Politics can affect things temporarily and locally, but technology is what drives things forward globally and permanently.
Read on...
From shells to gold, from papyrus bills of exchange to central banks, and from the invention of the telegraph to the creation of Bitcoin, Lyn Alden walks the reader through the emergence of new technologies that have shaped what we use as money over the ages.
And beyond that, Alden explores the concept of what money is at its very foundation to give the reader a framework to analyze and compare different types of monetary technologies and monetary theories.
The book also takes a distinctively human look at how money impacts the lives of real people, and how new monetary technologies shape the power structures within society.
In the modern era, energy abundance and technological enhancements have broadly improved human well-being, but the global monetary system has been slow to keep up.
After having read the book page by page, I, hereby, list down the 43 fabulous lessons from this awesome book.
These are the examples that stuck with me.
These learnings are worded and appended in a way that makes it easier for most of us to understand and absorb.
If you are interested in reading about such learning from other all-time best-selling books, you may click here.
For now, if you wish to know about "Broken Money", and what I learned from it, here you go...
1/ Ledgers - mental or written - came into being much before money.
2/ Mental ledgers work very well when both parties know each other or trust each other. I owe you a movie next time since you paid for it this time - this is a simple mental ledger.
3/ Polished seashells and beads made of animal teeth etc. became the first form of money used to co-operate between two unknown entities - something that animals couldn't do.
4/ Shell beads were tough to create - polishing, drilling, making it as an ornament for ease of carry - but lasted a very long time once created.
5/ Money has to be divisible, portable (packs lot of value in less weight), durable (doesn't deteriorate over time), fungible (individual units are not different), verifiable (by the seller for its authenticity), scarce (money supply can't be increased quickly) and has some utility. To sum it up, money is the most saleable good in a society.
6/ Stock (existing) to Flow (new addition per year) ratio (SFR) of money is critical. The higher the ratio, the better the money.
7/ Gold has a ratio of 67.5 which is best among all money types we ever had. This also means that the world holds gold that would take around 67 years to mine.
8/ If a commodity is extremely rare, then it may be valuable but may not make sense as a monetary tool since the liquidity and usage will become a challenge.
9/ Also, if the product gets consumed quickly after mining, like in case of Rhodium, then again SFR dips since the stock dips.
10/ It was always technology advancement that led to disruption of one currency and setting up of the next currency which became better suited as a monetary form.
11/ Anything can be money, but metals suit the best since they can be divided into smaller parts and later fused if need be.
12/ Even if a barter is not possible, it was possible for one party to take goods from the other on credit (by mentioning the credit on a ledger) instead of paying for it instantly via commodity money.
13/ Human issued currencies and promises have always devalued over time and that's because the devaluation impact takes time to percolate to the existing holders. And devaluation happens because we create more promise that is leading to unproductive work like wars, Corruption etc. If we only had commodities rather than easy promises in terms of easy money, then there would never be enough creation of commodities to take up a full-fledged war.
14/ Banks are legal and technical layers over the commodity money.
15/ Hawala network is still used today wherein one can transfer the money internationally (via hawaladars) transacting outside the banking network - without actually moving the money and by paying a much smaller fee.
16/ Individual users must trust their respective hawaladar and hawaladars must trust each other to run the network successfully. The hawaladars can settle with much lesser 'net' movement of money at certain defined frequencies.
17/ Banks are supposed to charge us fees if they were to keep our gold and issue us paper receipts for ease. But they don't (in fact they pay interest), because we have all agreed that banks need not keep gold with them and offload that for interest and pay us a part of that interest.
18/ As people got more comfortable with paper notes and considering the ease of transactions (since they didn't need actual gold for transactions), they started demanding less of gold back, and the banks started leveraging more fractional reserves, until the gold standard was diluted to 100% and disconnected from paper money.
19/ Speed of transactions (with internet, ecommerce, mobile payments) led to fiat currencies defeating even Gold (which was much scarcer).
20/ With Gold disconnected from paper money, it was easier for governments to fund wars without borrowing from public or taxing them - just by printing more - thus devaluing the currency that lied in the hands of citizens without their approval or awareness.
21/ Not only the citizens of that country, but of any country holding the currency of the first country are impacted by this devaluation.
22/ If a ledger can be manipulated easily, it will be manipulated.
23/ Currency devaluation favors debtors and harms creditors. Hence, there's is a significant wealth transfer that happens whenever devaluation occurs.
24/ Since 1973, when US totally disconnected gold from dollar, none of the world currencies are redeemable for anything.
25/ When a developing country takes loan from IMF or a set of developed countries, and then invites developed countries to build infrastructure etc., then a major part of the loan goes back to the developed countries while the developing country mostly pays the interest and goes in debt. The debt is usually payable in USD and if USD keeps getting stronger, the debt keeps piling up. Such countries continue to remain developing for a very long time.
26/ When a currency starts to rule the world, like USD, it becomes so strong that it makes local production and subsequent export very costly, this leading to a structural trade deficit.
27/ When one single country's currency gets dominant like USD, they can blackmail all those countries which hold the reserves of that currency. Reserves are not held as cash but as bonds or derivatives, which can be withheld by the source country. So, no single country's currency should rule the world. It has to be one globally accepted currency like Gold or Bitcoin.
28/ Your assets (money) is a Banks liability. That liability is backed up by bank assets (loans). Banks assets are a ledger entry into the federal Bank and is their liability. That is backed up by federal bank assets (taxes the government collects). Everything is circular and is reliant on continuous growth. The system is extremely fragile. This is very unlike the gold standard where everything ultimately ended with gold, because gold was not a liability for anyone.
29/ Gold represents the total value of the effort that's gone in mining and refining it.
30/ Many times, there are supply and demand imbalances. In such cases, a top-down economic approach to control prices is counterproductive to resolution of issues. These supply-demand imbalances are naturally bridged if left alone. If the demand is high for a product whose supply has suddenly got disrupted, people will use only where necessary, thus reducing demand and bringing prices down. Or more suppliers will come in because of high demand. But a govt control on prices leads to less suppliers interested in it. Decentralized system works far better than centralized control.
31/ Central banks have an inflation range target. They do not want higher and also do not want a lower inflation. With increased productivity and technology, gross prices should actually fall and lead to deflation, but the central banks do not allow that by printing more money and elevating the prices. This is because deflation leads to more savings and less consumption, which is good for users but not for the debt based fragile economy that we all have become a part of. Those who have taken debt would find deflation a very hard period. Inflation helps debt takers and that includes those very close to money creation - government being the first. The default price change is negative in a free society because of productivity gains and tech enhancements.
32/ When the broad money supply keeps increasing, leading to inflation, no one wants to just hold on to the money. People want to invest, for better returns and take higher risk, and even take on debt to buy high returning or rare assets.
33/ One who is closest to the source of money creation gets the maximum leverage of the new money (which is produced cheaply) before it spreads across to society. The governments and big banks are the biggest beneficiaries in crisis and bailouts, since new money is created by the central banks and they are obliged to buy government issued bonds. And the government uses that to bail out the crisis through some of the largest banks in the system. These beneficiaries then support the government with financial aid for elections. The farther one is from the money creation source, the more disadvantage one has.
34/ If Bitcoin becomes more penetrated, a few things will change on the way money works today (a) there will be a lesser need to invest (b) personal and small business tax would need to be replaced with traditional ways of taxing like wealth tax since personal level surveillance may not be feasible.
35/ Blockchain is a relatively inefficient database but with the advantage of decentralization.
36/ The simplicity of node requirement is a key feature of Bitcoin network. The increase in node requirement is far slower than the speed of tech advancements in memory and bandwidth. Many years from now, you expect a lot more nodes, leading to a lot more decentralization and more security.
37/ What gives Bitcoin the money hardness is the immutability to change the existing rules. Though the code is open source and anyone can attempt a change, but the change needs to be acceptable to a majority of the nodes - and there lies its strength. Any change not accepted by the majority becomes a fork and doesn't attract enough nodes, leading to high security risk on the fork.
38/ The Bitcoin network is slow compared to, say, an instant bank transfer. When we do an instant transfer, the money actually doesn't get moved, only the ledgers are updated between banks. A lot of transactions can get nullified across banks. At the end of the day, the actual money transfer of the net impact happens by a process called settlement. The Bitcoin layer is likely to act as a settlement layer over fiat money transactions.
39/ Unlike others, Bitcoin miners can go close to energy sources (such as an oil or field) to mine their bitcoins as long as they have a fair internet connection. They access cheap energy there. They create a win-win with energy sources that have varying demand and supply curves.
40/ Central Bank Digital Currency (CBDC) implements far more control and surveillance than fiat-based cash on how you use your money, and how it can be allowed to be used.
41/ Users want their currency to be free, private, and scarce. Issuers want the currency to be surveillable, controllable and that consistently devalues over time.
42/ Technologies that make it harder to freeze money are not about avoiding legitimate laws but ensuring that the governments themselves follow their own laws. In a rapidly turning authoritarian regimes across the world, Bitcoin comes as a saving grace to hold governments accountable.
43/ Information and value transfer privately (encrypted) are the key for trade. Information is already encrypted nowadays. Bitcoin is now encrypting the value.
Hope these 43 fabulous lessons will help shape up your thought process to some extent and help you appreciate life much better.
If you are interested in reading about such learning from other all-time best-selling books, you may click here.
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