. So the UK, the United States was technically the world’s biggest economy, even back then.

[00:46:24] Lyn Alden: Then by the early 20th century they had emerged, but we were isolationists and pretty federated. So we were not this considered a threat. Whereas Germany’s right near the UK, they had a growing industrial base, and they were like a threat. We can actually kind of compare it to the United States and China today.

[00:46:42] Lyn Alden: So there’s a dominant power, and then there’s this rising power that in some metrics is kind of catching up. And so the UK did not want Germany to win this war and then basically just have dominance across continental Europe. And so they decided to enter the war on the other side. And that’s a hard sell to the public.

[00:46:59] Lyn Alden: Like imagine saying we have to raise taxes a ton in order to go fight this overseas thing that trust us, it’ll benefit us. But we can’t exactly describe how, if you’re a steel worker in UK, you’re like, well, why are you going to raise my taxes to go fight in Germany? Right. Or France.

[00:47:15] Lyn Alden: And so the United Kingdom primarily financed it with war bonds. They said, okay, we’re going to issue a ton of debt. They’re going to offer slightly higher interest rates than normal. UK bonds and help us go fight the war and the problem was that, even though they announced that it was fully subscribed, that capital just poured in and really only about a third of it poured in.

[00:47:35] Lyn Alden: So they had this big, like unfinancial, they couldn’t finance it with taxes. It would be very unpopular. And then they couldn’t finance it with debt. And so that would be catastrophic. They literally, they don’t have the resources to go fight the war. It’d be a huge PR loss. And so they just basically said, okay, we’ll cheat then.

[00:47:51] Lyn Alden: If you can’t, if you can’t do it the way you want cheat. So instead they went to the Central Bank, the Bank of England, and they said, okay, how about just create a lot of credit and just basically monetize the remaining two thirds of these bonds. And so we’ll be able to spend all this money into the economy, into, paying soldier salaries, into buying commodities into buying equipment that we’re not actually extracting from the economy.

[00:48:14] Lyn Alden: If they did it actually with war bonds. Capital would flow out of the citizenry and then it would be redeployed back into the citizenry and be used to fight the war so you wouldn’t have a big jump in the amount of currency. Whereas because you financed it with central bank credit creation, you spent money into the economy.

[00:48:32] Lyn Alden: They didn’t extract from it. So the money supply like basically doubled and then prices basically doubled. And so if you were a holder of UK currency, you just got devalued and it was opaque to you. It’s not like they passed higher taxes. It’s not like they issued bonds that you voluntarily bought, you were just devalued.

[00:48:52] Lyn Alden: It doesn’t matter what you did and you didn’t necessarily see it coming, you didn’t know. This was not like it’s publicly known thing that’s happening. It was only uncovered, literally a century later that the exact details of how they financed this initial kind of series of war bonds.

[00:49:04] Lyn Alden: And so as a household you just kind of got blindsided, you got rug pulled. And then worse yet, if you were a foreign country, That was either due to colonialization holding UK assets or voluntarily holding UK assets. because they’re the Global Reserve, most, most powerful country. You got rug pulled too.

[00:49:21] Lyn Alden: You’re holding this foreign currency that just got basically cut in half and then it’s all just channeled into fighting in continental Europe. And so basically you had this in some ways beautifully engineered, high velocity classical gold standard system. But World War I showed how fragile it was and then everybody basically got rug pulled at once.

[00:49:41] Stig Brodersen: You have this wonderful quote here, Lyn, on page 113 and it’s from Keynes’ famous book, Essays and Persuasion. He wrote that between 1919, 1931 and he states that Lenin was certainly right. There is no subtler, no sure means of overturning the insisting. Basis of society. That’s our the currency. Now again, it’s we don’t talk a lot about Lenin here on the show, but I was hoping if you could elaborate a bit more on what Keynes meant, well, I should say, about what Lenin meant and whether or not you agree with that assessment.

[00:50:17] Lyn Alden: So the reason I quote Keynes is interesting. If I quote like an [inaudible] economics in the problems of inflation, people can be like, well, yeah, no, we all know the [inaudible] don’t like inflation. The reason I like the Keynes quote is because he, in many ways, like the architect of this inflationary system he’s the major proponent, a major influence on how we run modern finance.

[00:50:38] Lyn Alden: And yet he had some of the most detailed breakdown of the problems of inflation. The fact that it’s a, it’s basically a tax on everyone, but then more specifically, it’s an undetectable tax. It’s this purposely opaque way to extract value. Then to deploy that value somewhere else. And as part of his quote he basically, cites Lenin and says, the currency debasement is one of the most effective ways to kind of deconstruct this whole system.

[00:51:03] Lyn Alden: And I don’t discuss Lenin enough. I’m not like well-versed on the context where I studied, I know Keens way more than I know Lenin. But one thing I like to point out is if you actually read the Communist manifesto, so Karl Marx going back to the foundation of communism, they talk about 10 ways, like 10 tenants that, that you’d have to use in order to bring about communism, right?

[00:51:25] Lyn Alden: So this is from them, it’s not from others. And one of them is centralization of all credit and banking into a national monopoly. So all money centralized and only the state determines who gets credit, who doesn’t get credit. Number two is the centralization of all communication and transport.

[00:51:44] Lyn Alden: And these, this is from them. I mean, it sounds like a criticism, but that’s what they’re describing among other steps that you need to do in order to bring about communism. And so basically, if you, if put your mind, if you put your mind in the mind of a communist, you see, how can we enact our vision?

[00:52:01] Lyn Alden: Well, one of the ones is you have to mess up the currency. You have to centralize it. You have to be able to devalue people who you don’t want to have money. You have to be able to redirect the value from whatever someone’s holding to whatever you think the state should do. And so that’s basically what Keynes is talking about, that you have this untransparent way to take value from others.

[00:52:22] Lyn Alden: And it’s funny because Keynes was one of the few that was aware of the Bank of England’s kind of trickery during World War I. And so he’s an interesting character because on one hand he’s like the proponent of that type of, I mean, he’s not a communist, but he’s a proponent of, very flexible monetary systems. These kind of opaque. Inflationary systems. And yet he’s also describing in detail why it can be harmful, especially if overused.

[00:52:49] Stig Brodersen: And here we are. Let’s actually stay a bit with that thought. In your book, Lyn, you state that, and just going to quote here, to this day, there have never been a satisfactory explanation as to why the United States invaded Iraq.

[00:53:02] Stig Brodersen: And you also note that in 1999, Iraq, which at the time had the second largest oil reserves, began to sell oil in the newly created Euro. Now, this might sound crazy if you’re listening to this in 2023, but the world was very different in 1999, and the Euro was a serious contender. Like the power relationship between Europe and the US were just very different at the time.

[00:53:22] Stig Brodersen: Now, Russia, Venezuela, and Iran were also dabbling in non-dollar oil sales around the same time. And the idea that the United States invaded Iraq due to the sale of oil in Euros is often labeled as a conspiracy theory. And one of the things you discuss in your book is that while it probably wasn’t the only reason for an invasion, do you think that it played a role?

[00:53:47] Lyn Alden: I do and basically, moneys emerge naturally, and to some extent that even includes via currencies. So, you know it, if you go to an Egyptian and he’s holding physical dollars because he doesn’t want to hold too many Egyptian pounds because they devalue quicker. If you ask him, why do you hold dollars?

[00:54:05] Lyn Alden: Well, why didn’t you pick Chinese wine? Right. This is an emergent decision. The United States is brand of money. It’s more known to this person. It’s more accessible, it’s more liquid, it’s more globally ubiquitous. Right? So in some sense, when fiat currency systems collide, the sounder and bigger and more liquid one is likely going to win.

[00:54:25] Lyn Alden: Right? So the Euro dollar, petrol dollar system was a. Partially designed, but then also partially it’s as the biggest, the most saleable money, it’s the one that, that becomes dominant. But because these are centralized systems, they need kind of enhancements or management of their network effects in order to keep them going.

[00:54:46] Lyn Alden: And so in, in the 1970s, they had all those initial pet dollar agreements with OPEC to basically keep the ball moving on what was already a pretty strong network. So they didn’t like create the importance of the global dollar? No. That they already had that from Bretton Woods and World War II and all that, but they, that, that was a way to kind of keep it sustained.

[00:55:05] Lyn Alden: And when the creation of the Euro came, as you pointed out, that was considered a comparable currency to the dollar it was considered a rising challenge of global dollar supremacy. And we started to see in a very pretty rapid period of time, a number of countries that were not on good terms with the United States, become interested in trading oil for Euro.

[00:55:25] Lyn Alden: We either went to war with them or we destabilized them, or we sanctioned them. And it’s interesting because, I mean, there are no shortage of dictators in the world. I mean, there are tons of dictators of, say, certain African countries, certain Southeast Asian countries, North Korea. We generally don’t invade these areas.

[00:55:46] Lyn Alden: Doesn’t matter if they’re committing atrocities. We don’t spread freedom to these countries, using the phrase sarcastically. We generally do these types of actions when we feel it’s, we’re ending a threat to us or we’re gaining some strategic advantage. So, after nine 11 and the war in Afghanistan, there’s this period of like confusion and this period of popularity and kind of pro-war mentality.

[00:56:10] Lyn Alden: And they basically use that to then go into Iraq, which does not even share a border. It’s a completely unrelated, and they’re like, well, is an evil dictator. He is got weapons of mass destruction. He’s got to go. Let me find out. There’s no weapons of mass destruction. He’s, he is an evil dictator, but there’s plenty of evil dictators.

[00:56:26] Lyn Alden: Why do we, why did we pick that one, the one that happens to be a major oil producer who’s now pricing his oil in euros, and we go in and take him out and then they go back to pricing oil in dollars. And so, I quote Ron Paul there because he gave a famous speech in the two thousands in Congress.

[00:56:44] Lyn Alden: So he put this all on the record, and he kind of lays out all these different regimes that every time they’re not on good grace with the us, especially when it touches our monetary system, we tend to either outbreak, go to war or our c I A and others destabilize them and try to do coups and try to get them back in our favor.

[00:57:03] Lyn Alden: And so that was kind of an era where the United States felt threatened. And I would argue, and many others have argued that a significant reason for why we did some of these military and geopolitical engagements was to try to keep the network effect of the dollar going strong.

[00:57:19] Stig Brodersen: It’s so interesting that you mentioned that Lyn, and I would say probably due to my ignorance, I never really connected anything between the currency and war efforts before I read Alex Gladstein’s book, Check Your Financial Privilege, I’ll make sure to link to that. Preston interviewed him on his show. I also want to use that as a segue into the next question, which Alex also talks about. And you do really well in your wonderful book. because you argue that the Brenton Woods monetary system and subsequently the Eurodollar pitch dollar monetary system represent a form of narrow colonialism.

[00:57:52] Stig Brodersen: How do wealthy nations push inflation and volatility to developing nations of the systems’ periphery?

[00:58:00] Lyn Alden: So, back in the gold era, the underlying unit was something that no currency, no, no country could print, nobody could print gold. Some countries could mine gold, but that’s an expensive process. So gold was this like neutral foundation.

[00:58:13] Lyn Alden: And then there are all these claims built on top of it, and they all kind of had to deal with this layer of abstraction and occasional defaults problems in the modern system where the foundation of money is the dollar that the United States can print and no one else can. And so what happens is, if you are a developing country and you want to get foreign capital to help build and build your infrastructure and build your capital up, it’s hard to do it in your own currency because you don’t have the history, you don’t have the institutions, you don’t have necessarily the rule of law and the currency stability for outside financiers to want to finance you in your own currency.

[00:58:51] Lyn Alden: And so they often have to borrow in dollars. To much lesser extent Euros are yen, but it’s vast majority’s dollars. And so they have now debt in a currency that they can’t print, but that one other country can print. And so that’s a negative feedback loop because that now makes their currency even less stable because now they have all these hard liabilities that they can’t print.

[00:59:13] Lyn Alden: Whereas the United States, we can print our own liabilities. Japan, they can print their own liabilities broadly. One of the key variables that separates a developed country from a emerging country is that a developed country, most of its liabilities, the vast majority are in its own currency. It’s not the only variable, but it’s like a, it’s like a necessary but not sufficient condition to be basically be a developed country.

[00:59:34] Lyn Alden: And so the problem with that system is that, when the United States run this monetary policy, we mostly do it for ourselves. If you look at the federal reserve’s mandates, none of them involve other countries, right? So if we, if our economy’s running hot, if we have inflation, we can tighten the dollar, we can raise interest rates, we can do quantitative tightening.

[00:59:54] Lyn Alden: If our economy’s weak, we can print money, we can cut interest rates to zero. We can do whatever we want. And so all these other countries, Who have both liabilities to no in dollars, or they have maybe their major credit donation. They have assets to no in dollars. Their Saudi Arabia or their Taiwan, they’ve had massive trade surpluses.

[01:00:11] Lyn Alden: They build up dollar assets. We can devalue those whenever we want. And then on the other side, if you’re a emerging market with a lot of dollar time in debt, we can harden those liabilities whenever we want and basically crush you. And so emerging markets that have all this dollar diamond in debt go through exaggerated boom bust cycles, which makes them less investible, which makes it hard to accumulate capital.

[01:00:34] Lyn Alden: And it’s not based on gold. It’s based on the foundation of what a handful of people in Washington DC decide to do. And so that basically gives, and back when the Brett and Wood system was designed, you had the I M F and the World Bank that were designed along with it, those are the guardrails and enticements of the system.

[01:00:51] Lyn Alden: So if a country finds itself needing dollars, because it pretty much has to use dollars to finance itself, and now it’s run into a debt problem as they all do. The only place they can go is they can go to the United States to get like a dollar swap line or they can go to the I M F and get a loan.

[01:01:07] Lyn Alden: And of course the I M F is primarily, it’s basically entirely controlled by United States and Europe. And so the I M F says, okay, we’ll give you a loan, but you have to change these things according to our will. You have to devalue your currency. You have to end subsidies for these things. You have to let our corporations go in there and do whatever they want.

[01:01:26] Lyn Alden: You have to export these things to us more efficiently, right? So we can shape those countries to our will because they can only finance themselves in dollars and we’re the ones that have the dollars, right? And so the way the system essentially works is that the developed world, especially United States, but also Europe, Pushes their volatility onto the rest of the world.

[01:01:47] Lyn Alden: So all of the emerging and frontier markets of the world are at the side of it and just kind of getting whip solved all around by whatever the United States and Europe decide to do with their monetary policy. And, a handful of countries like, Japan has broken out that system.

[01:02:02] Lyn Alden: They’re kind of in the club now. China has been powerful enough. That’s like kind of their, arguably their main goal is to kind of break out that system. They’ve done it pretty effectively, but with a handful of exceptions, it’s very hard for countries to ever break out that system. They have these constant waves of volatility pushed to them in order to stabilize and reduce volatility in the United States and Europe.

[01:02:24] Stig Brodersen: It’s so interesting, Lyn how money is underlying theme on so many geopolitical things here. And, it takes me to the next question about this old joke about a woman claiming that the world rests on a giant turtle. Then she gets asked, well that giant turtle, what does that stand on?

[01:02:42] Stig Brodersen: And she’s like, another giant turtle. And then you would continue to ask her like, what about that turtle? What is that turtle standing on? And she says, it’s giant turtles all the way down. And so you’re using that joke as this beautiful metaphor for the US financial system. So let’s see if we can go from giant turtles to the US financial system and tie that bow there.

[01:03:07] Lyn Alden: Sure. So if you go back to the gold base system in, in terms of financial markets, most assets are someone else’s liability. So a US Treasury bond is an asset for me and it’s a liability for the US government. Corporate equity is an asset for me, but it’s definitely a liability for that corporation.

[01:03:22] Lyn Alden: Same with a corporate bond. And so most assets are someone else’s liability. They’re based on the ongoing operation of something else. Gold and commodity monies in general are assets that at their core are no one else’s liability. So gold is, it took a lot of energy to get it and refine it and, here’s a gold bar and whoever owns it, if they custody it, that’s an asset and it’s known else’s liability.

[01:03:45] Lyn Alden: It’s not based on the continuing work or legal claim to someone else. And so when you have a financial system that’s ultimately built on gold, most things are assets and liabilities and it’s just, it’s whole circular system. But at the very bottom of the system is gold, right? An unencumbered asset.

[01:04:02] Lyn Alden: Now, once we remove gold from the system, we rendered our system into that turtles example where it’s turtles all the way down, meaning it’s liabilities all the way down. There’s no bedrock there, there’s no bottom of the system where there’s an unencumbered asset. Because right now, when you say, okay, what is a dollar in your bank account mean?

[01:04:21] Lyn Alden: Well, it means you have an I, you have a fractional I O U. To a base dollar. And they say, okay, well what? What is a base dollar? A base dollar is a direct liability of the central bank of that country, let’s say the Federal Reserve in this case. So that would consist of either physical bank notes or bank reserves directly held with the Fed.

[01:04:40] Lyn Alden: That’s the monetary base, that’s the ledger, that’s the monetary ledger of the United States. And those are liabilities of the Fed. And you say, okay, well what are the Fed’s assets? How do they back up their liabilities? Well, they hold treasuries and they hold mortgage-backed securities and a handful of other assets.

[01:04:55] Lyn Alden: And you say, okay, well what are mortgage-backed securities? Well, they’re an asset for the Fed, but they’re a liability to whoever owes those mortgages. You say, okay, well what is a treasury? Well, it’s an asset for the Fed, but it’s the liability of the federal government. And what is, so what does the federal government support its liabilities with?

[01:05:13] Lyn Alden: Well, it has some assets. I mean, it has land, it has real estate, it has military assets. But if you add all those up, they’re much smaller than. The $32 trillion that they owe. So, but their primary other asset is tax authority. They have a kind of a guaranteed income stream that helps them support, at least some of their liabilities.

[01:05:32] Lyn Alden: And so it’s now we have this big circular system. There’s no unencumbered asset at the foundation of this system. It’s just, it’s liability, and it’s big circle that leads back on itself. And that’s basically just the system we’ve had ever since 1971. Whereas prior to that, and really throughout modern history, I mean, throughout ancient history, you had unencumbered assets to the foundation of the system where these past five decades have been this kind of anomaly where there’s no unencumbered asset.

[01:05:59] Lyn Alden: Now, technically you could say, house houses at the end of the day, when you own property, like, mortgages are basically claims on houses. There’s, there still are unencumbered assets that exist throughout the system. But the various monetary units that we use are not explicitly tied to any of them.

[01:06:19] Lyn Alden: It’s not like, it’s not like a dollar’s worth a certain amount of a house or a certain amount of gold. It’s that we have this kind of circular system that exists alongside unencumbered assets rather than being built on unencumbered assets.

[01:06:32] Stig Brodersen: Lyn before you dialed in, I had a quick chat with Preston, and basically all that we said to each other was how amazing this book was.

[01:06:39] Stig Brodersen: There’s probably one or two books a year that really stand out and makes you think differently about the world. Ideas I’ve never heard before or at least did think about that way. And for 2023, I can just say that broken money is in that category for me. For me personally, I’m going to not just buy for myself, I’m going to gift it to friends and everyone who I think could find help in your wonderful book.

[01:07:01] Stig Brodersen: This is just the first part of this conversation, Lyn, we’re going to have today. The second one goes out with Preston on September 5 here. But I just would like to take the opportunity to thank you for writing this wonderful book. And I probably praised it like 15 times already, but let me just say for the 16th time, like, this is such an amazing book and it’s so at least for me, so thought provoking probably.

[01:07:22] Stig Brodersen: because I’m completely ignorant that I haven’t thought about the world like that before, but it was just I kind of feel that there were so many a bit like reading Dalio’s book that I know that a lot of an audience are familiar with, where he just like, there were a lot of thoughts and a lot of loose things.

[01:07:36] Stig Brodersen: And to me, that Book, Dalio’s book for example, I could say same thing for you now, just had so many things together. I think you, you said it yourself, Preston, it’s just so much easier than, don’t listen to me. Just pick up Dalio’s book or pick up Lyn’s book and you’ll get it.

[01:07:51] Preston Pysh: It’s the organization of all these ideas. So like, people who just listened to that first part of the discussion with Lyn are like, wow, there’s a lot going on here. And there is, because we’re pulling from various parts of the book, but for a person who sits down and reads it from the start to the finish, they’re going to, they’re going to walk away and they’re going to say, oh my God.

[01:08:09] Preston Pysh: It was just organized in a way that, that I feel like I got the whole picture now opposed to these random or somewhat compartmentalized ideas. And that’s what I loved about the book was the organization, the flow of it, how she walks you from this very beginning. I think I was talking to Lyn offline and I started laughing.

[01:08:28] Preston Pysh: I was like, Lyn, I finished your book. And I felt like, Almost like a boxer where they kind of like corner you into the corner of the ring for the final, like upper cut below knockout, like at the end. And I know that’s, that wasn’t necessarily maybe what Lyn was trying to do to the reader, but as a person who’s looking at it from the outside in, it’s really kind of hard to miss the really big, so what, by the end of the book, which is, and this is my words, Lyn, you can say Preston, you totally missed the point, but it’s this chronological history of money in technology.

[01:09:04] Preston Pysh: And then at the end you’re walking down this path of things that used to be really kind of bifurcated between like ledger money and commodity money merging. And the technology of where that’s going to take us into the future is going to be very different than what we’ve experienced in our lifetimes and in our past and it’s an exciting time to be alive and I feel very blessed to have had the opportunity to read this just really profound book.

[01:09:34] Lyn Alden: Well, I really appreciate that and I appreciate the opportunity to talk about it. And, for people that read it there’s hundreds of citations in the book, and so the book couldn’t come together without all these other people that have put out amazing content over the years.

[01:09:46] Lyn Alden: And so, yeah, what I really tried to do was, I had a couple, a couple kind of, key themes or insights myself that I inject into it. But a lot of it is organizing all of the amazing things I’ve learned over the years from other people and trying to put them together in a way that makes sense for the reader.

[01:10:02] Lyn Alden: So that organization in the major themes I think, are really important. And also, I think one of the themes, I kind of in indirectly touch on this idea of technological determinism where like certain things naturally happen in a certain order. It’s not, history’s not random in that sense. If you read like the fourth turning from Neil Howell for example, he kind of makes a similar argument that, humanity tends to kind of go in cycles.

[01:10:23] Lyn Alden: Like what happened before kind of naturally feeds and what happens next? And then what happens in that era kind of naturally feeds to what happens after that. It doesn’t mean it has to happen exactly that way, but there’s certain loose patterns that happen. And so I kind of, there’s in a certain sense this as new technologies get discovered, they impact how we use money and what the pros and cons of that money are.

[01:10:43] Lyn Alden: And, but furthermore, those technology things almost have to happen in a certain order. So for example, if we were to run the world back 10 times, how many times would the bicycle be developed before the automobile? Virtually every time, because the automobile relies on the same technology that makes bicycles possible, plus additional ones.

[01:11:02] Lyn Alden: And so there’s no world where, say, telegraphs and morse code are invented after, say, Bitcoins or central bank digital currencies or something. It’s like the foundations of sending very simple information like abstracting transactions naturally happens before abstracting settlements on a digital scale, for example.

[01:11:22] Lyn Alden: And so it’s like we can divide almost monetary history into like three parts, which was pre telegraph, everything’s physical. And then we’ve been in this past century and a half where we’ve been navigating this kind of unique environment where information goes very quickly, but obviously material objects do not.

[01:11:38] Lyn Alden: And so in some ways, the past 150 years are humanity struggling with abstraction of our money, including all the benefits from that, but then all the downsides of that. And so I just think it’s something that’s, it’s not a topic that’s been explored enough. And so I, I really appreciate the chance to come on and talk about it.

[01:11:55] Preston Pysh: And we’re about to blossom out of that second phase into a third phase, which we’re about to talk about in the next part. So make sure you guys are on the lookout for that.

[01:12:05] Stig Brodersen: Well said. I think that’s the best way we can end this first part series here with Lyn. Again, Lyn, thank you so much and we’re just going to stop the recording and start a new one that’s going to air on September 5, so everyone make sure to download that. It’s going to be a fascinating discussion.

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