Your book recommendations about money include some very old texts, including a couple of books that are over 100 years old. To start us off, perhaps you might explain what money is, exactly, and why people seem to have had better ideas about this at the beginning of the 20th century?
I would start by describing the list as an odd one. It doesn’t look like other lists, perhaps because this proves to be such a challenging topic. I think that we can understand the history of economic thought around money as a history of misunderstandings. There are a lot of clear, concise summary texts that will tell you what money is, but having studied money and taught about it for the past decade— ‘what is money?’ has been my question for the last ten years—I think that most such texts are just completely wrong. They aren’t even close.
You can take something like The Origins of Money by Carl Menger, from the early 20th century, as a very straightforward text, explaining why money is a commodity. It tells a story about how we went from the barter of commodities to picking one commodity as the most saleable commodity, and it becoming money. And those stories inform introductory textbook in economics and that’s the standard account. Unfortunately, it’s just not true.
There have been some good critiques of that account, but developing a fuller account has been very hard. I’m not a historian. I’m a social and political theorist, and a political economist. But the more I studied money, the more I realized that there was a period in the late 19th century where bankers had a handle on money, particularly within British banking practices, with the pound sterling as the international money of account. There were some ideas extant then—with some people really seeing what money was about—that was later lost. And then there’s this period, basically from the beginning of World War I through World War II, where money practices changed dramatically, and people started thinking about money in a very different way. And so I picked a couple of texts from that period, the books by Ralph Hawtrey and Alfred Mitchell-Innes.
But I should also say that the Joseph Schumpeter book’s date of 1954 is misleading. He worked on it for multiple decades and it was incomplete when he died. Most of it was written in this same period of time, the 1910s and 1920s. And that was a period of time when alternative views, alternatives to the idea of money as a commodity, flourished. Schumpeter, in his 1,100 page book, describes dozens and dozens of theories and arguments and positions on money. He shows readers that there are a number of key questions to ask about money, and a complex variety of theories. It’s not a simple dichotomy.
“Money is very difficult to grasp”
If you want to challenge neoclassical economics, which is the way we teach introductory macro and micro, you’ll find the textbooks say very little about money and when they do it is with this default position, that money is a commodity. This makes for an easy rhetorical move: first, you say, ‘that standard account is totally wrong’ and then you say ‘my alternative must be the right one’. But it’s not actually quite that simple. I think money is still very difficult to grasp, even after you’ve gotten to the point where you see that it’s not a commodity. And when we go back in time, we encounter authors who were really seeing this with a lucidity that you don’t have today. Both the Hawtrey and the Innes are 100 years old. So in some ways, they’re hard to read, but in some ways that are also just so much more direct.
Hawtrey’s approach is to accept everything about the standard account. He accepts the standard distinction between money, which we would think of as a commodity, and credit. And then he does this really neat thing, where he basically says, ‘Okay, what can credit do in practice? Let’s just study banking practices and economic practices at the beginning of the 20th century, mainly centered in the UK, and look at what credit can do.’ And he shows it can do everything that money can do. So he’s deconstructing the money/credit dichotomy, but not through abstract or philosophical work. He’s not questioning the deep nature of money. He just says, ‘yes, let’s assume this basic distinction’ between money and credit. This distinction appears over and over again in the literature and it always boils down to credit being a promise to pay and money being the thing you actually hand over when you pay. You can challenge that distinction conceptually, but Hawtrey is really interesting because he doesn’t challenge it. He just says, ‘Okay, fine, we’ll assume that money is the thing you actually hand over and credit is the promise. But let’s look at the practices.’ And then he shows that credit can do everything that money can do.
So I picked that to pair nicely with the Innes, which is the one thing on the list that’s not really a book—it’s two articles that appeared in an obscure banking journal. And no one read them for 75 years. John Meynard Keynes famously reviewed them, and his article was pretty dismissive. And then it’s just not mentioned in the literature until Randall Wray brings it up in the 1990s. But those two paired articles are the full on frontal assault against commodity theory; they are the most powerful presentation of the idea of money-as-credit, credit-as-money, on everything you thought you knew about money being a commodity and everything that’s a part of the standard orthodox story. It’s really polemical, and therefore rhetorically powerful.
He argues that whole history of thinking about coinage as the value of money, as lying in the value of the metal, is nonsense. He shows quite directly that any arguments about weight just don’t hold.
The time period is also key, because there are things that we didn’t know about money through the middle of the 19th century. Historical and anthropological evidence about coinages and money practices only emerges in the late 19th century. People will often reference Keynes’s period of ‘Babylonian madness’, which is when Keynes was looking at the anthropological and historical literature on ancient Mesopotamian money practices, the use of clay ledgers to write down credits and debts in grain as a money of account. Keynes saw how this idea of money, coming out of this concrete history, undermined much of what Keynes calls ‘classical economics’. Keynes’s first major books were on money! This historical literature was available from the late 19th century, but economists hadn’t really looked at it. Keynes was one of the first to do so, partly because he was assigned this position to think about money in India. In thinking about the rupee, he started looking at this literature and he got lost in it—hence his ‘Babylonian madness’.
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There are other interesting arguments about money from early political economists going back even to the 17th century, and certainly to Marx in the mid-19th century. But all of those are before this evidence that coinage didn’t function the way we thought it functioned. Initially we found these coins, and we thought, ‘Oh, it’s the weight that matters.’ And then scholars do more archaeological work and more anthropological work and suddenly we learn that the weight means nothing at all. It’s the stamp on the front that matters. That makes this time period a rich resource, and and the more I’ve taught money, the more I’ve kept coming back to this weird time period as a place to look.
Excellent. Let’s go back to Ralph Hawtrey. What was he trying to achieve in this book, Currency and Credit?
It’s almost a descriptive, empirical, historical journalistic project. He’s looking at concrete banking practices. Something you see across time if you’re studying the history of money, and I think this holds true even today, if you want to know who really gets it, who really has some insight, talk to bankers. At the highest level, the smartest bankers see how money works. What Hawtrey is doing is looking at actual banking practices in late 19th and early 20th century Britain and talking about the way bankers expand and contract credit by creating bank loans and liquidity. Issuing and paying off loans is the creation and destruction of money, which doesn’t happen at the central bank—although the central bank plays a very important role today. The actual creation of money happens when commercial banks create loans, because the creation of a loan is this simultaneous creation of a deposit account, and a loan. That’s where new money comes into being.
Hawtrey was one of the first to look at how the expansion and contraction of credit functioned. He poses the question ‘what is it that credit can do’? He doesn’t question the assumption that money and credit are different, but from the same starting place as an orthodox account he reaches radical conclusions: because when he looks at the actual high-level functioning of the banking system in Britain, which is the center of the banking system of the world at that time, and goes through all these cases, he shows that credit can do everything. And, in fact, credit is what’s doing everything most of the time.
Next up are Alfred Mitchell-Innes’ two pamphlets, What is Money? and The Credit Theory of Money.
Innes and Hawtrey are the same historical period. Innes is the urtext for me. If this wasn’t a list of five, but a list of one, this is the one that would be on it. I can’t imagine trying to teach about money at any level of education without using Innes. His first essay is What is Money? And his answer is, money is credit, credit is money. It is very much that straightforward for Innes. He’s not an economist, and he’s not an academic. He was a diplomat and an international financial advisor (in our time he’d have been a consultant or an investment banker). And he’s writing in a banking journal that I don’t think anyone’s ever heard of. But his arguments are so piercing. He says, ‘Let’s look at the Adam Smith passage, the famous one about the brewer and the baker and about the emergence of money as commodity exchange.’ And he’s got this powerful outsider’s insight where he says, ‘Well, this whole story about how what we need is to pick the best commodity and designate that as money. And then we’ll all save up some of that commodity—and we know it’s going to be gold—but we will all save up some of that gold, so that when we have this lack of mutual coincidence of wants, when barter fails, we will use this gold to solve all of our problems. And Innes just says so forcefully, ‘What if I go down to the butcher, I get my order, the butcher hands it over. And I say, “great, I owe you. We’re done.” We don’t need this complex contrivance of a money commodity that we all hoard, when we can simply have credit.’
In my own work I have argued that inside of Innes’ argument is this really radical transformation of how we understand economic exchange. The history of economics has said that the core concept of economic exchange is that I have a commodity and you have a commodity and we decide to swap them. Innes’s insights can help us to develop a totally new conception. Fundamentally in money economies—and every capitalist economy is a money economy—the basic fact of economic exchange is not the swapping of these things that are the same kind (that is, two commodities), but the swapping of two things that are totally different kinds (that is, a commodity, and a credit).
“His first essay is What is Money? And his answer is, money is credit, credit is money”
A sweater is a commodity, and, as classical political economy argued, commodities are both use-values and exchange-values. If I offered to sell you my sweater, you know it could keep you warm (use-value), and both of us would try to determine its price, its monetary value (its exchange-value). Economics has always defined economic exchange, the bedrock of economic science, as the swapping of two commodities. But with Innes we see something totally different: economic exchange is the swapping of a commodity for a credit, and a credit is a completely different sort of thing.
Whenever I say credit, I always also mean debt. They are the same thing. It’s always credit/debt, because they have to be connected. So if I hand you my sweater and we agree that you owe me a fiver, we now have credit/debt in the equation. The fiver is a debt for you, and it’s a credit for me. That’s the fundamental nature of money. There’s only ever this one sort of thing, which I call money-credit. But, of course, there are higher and lower forms of it. The five pounds that you owe me in an IOU is maybe not so great. If I took your IOU and tried to buy a pint at the pub, the bartender might turn me away. But five pounds that the Bank of England owes—because it’s an actual five pound note and it says ‘I promise to pay the bearer’—that’s something I can transfer. Higher forms of money-credit are easier to transfer; lower forms are harder.
Innes helps to show us this entire framework. He spends a lot of time debunking all of the old myths by synthesising that anthropological and archeological literature I mentioned earlier. He looks at specific money practices and examples throughout European early modern and modern history, and proves that the whole idea of stable or sound money, this notion of commodity money—which we see again today with goldbugs, but that also undergirds some of the crypto imaginary works—this idea that what we need is money that’s really worth what it says it’s worth, that if we have a coin that says it’s worth a pound, it has to have enough gold or silver in it to be worth that—that’s never how minting has worked.
It’s the exact opposite of that: if you want to use some sort of metal to mint money, then you want to make sure that the amount of metal valued as a commodity in your coin is worth less than the value of a coin stamped on the face. That’s how money works in practice. And if that gets messed up, because the value of silver shoots up, then your coins won’t work anymore. That is, they won’t work as money. I go into some detail in a piece of mine on the silver US quarter in the 1960s, where the price of silver starts going up. People started hoarding quarters—holding them as the silver commodity rather than circulating them as money. You fix that knot not by issuing quarters that have 25 cents of silver in them (i.e., sound money); you fix it by issuing quarters whose metallic value was worth three cents, because nobody wants to hoard quarters if they are worth three cents in metal, they want to use them as a token. The US government did just that at the time.
That should be a relatively straightforward argument. But it actually takes a lot of work to undermine a lot of literature that says the opposite. Innes is the first to do so and he does it very powerfully. He goes through it in a lot of historical detail. And shows that coins aren’t about weight. Valuations aren’t about having the weights correspond to the nominal value. Devaluations are not about the government cheating us; they’re about changing the valuation, so the currency will still circulate, because market changes happen. And because there is a need for tax revenue. So all of that is in Innes in a fairly readable form, although it’s 100 years old. Innes also has these lines that are some of the best money quotes ever. ‘Credit and credit alone is money’.
“The dollar and the pound and the euro are not things any more than a meter is a thing. You cannot have or hold ‘dollars’”
Or, ‘The eye has never seen, nor the hand touched a dollar’. That’s a deeply conceptual claim, but it can be directly useful to contemporary cases. The dollar and the pound and the euro are not things any more than a meter is a thing. You cannot have or hold ‘dollars’. You can have and hold debts denominated in dollars. So in our earlier example, where I swapped you my sweater, we need to know the denomination of that debt (I just said it was a ‘fiver’). But even after we stipulate the denomination, you will not pay me by handing over ‘dollars’. You will pay me by transferring a debt someone else owes you, likely your bank.
Here we can think about Russia today, trying to make bond payments to its bondholders that are denominated in US dollars. Russia wants to avoid defaulting, while the US and its allies not want Russia to default. You’ll read in the press today that Russia owes dollars and they will pay dollars, or that Russia has dollars and they will pay dollars. In one sense, we understand why that’s said, but it’s actually not accurate. What Russia has is credits on US banks, Russia has deposit accounts in dollars on US banks the same way I have a deposit account in US dollars on US banks. Theirs are much larger than mine, but it’s the same sort of account. And the US regulators have said to those banks that they may not transfer those credits if Russia authorizes them to transfer them to somewhere else. But if $1 was just a thing that Russia could hold, they could give it to whomever they wanted. But what Russia actually has is someone else’s debt; those US banks owe them.
All of these basic ideas, which for me are the building platforms for how you would start to answer the question, ‘what is money?’ are all in Innes.
Shall we move on to Geoffrey Ingham’s book The Nature of Money next?
Ingham’s book is the best overview we’ve got right now, the best single book written on money in the past 25 years. And no one has devoted more of his career and scholarship and time to understanding money than Geoffrey Ingham. I’ve learned an enormous amount from him. He gives a really incredible overview, taking lots of complex histories and summarising them. He presents two main options: a commodity theory of money, and a state/credit theory of money; then he shows his readers why the state/credit theory is better. He folds that into a kind of Keynesian lineage of a state/credit theory. Without Ingham we wouldn’t have gotten some of the other developments that we’ve had in money more recently, modern money theory being the biggest one, with Stephanie Kelton being one of the foremost proponents of MMT today.
Kelton is Randall Wray’s student, who’s the first modern money theorist. Wray and Ingham are working at similar times and with similar resources. It’s Wray who discovers Innes, but it’s Ingham puts constructs the two synthetic stories of a history of orthodox money as commodity money and a history of a state/Keynesian/credit theory of money. And it’s an amazingly powerful overview, and I think it gets most things right. It’s a great critique of orthodox theory, it gets to that notion of endogenous money creation, that notion that commercial banks create money. It links a lot of things up. It’s a fabulous book, though I think it misses a couple things and it’s a little dated now. But if you have to have one book that isn’t an old book, it has got to be Ingham’s.
And are there lots of technical economics in there, or is it pretty readable?
Ironically, the best works on money are not written by economists. The economist texts on money are ones like Menger’s On the Origin of Money, from the early 20th century that are giving us the neoclassical story that I think is bogus. Joseph Schumpeter is probably the one economist who does the best work on money in his History of Economic Analysis, but it’s very historical. Ingham, in contrast, is a Cambridge sociologist, who was meant to write a sort of intro sociology text that was going to have just one chapter on money—and as Ingham narrates in the preface to the text, he then spent eight years writing that book. After publishing that book, he spent 20 years developing those ideas and defending his account against other misunderstandings in and around money.
So no, Ingham’s work isn’t technical: it’s written by an academic, and sometime situated in those contexts, but it’s very readable without any complex statistics or algebra. Actually nothing on this list is technical or requires a prior understanding of math or stats.
Next up is Joseph Schumpeter’s History of Economic Analysis.
Schumpeter doesn’t boil down and simplify; he multiplies and complexifies. Schumpeter has seemingly read everyone from the 17th century through to the 1930s (though Innes is a conspicuous exception). The History of Economic Analysis is actually a 1,100 page book on the entire history of economic thought, but I’ve put it on this list because there are about 150 pages in it on money that I think are invaluable. I think Schumpeter gives us the best history of theories of money, because he shows history’s diversity. Reading Schumpeter you can see how complicated the debates are, how many different voices there were in the debates, and you can find strands that have been lost.
For me he’s also a crucial figure because he undermines the simplistic dichotomy that you sometimes get in Ingham, or in the modern money theorists, who want to say that there’s the commodity theory, and it’s wrong and then there’s our state theory and it’s right. Schumpeter was actually trying to do something that wasn’t compatible with either.
Another person doing this interview might have given you a list with Georg Knapp’s book from 1905, The State Theory of Money, a crucial resource for both MMT and Ingham. Knapp articulates the basic notion that money is what the state declares it to be. The sovereign state says, ‘we declare this to be money’ and henceforth money exists and has value, on the basis of that declaration. Knapp invented the term chartalism, from the Latin charta (token), and you see his basic ideas all the time today. Whenever someone refers to the state ‘printing money’ they are implicitly invoking Knapp and the state theory. But even the idea that money has value because we ‘all agree’ that it has value, or money is a ‘collective leap of faith’—all of these ideas can be traced back to state theory. Ingham takes the state theory from Knapp and merges it with the credit theory from Innes to create a Keynesian blend.
I think Schumpeter is so important because he shows us that these two strands should not, cannot be blended. Schumpeter rejects commodity theory and state theory at the same time. Schumpeter thinks money is a token or ticket, but refuses the idea that the state creates it. Schumpeter rejects the state theory and develops an incisive critique of Knapp. I think Schumpeter’s critique poses an enormous challenge to MMT, and that he offers a powerful critique to Ingham.
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Schumpeter agrees that money is a token of credit created endogenously by commercial banks. But for him, that is not at all the same as the state determining money, in a top-down way by, declaring that this is what money is and what it’s worth. I find Schumpeter’s critical arguments here to be historically accurate and to offer us potential building blocks for a better theory of money (one I myself try to build).
Beyond this, Schumpeter helps us to avoid overly simplistic accounts of money. There are some political accounts of money today from both from the left and the right, that take the state theory and basically say, ‘Well, the state completely controls money,’ and then in a kind of crude Marxist way add, ‘if we just take over the power of the state, we’ll have the Fed do what we want, we’ll have a central bank do what we want, and all of our problems will be solved.’ And Schumpeter gives us a more sophisticated economic analysis of how that works, which is why he’s on the list for me. There’s some real lost value in Schumpeter, some arguments there that have disappeared. And my one quibble with Ingham is that he folds Schumpeter into his own account—he puts Schumpeter on Ingham’s side when Schumpeter himself so starkly rejected state theory.
Let’s go on to The New Lombard Street by Perry Mehrling. What’s Mehrling contribution to this debate?
Mehrling is an economist, but of a particular kind. His career, in some ways tells the story of modern economic relationships to money because, in wanting to understand actual banking practices and finance, Mehrling kept moving further and further away from the neoclassical paradigm of economics. And so far as I can tell in the late ’90s and early noughties, Mehrling was not a big name in economics. But he was developing these great models for explaining contemporary banking. He was teaching this banking and finance course that was just amazingly illuminating. And then he found himself teaching that class during and just after the great financial crisis of 2008. Whenever people say, ‘Oh, economists didn’t know what was going on. Economists have no models. They missed everything’—that’s of course, mostly true. But it has to have huge asterisks for people like Perry Mehrling because he totally knew what was going on. And so, after the crisis, when you were looking for a model, for a framework, his explanation of banking and finance explained it brilliantly. His profile has gone up dramatically since then.
The New Lombard Street is a summary of his take on the financial crisis. He talks about three ‘views’. First there’s the ‘economic view’, the orthodox economic account that I’ve already mentioned; Mehrling’s critique of that would be similar to mine and other people on this list. Then there’s the ‘finance view’, which, boiled down, says you take the Black-Scholes model of how we do portfolio finance and it all works perfectly because markets are efficient. But Mehrling shows that markets are not ‘efficient’ in that way, because both the economic view and the finance view leave out what Mehrling calls, the ‘money view’. This is what actually happens with commercial banks, with money market dealers, and with central banks. We just cannot forget that money markets and the swapping of money credits for money credits is at the heart of contemporary capitalism today, and Mehrling has a better grasp on how that works than probably anyone else. A few central bankers also have that understanding. Someone like Martin Wolf at the FT has that understanding, but Mehrling is explaining—teaching it—very lucidly.
So, as good as Mehrling’s book is, even better is his online course on money and banking, because he will teach you how currency exchanges work, how derivatives work, how the repo market works. The repo market is a $7 trillion overnight market in money. And the world’s global system depends on it. Sure, you can Google ‘repo’ and there’ll be simple explanations for it. But it’s not simple! Mehrling patiently explains it.
He pulls this off by starting with the construction of brilliant tools that he then uses to work through really complex financial arrangements. The basic tool are so-called ‘T accounts’: draw a ‘T’; then list all assets on the left and all liabilities on the right. Mehrling’s ’money view’ means looking at each and every actor—be individual, bank, corporation, or other institution—through their T account. For every single act of economic or financial exchange, you must ‘follow the money’ by tracking the movements of assets and liabilities on the T accounts. In his online class Mehrling spends hours at the chalkboard, drawing T accounts and tracking the movements of credits and debts. By the end you are doing credit default swaps and it just make sense. He’s a brilliant teacher.
“When we think about money as credit, we have to understand where the credits are and where the debts are; we have to mark them down and see how they move”
So I’ve used Mehrling to make what I think is not necessarily a revolutionary, but at least a novel new argument. It goes like this: when we think about money as credit, we have to understand where the credits are and where the debts are; we have to mark them down and see how they move. There’s a traditional understanding of a bank as a place that holds ‘our’ money for us. For many people it’s intuitive to think that the money or ours that a bank holds would be an asset for them. But that’s completely backwards! If I have a deposit account, the bank becomes my debtor; they owe me. Every banker knows this, of course: customer deposits are a bank’s liabilities, and loans to customers are a bank’s assets.
In one sense this is really simple, but it also turns things upside down at first. We can go back to our exchange of the sweater, and have you pay me in ‘real money’, not an IOU. (Real money is almost always bank money.) So I ship you my sweater and you pay me £20 in bank money. We’ll avoid foreign exchange complications by having you pay me in my UK bank account, and we assume we bank at different banks. To carry out this transaction the following has to occur: my deposit account will grow by 20 pounds, which means my bank now owes me 20 pounds more than it did before. Your bank account deducts your deposit account by 20 pounds, so your bank owes you 20 pounds less. I’m making a transaction with my bank, you’re making a transaction with your bank, but then our banks have to settle up because your bank owes my bank 20 pounds. And this is where Mehrling is very helpful and where it gets very interesting. My bank and your bank can’t pay one another in the money we just paid one another. We can pay each other in bank account money. You bank with TSB and I bank with Royal Bank of Scotland. That’s our bank money. I’m paying in TSB money and you’re paying in Royal Bank of Scotland money. But when they have to square up, they can’t pay each other in their own bank money. Their balance sheets list Bank of England reserves as assets, and they pay each other in Bank of England money.
At first this seems like such a simple transaction—done through bank direct debit or Venmo or Apple Cash. But it actually involves: three different banks (your bank, my bank and the central bank); it involves multiple debiting and crediting, with all of that money moving around on these T accounts. The insights of people like Innes and Hawtrey when then put into the complex structure that we’re in now, Mehrling’s money view, and his ability to map this through T accounts, allows us to start seeing how money actually works and what money really is, these credit/debt relations that are transferable. Mehrling’s other powerful insight is that money is a hierarchy. That’s Mehrling’s thesis: there is a hierarchy of money. So our bank money is at one level and Bank of England money is higher.
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It may be that the Bank of England also has some bank money that it holds in reserves on the US Fed, which for it may be a higher form of money. We can always keep moving up and down the hierarchy. Here’s another crucial insight of Mehrling: wherever you are on the ladder, when you look down, you may see credit, and when you look up, you may see real money. Because when you look up, you say ‘Oh, that’s the thing I can settle debts with.’ And when you look down, you may say, ‘Well, that’s the thing that people owe me in.’ You can even go much lower than bank money, back to my earlier example—which was trivial, but gets at a real insight—which is that you can write me an IOU, ‘I owe you five pounds’, and you sign it and I hold it in my hand. That’s ‘money’ because it’s a credit that might be transferable.
Mehrling gives us the hierarchy view, he gives us the T accounts. And we start to see money move. We start to see the centrality of the dealers in money, who make all this possible. We can identify what mechanisms broke down in 2008 and the things that started to break down in 2020, but didn’t. So, for me, Mehrling is an absolutely key part of the picture. I think if you’re going to write a great book on money today, you’ve got to say something about money markets, you have to be able to explain the repo markets, someone has to be able to explain why in April of 2020, oil traded for negative $37 on the derivatives market. That’s crazy. And we don’t understand money or capitalism, or what’s going on in our social and political systems until we have that. Mehrling is thus a really key tool for me. Mehrling can explain credit default swaps, and not many people can!
Excellent. There’s just one other thing I wanted to ask you. Cryptocurrencies—are they the creation of people who believe in the commodity theory of money and born of a fundamentally wrongheaded approach to money or, or are they compatible with the credit/debt approach to money?
Good, but hard question! I’ve been studying crypto and blockchain extensively for the past five years. A few things I would say. First, your baseline is right. What we see in the Satoshi white paper that creates Bitcoin and what we see in most of the crypto imaginary is precisely an attempt to use today’s technology to create commodity money. When I say ‘crypto imaginary’ I mean this broader worldview that believes progress can come from human and technological innovation that exceeds or avoids extant social and political institutions (including formal governments). The original Bitcoin white paper is very clear: we need a ‘digital currency’ that is not dependent on third parties, whether they be commercial banks, the visa network, or a central government.
And I do think the Bitcoin story, as first told in the white paper, bases itself on the old story of commodity money: money starts as a commodity with intrinsic value, and then gets chosen to be money because it’s durable and rare, etc. Now with Blockchain, and with crypto, we have to get to the explanation of why a Bitcoin would have intrinsic value, because of course, it doesn’t actually have any. In the crypto imaginary we build in this story about ‘Oh, it’s because the blockchain is a useful technology. And that’s the use value.’ That story has been told persuasively, I think. But it’s still false.
Crypto’s importance today depends on a historical development that was not inevitable. People have transferred billions of dollars worth of real money in order to hold a digital token, a virtual asset—namely, a proof of work token (Bitcoin and Ether, mainly). So you rightly read narratives today about crypto as financial speculation; crypto has value because other people say it has value, and contrary to the white paper, it doesn’t perform any of the functions of money as traditional economics thinks about it. So it can’t be money in that sense. Note also that we are always talking about crypto by comparing it to its value in an actual money of account. Bitcoin is important because it trades for $27,000 a coin and its ‘market cap’ is X amount (where X is measured in dollars or pounds or euros).
The interesting development for me is the huge rise of stablecoins. Right now Tether, the Circle Coin and the Binance Coin, these are all three, four, and five in the highest overall outstanding market cap (that is, total value of coins at their current price) right behind Bitcoin and Ether. Tether, by daily turnover, the amount of Tethers circulated during the day, is roughly triple Bitcoin right now, about 75 billion in Tether a day and only 25 billion in Bitcoin.
“Tether and Circle…they are not crypto. They pretend to be crypto, but that’s just nonsense”
Here is the shortest version I can give about this story of crypto. Most stablecoins including all the big ones, Tether and Circle…they are not crypto. They pretend to be crypto, but that’s just nonsense. Tether is a shadow bank. This is not secret knowledge on my part; you go to the Tether website, and they will show you that they have $70 billion of Tether tokens, and they (rightly!) list those tokens as the debt of the Tether institution. They then show their assets: US Treasuries, asset backed commercial paper from China. So Tether has assets and liabilities, just like a bank. Of course, they’re not regulated like a bank. Their capitalization is horrific. Where a regular commercial bank might need to be capitalized at say 8% minimum, Tether is capitalized at 0.3%. So it’s a really lousy shadow bank.
But here’s why I think this is important. I gave the example earlier where we each had our bank money. To hold a Tether in my wallet is simply to hold bank money. If I have 50 tether tokens (valued at $1 each) then I hold $50 in credit against the Tether institution. They owe me $50. It’s just like a bank deposit. What that means is the Tether institution completely undermines the initial promise of crypto. Blockchain promised a decentralized ledger, where ‘money’ could be held and transferred. But there’s nothing decentralized about Tether, nothing at all. To hold Tether tokens is to hold a claim against the Tether institution. If I want to buy something from you valued at $50, I can offer you my Tether tokens. And maybe you will accept them. But if you do, you are deciding to trust the Tether institution—to trust that this debt is good debt—in just the same way that you might accept a $50 check I wrote on Bank of America.
Tether has just reinvented standard banking, in less regulated fashion, while pretending to be crypto. They’ve recreated bank money. It looks like bank money looked in 15th century Venice. It looks like bank money looked in 21st century Britain and America and everywhere else.
A lot of people will tell you crypto is not money. They are right. Crypto is a faux commodity, digital gold. And you can see that from the framework I’ve developed. If something’s money, then you need to be able to show me the creditor and the debtor. And with Bitcoin you can’t do that. Trading a bitcoin is just is like trading a commodity. It’s like saying, I’ll give you the title of my house. My house isn’t money. Of course it’s worth money, but it’s not money. So most crypto is not money. And we know that. What’s interesting for me about stablecoins is that most stablecoins are not crypto, but they are money. Tether is money. I don’t think it’s very good money; it’s way down here under this hierarchy, and I wouldn’t substitute it for all sorts of other money, but it’s totally money.
I find it fascinating that we’ve gone from this myth that crypto will be a revolutionary new form of money, to this new point where we’ve just redeveloped money—the same old form of money. And in the process they had to abandon all the promises of crypto. With most stablecoins, the revolutionary idea of a decentralized ledger has been tossed out the window. All of the stablecoins that work under this model—Binance, Circle, Tether—you go to their websites, and they parrot a lot of crypto discourse, but they’re not crypto. I mean, they happen to issue this thing on a blockchain, but they’re just shadow banks.
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There’s one exception to this, which gets technically complicated, but it’s interesting. And that’s the realm of DeFi—decentralized finance, and smart contracts that are done on the Ethereum blockchain, which is the stablecoin Dai. The way you create the stablecoin Dai, is you take your ether, which is proof of work crypto, and you lock it up in a smart contract and the contract issues your Dai. And it is, in a certain sense, money creation, because there’s credit being issued. But it’s also operating within the crypto universe. So it’s crypto money. It basically functions like a margin account, in the same way that you could put real money in a brokerage account and have 100,000 pounds that you’re investing. And because you have 100,000 pounds with the broker, they’ll let you buy 150,000 pounds worth of stock and bonds. With Dai, you’re basically locking up this collateral in a similar fashion. The difference is the loan-to-value ratio with Dai is incredibly conservative. That is, you get far less margin trading ability—far less credit. That means we have this little space of credit creation within the crypto universe. But notice that the Dai smart contract only functions by locking up—making illiquid—some other crypto. So if I take this loan out, and the price goes down, they just sell my collateral and I lose it all. Dai is very unlikely to go to zero, but the existence of Dai increases the chances that all of crypto will go to zero. Put differently, the stability of Dai likely increases the instability of the overall crypto universe.
Again, DeFi is a special case. Most of the crypto universe right now can be captured with three categories: Proof of Work coins that have become sites of speculation, but are not and cannot become money; Proof of Stake coins that aren’t really decentralized to begin with, and these days mainly function as structures to support rug-pulls and Ponzi schemes; and stablecoins that represent a reinvention of shadow bank money, but only pretend to be crypto.
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