Broken Money: Why Our Financial System is Failing Us and How We Can Make it Better

Introduction

In September 2022, a wave of normal people robbed banks in Lebanon.

What made these events more newsworthy than typical bank robberies was that most of these people were only robbing the banks to get their own money back. Due to a financial crisis in Lebanon, banks were not letting people access their own cash deposits for a long time.

One of the bank robbers that made headlines was a young woman who worked as an interior decorator. She held up a bank in Beirut using what later turned out to be a realistic-looking fake gun, to withdraw her family’s savings for the treatment of her cancer-stricken sister, since the savings had been frozen by the bank. This was perhaps the most striking example, but there were several other bank robberies during this period by people who just wanted their own deposits back, and some of them used real weapons.

These events in Lebanon are specific to a certain country and time, but they are part of a global story.

Nigeria, a country with over 200 million people, has experienced 13% annualized inflation over the past decade.¹ They launched a central bank digital currency called the eNaira in 2021, which so far has had extremely low adoption, while cryptocurrencies (especially bitcoin and U.S. dollar stablecoins) have seen an order of magnitude higher adoption rate within the country despite being cut off from the country’s banking system. The Nigerian government subsequently deployed a set of policies meant to reduce the availability of physical cash and push people toward digital payments, which contributed to a period of political turmoil and riots.

Egypt abruptly cut its currency’s value in half relative to the U.S. dollar in autumn 2016, which eviscerated years of savings for a population of approximately 100 million people. In 2022 and 2023, the country again performed multiple sharp devaluations of its currency relative to the dollar, resulting in yet another halving of the exchange rate. I know people in Egypt that buy physical U.S. dollars on the black market and hold them as protection from this ongoing problem. They pay significant conversion fees to do this, while earning no interest on the paper dollars they hold. And when these devaluations occur, it immediately puts the onus on all employees in the country to try to negotiate higher salaries to recoup some of their lost purchasing power, since their ongoing salaries are denominated in the devalued local currency.

Türkiye and Argentina, both members of the G20 nations and with a combined population of over 130 million people, have been dealing with runaway inflation in recent years. Türkiye reached 85% year-over-year inflation in 2022 and Argentina reached well over 100% inflation in 2023.²

In the 1990s, Brazil experienced outright hyperinflation while it was the fifth most populous country in the world. When people imagine hyperinflation, they often picture 1920s Germany or certain failed states today, but a surprisingly large number of countries went through it at one point or another during the latter half of the 20th century. Just since the 1980s or later, people in Brazil, Argentina, Yugoslavia, Zimbabwe, Venezuela, Poland, Kazakhstan, Peru, Belarus, Bulgaria, Ukraine, Lebanon, and several other countries have experienced hyperinflation. Other countries such as Israel, Mexico, Vietnam, Ecuador, Costa Rica, and Türkiye experienced triple-digit inflation (i.e., nearly hyperinflation) within that period.

From 2016 to 2021, many sovereign bond markets in wealthy nations across Europe and Japan were offering near-zero or even negative nominal yields, and there was over $18 trillion worth of negative-yielding bonds at the peak.³ People had to pay for the privilege of lending to governments and to large corporations rather than receiving interest for doing so. The incentives of the financial system were therefore turned upside down. And then over the next few years, a global inflation wave severely reduced the purchasing power of the holders of those bonds.

Throughout the 2010s, multiple senior members of the U.S. Federal Reserve repeatedly said that the economy was below their average inflation target for too long and that they wanted higher inflation. During a congressional hearing in early 2021 when the headline U.S. inflation rate was 1.7%, the chairman of the Federal Reserve was asked by a congressman about the 25% year-over-year surge in the broad money supply (the highest since the 1940s) that had occurred due to recent fiscal stimulus efforts, and any potential implications it might have for inflation or the value of the dollar. The chairman dismissed these concerns, saying that such a surge in the amount of broad money likely wouldn’t have important economic implications and that we may have to unlearn the idea that monetary aggregates have an important impact on the economy.⁴

As price inflation began to seriously emerge later in 2021, the chairman initially brushed it off as being transitory and the Federal Reserve continued expanding the base money supply with quantitative easing. But then, as four-decade high rates of inflation emerged during 2022, the chairman and other leaders of the Federal Reserve panicked and completely changed their monetary policy, citing price inflation as the biggest problem to deal with. In their attempt to quell inflation, they raised rates so aggressively — and reduced the base money supply at a record pace over the next year — that they ended up creating over a trillion dollars’ worth of unrealized losses for banks on their Treasury securities and other low-risk assets. By sucking deposits out of the banking system at such an aggressive rate, they contributed to some of the largest bank failures in American history. By 2023, banks across the country had severely impaired capital ratios due to the sharply rising interest rates. For the first time in modern history even the Federal Reserve itself was running an operating loss due to paying such high interest rates on its liabilities relative to what it was earning on its assets.⁵ These Federal Reserve decisions affect the monetary conditions for 330 million Americans and billions of people in foreign countries and yet are made manually and subjectively by a group of just twelve people.

There are approximately 160⁶ different currencies in the world, each with a local monopoly over their own jurisdiction, and most of them have little or no acceptance outside of that jurisdiction. The global financial order is practically a barter system in this regard. A handful of top currencies are held as reserve currencies by other central banks and enjoy some degree of foreign acceptance, but they lose value slowly over time and have interest rates that haven’t kept up with inflation for years. Most of the other currencies are more prone to sharp devaluations, persistent periods of double-digit inflation, and occasional hyperinflations, while enjoying little or no foreign acceptance. For people in countries that are in the second group, they often try to get their hands on foreign currencies such as dollars to protect their savings, and generally can’t trust their local banks to hold them.

It can be a challenge to save money even in the most stable monetary jurisdictions, and if someone happens to be born in the wrong jurisdiction, it’s an incredible uphill battle.

How did we get to this point? Why isn’t our money better than this?

The global financial system has been broken for developing countries throughout modern history, and in recent decades it has built up serious imbalances even for developed countries. It’s no longer solid at its foundation, in part because its core technology is outdated.

I contend that the rise of populism throughout the United States, Europe, and several developing countries ever since the 2008 global financial crisis is in large part due to this fact. People on both the left and the right of the political spectrum can sense that something is wrong, that things are rigged against them, but can’t quite put their finger on why. A big piece of the puzzle is that the financial system as we know it isn’t working anymore.

We’ve seen in prior decades that global financial orders gradually fall apart due to the buildup of economic imbalances, the occurrence of geopolitical realignments, and the introduction of new technologies. When that happens, the old order gets partially or completely reconstructed and rebuilt into a new order, and examples of such occurrences are provided in this book. Most signs suggest that the financial order that we have been in since the 1970s is reaching its later years and is beginning its process of reconstruction and realignment.

This is a book about money through the lens of technological developments. It covers the evolution of money in the past, why the current technology and institutions we use for money are failing us in the present, and some of the possible solutions to the monetary problems that we now face. It’s written in plain language and is modular in its design, so that readers can focus on the parts that interest them the most.

Part 1 of the book walks the reader through ancient ledgers and commodity monies, to analyze why money emerged naturally and why certain monies outcompeted others. This helps us discern what the ideal properties of money are, and why these properties tend to reemerge time and time again independently throughout history. It also explores the relationship between social credit and commodity money to provide a reconciliation for two economic schools of thought that are often in opposition.

Part 2 is about early proto-banking services and the rise of full-service banks. It examines how various technological developments sped up monetary transactions and abstracted them away from the slower process of physical monetary settlements, which came with many benefits but also some drawbacks. It finishes by discussing how the increasing speed gap between transactions and settlements at the dawn of the telecommunication age gave considerable power to banks and central banks, since they became the primary entities capable of quickly transmitting money around the world.

Part 3 describes the global financial system as it has been structured since the early 20th century, including the geopolitics behind its creation and how it has changed over time. It covers the period of failing gold pegs around the time of World War I, the Bretton Woods system that existed from the 1940s to the early 1970s, and the Eurodollar/Petrodollar system that replaced it from the 1970s to the present. Finally, it explains how some troublesome aspects of the current version of the system have led to structural imbalances around the world in recent decades.

Part 4 analyzes the details of how money is created within the modern financial system and how debt inherently destabilizes the system over time. It then examines some of the imbalances and problematic incentives caused by constantly devaluing monetary units, as savers try to maintain purchasing power by buying other non-monetary assets instead. It shows how lawmakers have been empowered with a flexible public ledger to engage in warfare without taxation, to perform selective bailouts through the devaluation of other peoples’ savings, and in general to finance expenses in opaque ways.

Part 5 looks at digital monetary innovations in the 21st century, including Bitcoin, stablecoins, smart contracts, and central bank digital currencies. This is the most speculative part in the book, because it’s about the present and future, rather than about the past. It describes some of the new technologies that are available to us, and specifically looks at the various trade-offs and risks that these technologies come with alongside the opportunities that they can provide.

Part 6 explores the ethics of money and communication, which are the two components of commerce. It discusses the role of cryptography in general (a critical piece of modern banking and internet infrastructure), open vs closed financial networks, and the intersection of financial technology and human rights.

At its core, money is a ledger. Commodity money serves as a ledger governed by nature. Bank money serves as a ledger governed by nation states. Open-source money serves as a ledger governed by users. As the book explores, the evolution of technology changes the prevailing power structures and incentives surrounding money from era to era.

My background consists of a blend of engineering and finance, and I use a systems engineering approach when analyzing various aspects of the global financial system. Systems engineering is a multidisciplinary field that focuses on the design, integration, operation, and maintenance of complex systems over their life cycles. I treat the global financial system as the engineered system that it really is, and I have found that this method of analysis arrives at fresh conclusions that sometimes challenge conventional economic thinking.

My goal for writing this book is to help people better understand how money works, and why the global financial system is not functioning as well as it used to. The book is not just about why our financial system is not working well this year or this decade, but rather it is a deeper analysis of what money is, how we got to where we are now, and what the current foundational problems are.

I don’t have all the answers and can’t tell you what the world of finance will look like in the decades ahead, but what I aim to do in this book is to share what I’ve researched so that it may empower readers to find more answers for themselves. Politics can affect things locally and temporarily, but technology can affect things globally and permanently, which is why I analyze money primarily through the lens of technology.

This is not a gold book, not a banking book, not a bitcoin book, and not a political book. Instead, it is an exploration of monetary technologies in their myriad forms of the past, present, and future and touches on all of these topics and more, so that we might better understand where we came from and which paths we may take going forward.

¹ IMF, Consumer Prices, End of Period, Datamapper.

² Zeynep Dierks, CPI Inflation Rate in Turkey, Statista, March 3, 2023; Patrick Gillespie, Argentina Inflation Surpasses 100% as Economic Recession Looms, Bloomberg, March 14, 2023.

³ Cormac Mullen and John Ainger, World’s Negative-Yielding Debt Pile Hits $18 Trillion Record, Bloomberg, December 11, 2020.

⁴ Howard Schneider, Powell’s Econ 101: Jobs Not inflation. And Forget About the Money Supply, Reuters, February 23, 2021.

⁵ Erica Jiang et al., Monetary Tightening and U.S. Bank Fragility in 2023.

⁶ XE.com. ISO 4217 Currency Codes.

Part One

What is Money?

"The precursors of money, along with language, enabled early modern humans to solve problems of cooperation that other animals cannot — including problems of reciprocal altruism, kin altruism, and the mitigation of aggression. These precursors shared with non-fiat currencies very specific characteristics — they were not merely symbolic or decorative objects."⁷

-Nick Szabo

⁷ Nick Szabo, Shelling Out: The Origins of Money.

Chapter 1

Ledgers as the Foundation of Money

Many people think that money as a concept starts with something like coins or shells, but the story really begins before that. It begins as a ledger.

A ledger is a summary of transactions and is used to keep track of who owns what. The oldest known written ledgers date back over 5,000 years to ancient Mesopotamia in the form of clay tablets. According to Encyclopedia Britannica, Sumerian is the oldest known type of writing in existence, and the oldest known instances of Sumerian writing were clay ledgers that kept track of commodities.⁸ They showed pictures of various commodities and had dots next to them that represented quantities. In other words, the first ideas that humans are known to have written down with their early proto-scripts were lists of ownership, credit, or transactions.⁹

But ledgers as a concept can be even simpler than that. And prior to the invention of writing, they must have existed to some degree in memory and in oral form. Anytime somebody owed something to someone else, either formally or informally, they were inherently maintaining a basic oral ledger.

At the simplest level, with a modern example, let’s imagine two child siblings named Alice and Bobby. They are old enough that their parents task them with chores, and as they grow and start to lead more complex lives, occasionally they need to rearrange their schedules. Alice, for example, might need to skip chores one night so that she can go out with her friends. To do this, she can offer to her brother Bobby that if he covers her chores today, she’ll cover his chores tomorrow. As he accepts the offer, they have just created a basic mental ledger and a form of credit. Alice now owes Bobby a specific set of chores. This is enforceable only through trust and reputation: If Alice does not repay her debts, then Bobby will likely refuse future trades. If it remains simple enough, their little ledger will be a verbal one only, but if their schedules get complex enough and they trade around chores on a regular basis, they might use a calendar as a written ledger. There is no specific monetary unit associated with this ledger — it’s just a barter system. The only units involved are individual chores. The ledger merely keeps track of individual chores that are swapped over time, as a form of credit.

We can also imagine a group of hunters, perhaps tens of thousands of years ago in a tribe somewhere, counting how many kills they each had made, or loosely keeping track of who did whom a favor. Tribes throughout the world had (and still have) various ways of selecting leaders formally or informally, and the process is often meritocratic to some degree. Whether intending to or not, people approximately keep track of deeds and reputations of others, to see who provides the group with a surplus and who is a burden.

Early human social groups generally consisted of dozens of individuals, forming a band. Various bands within a geographic area, with a closely related culture, would then often recognize themselves as being part of a larger interconnected tribal culture. Within a group where everyone knows each other, money isn’t needed, aside from oral and memory-based ledgers. Favors can be loosely tracked, and it is usually clear who is pulling their weight and who isn’t. Groups of this nature would typically consist of kinships and friendships, so the exact score didn’t need to be tracked. The ledger would be approximate, loose, and flexible.¹⁰

Back in my engineering days, a subset of my colleagues and I often went out to lunch together. We loosely kept track of who drove the small group each time, so that we could roughly balance it out. It wasn’t written down, and it wasn’t exact, but there was indeed a rough mental ledger that we collectively kept track of. The same was true for driving co-workers to the mechanic or to the airport and having the favor returned later (before ride-sharing apps were commonplace), or lending someone a bit of cash in a moment where they were short on it (for example, when splitting a cash restaurant bill, which used to happen more often back in those days). These favors were never phrased in terms of I’ll do this for you now, but you have to reciprocate in the future. Rather, such a favor was happily provided as a gift when asked for, and then it would be assumed that if a reciprocal favor was asked for later, that it would be happily returned.

Considerable research by anthropologists on hunter-gatherer tribes has found similar gift-oriented behavior as a recurring theme. While cultures of course vary substantially, individuals that know each other generally give gifts or favors and then naturally expect sharing in return.¹¹ That’s a big piece of what friendship is.¹²

The situation becomes more difficult once we start interacting with people we don’t know well, and that we either don’t trust or that we may never see again. If two groups encounter each other in a primal environment, for example, it introduces the risk of violence, but it also opens the possibility for trade.

Spot trading is an obvious first step to transacting with people we don’t know well. Rather than extend them a form of informal gift credit like we would do with our family and friends, we ideally want to finalize any transaction on the spot, since there’s a high likelihood that we’ll never meet them again. Two groups encounter each other, both of which have resources but also some capacity for violence, if need be, and through basic language or gestures they complete a trade. Perhaps one band has an excess of spears but needs furs, and the other band has an excess of furs but needs spears. They can trade furs for spears on the spot, and both groups are better off. Anthropologists have documented multiple instances of ritualized trade between different hunter-gatherer groups, often involving the prospect for mating as well.

If there is not already an established ritual process between relatively equal groups in the region, and instead some parties come across each other more haphazardly, there is a high probability that a trading attempt will fail, due to not fulfilling the double coincidence of wants. A double coincidence of wants is an economic description that means that for the trade to be successful, each party must have an excess of what the other wants. If both parties are short on spears, the trade will fail. If both parties are short on furs, the trade will fail. There are more combinations that lead to a failed trade than a successful one.

It’s much easier to trade with our friendly band members than to trade with strangers, because with family and friends we have the luxury of trust and time, which we can consider a form of flexible social credit. Someone can ask me for a favor, and I can do it for them, even if there is absolutely nothing that I want from them now. I could have all the excess food, furs, and tools I need, and yet when someone I know has a shortage of something or needs me to spend time helping them with something, I can do them a favor and provide it.¹³

In addition to it feeling good, the reason I would extend this gift-credit to someone I know is because I anticipate that eventually there will be a time when I need something. Maybe I will become ill or injured or pregnant and unable to collect food for some time and will then rely on the person I am giving a favor to now. By providing a surplus of favors, I increase my social standing and thus my social safety in the group. The same logic applies in modern times when helping friends, neighbors, and family. Of course, I likely won’t be thinking so mechanistically when I perform a favor; I may simply do it because I’m biologically wired to feel good when I help someone out, due to thousands of generations of biological selection for this trait that led my ancestors to survive and thrive as intelligent and generous social animals. But in the back of my mind, the conscious mental calculations are inevitably there as well: By doing this favor I am strengthening the whole group, including myself, and I am banking some personal insurance or social savings for myself and/or my close kin in the future. I’m expending current work or resources during my time of abundance and in return I am collecting some savings in our collective social ledger. This social credit, this informal mental ledger, is the friend-and-kin group solution to the double coincidence of wants problem. With flexible social credit, we can easily help each other when one person needs something even if the other person currently needs nothing.

In a 2010 study called Wealth Transmission and Inequality Among Hunter-Gatherers, that referenced a wide variety of existing literature, the researchers noted that social insurance can in some cases be based on the reputation of the person in need and the quality of their social network:

Most adults in hunter-gatherer societies actively contribute to food production and processing, as well as tool manufacture and maintenance. In addition, child care and provisioning is generally a parental duty. Most of these forms of labor require considerable strength and stamina, visual acuity, and other aspects of good health. As a result, we expect somatic wealth to be of prime importance to success and well-being. On the other hand, those who suffer periodically from suboptimal somatic endowments can usually rely on aid from others in the form of food-sharing, assistance with child care, and protection in disputes. This social insurance is normative and widely available, but some evidence suggests that the quality of such aid will vary according to the relational wealth (reputation, size and quality of the social network) of the needy individual or household (Gurven, et al. 2000; Wiessner 2002; Nolin 2008).¹⁴

Early in the famous movie The Godfather, a man asks Vito the mob boss for a favor, and Vito agrees to do it for him. The price Vito asks for in return, rather than money, is an unspecified favor sometime in the future. In other words, he wants flexible social credit. This is because this man needs something from Vito, Vito needs absolutely nothing from this man now, and yet Vito knows the man and recognizes that the man is part of his wider community. Vito is in the business of collecting favors and then calling them in when it is advantageous to him. Later in the movie, Vito indeed calls in the favor; he develops a need that this man is uniquely suited to provide, and it was a need that Vito didn’t have early in the movie. Vito’s story is of a man who tries to maximize his family’s relational wealth by maintaining an extensive ledger of favors, with these favors serving as a form of credit-based currency in the mob’s shadow economy.

Going back to our trading example between separate bands of people, since they lack this option of flexible social credit or ledgers (they don’t trust each other and might never see each other again after this meetup), what could they bring to a trade that they expect to have a very high likelihood of being wanted by the other party? If I was in their situation, could I think of something to bring that almost everyone wants, all the time? In other words, is there a good that is the most sell-able? For many tribes, an early answer was shells.

Shells, especially ones that were carved and polished into jewelry beads, emerged as money-like assets thousands of years ago in multiple different regions. The utility was aesthetic: They could be fashioned into bracelets, made into belts, used as earrings, sewn into clothing, or hung in the hair. The advantage of shells in trade is that they are small, scarce, and long-lasting. And the specific advantage of putting them onto wearable strands is that they don’t have to be carried in the hands, which makes them portable.

In his 2002 essay, Shelling Out: The Origins of Money, Nick Szabo elaborates with extensive detail on the reasons why shells and other collectible proto-money likely came to be. As he summarized in his abstract:

The precursors of money, along with language, enabled early modern humans to solve problems of cooperation that other animals cannot — including problems of reciprocal altruism, kin altruism, and the mitigation of aggression. These precursors shared with non-fiat currencies very specific characteristics — they were not merely symbolic or decorative objects.¹⁵

On the Pacific coast of North America, tribes collected dentalium, which refers to long shells that look like teeth. They served a role as money and were traded as far inland as North Dakota. As naturally occurring tubes with openings on each end, dentalium were strung together in long strands, and certain tribesmen would have tattoos on their arms that they used as reference lengths when measuring strands in transactions. Some tribes specialized in collecting these from deep waters.¹⁶

On the Atlantic coast, a different type of shell called wampum was used. These were made from clam shells and required extensive polishing and using a bow drill to create small holes in them for stringing together. The creators of these shells typically didn’t consider them to be money as such. The beads were honored for having once been living creatures and were often used for ceremonial purposes, like crafting into priceless belts to honor treaties and other big events. But other tribes, and even colonialists, did begin to use these as money, or stores of value and status. Inland tribal groups collected them extensively.¹⁷

In parts of Africa and Asia bordering around the Indian Ocean, cowrie shells were used as money for similar reasons. International traders would bring cowrie shells with them for trade, and there is extensive documented history of this practice up through recent centuries.¹⁸

Although shells were among the most common proto-monies, there were other types of bead monies as well. Beads made from ostrich eggs, or strings of teeth from large predatory animals like lions or wolves, sometimes filled a similar role. In Shelling Out, one of Szabo’s examples is of the !Kung:

Like most hunter-gatherers, the !Kung spend most of the year in small, dispersed bands and a few weeks of the year in an aggregate with several other bands. Aggregation is like a fair with added features — trade is accomplished, alliances are cemented, partnerships strengthened, and marriages transacted. Preparation for aggregation is filled with the manufacture of tradeable items, partly utilitarian but mostly of a collectible nature. The exchange system, called by the !Kung hxaro, involves a substantial trade in beaded jewelry, including ostrich-shell pendants quite similar to those found in Africa 40,000 years ago.

As one might expect, the African continent is home to the oldest known beads. At the Blombos Cave archeological site in South Africa, small snail shells with tiny holes in them were found and were estimated to be 75,000 years old. The U.S. National Science Foundation reported on this find in 2004:

Perforated shells found at South Africa’s Blombos Cave appear to have been strung as beads about 75,000 years ago — making them 30,000 years older than any previously identified personal ornaments. Archaeologists excavating the site on the coast of the Indian Ocean discovered 41 shells, all with holes and wear marks in similar positions, in a layer of sediment deposited during the Middle Stone Age (MSA).

The Blombos Cave beads present absolute evidence for perhaps the earliest storage of information outside the human brain, says Christopher Henshilwood, program director of the Blombos Cave Project and professor at the Centre for Development Studies of the University of Bergen in Norway.

The shells, found in clusters of up to 17 beads, are from a tiny mollusk scavenger, Nassarius kraussianus, which lives in estuaries. They must have been brought to the cave site from the nearest rivers, 20 kilometers east or west on the coast. The shells appear to have been selected for size and deliberately perforated, suggesting they were made into beads at the site or before transport to the cave. Traces of red ochre indicate that either the shell beads themselves or the surfaces against which they were worn were coated with this widely used iron oxide pigment.¹⁹

Food decays, and so in a world without freezers, people don’t have an incentive to keep much more food than they need. Similarly, spears and furs are bulky to carry around; beyond a certain point, there isn’t much value to having too many extra spears and furs. Trading with other tribes with these things is difficult because each side needs to have precisely what the other side wants. But having carved and polished shell beads fixes the problem. They don’t rot and they aren’t bulky, so it’s fine (and even desirable) to collect extra of them whenever peoples’ other needs are met. They’re nearly universally desired in a world with that basic level of technology. Even if someone doesn’t like wearing them, their spouse or sibling or friend might. And they know members of most other tribes like them, which opens future trading opportunities.

Creating carved and polished shell beads was a very labor-intensive process. The shells first had to be collected by hand on the coast, and then depending on the type, they were carved, polished, and manually drilled into with a bow drill so that a thread could be run through them to affix them together or onto something else, making them into a useful ornament. Once made, these shell beads lasted a long time, and had a lot of value relative to their size and weight due to their attractiveness and the amount of work that it took to make them. If someone trades excess food for some shell beads, or spends surplus time creating shell beads, they could hold onto the shell beads for months or years until they come across something that they want or need and trade them for that thing. And in the meantime, they are wearable and aesthetically pleasing.

In other words, the shell beads serve as something that can be accumulated, that can augment or replace the need for flexible social credit, and that can replace the oral ledger — at least when it comes to dealing with people that are not trusted or might never be seen again. Shell beads, as a nearly universally desirable and durable good, allow someone to trade with people even if they need nothing from them, because they can always just request shell beads that act as a placeholder until they do come across something they need or want. And they can always use more shells than whatever number they currently have, because they represent portable, stored-up value that they can trade away for resources in the future, either with their own bandmates or with other groups. Compared to food that decays, or furs and spears that are too bulky to hoard or carry, these small wearable shells arguably represent the invention of long-term savings technology — meaning a way to convert surplus time or resources into a financial battery. People can keep some strands of shell beads on their wrists, some on their neck, some on their ankles, some in their hair, some as a belt, etc. People can put them on their kids or give them to their spouse. Each small piece of shell jewelry is intrinsically desirable and represents quite a bit of work.

In this role as the most sell-able (salable) good, each strand of shell beads acts like one of Vito’s unspecified future favors. Someone or some group that has collected a lot of shell beads by spending surplus time and resources to accumulate them (or who inherited them from the prior generation who did) now has plenty of value to offer if they need more immediate resources in the future. And unlike a favor, a strand of shell beads represents final settlement; its ongoing value does not depend on the memory of the one who received the favor.

In addition to someone simply enjoying wearing shell beads for their own aesthetic sake, shell beads were often a sign of status. Someone with a lot of shell beads had a lot of wealth, literally and socially. In this tribal context, if we see someone covered in beautiful shell belts, bracelets, necklaces, and sewn into their clothes, we can assume they must have provided a lot of value to others in the past to have accumulated so many shell beads, or that they are closely connected to other people that have. They are literally wearing a bunch of valuable stored-up favors on their person, and thus have enjoyed a significant period of surplus resources. This seems like a good person to get to know, to respect, and possibly to mate with. They’re socially signaling that they’ve had a past filled with abundance.

In the study mentioned previously — Wealth Transmission and Inequality Among Hunter-Gatherers — the researchers noted that moveable property was usually individually owned in hunter-gatherer societies, while land tended to be more communally owned:

Moveable material property, such as tools, clothing, and valuables, is generally treated as individual property and is often transmitted to descendant kin. In most foraging societies, however, such property can usually be manufactured by any adult of the appropriate gender, or obtained fairly readily; exceptions include items involving highly specialized manufacture or obtained through limited trade contacts, as well as wealth and prestige goods in some sedentary and less egalitarian societies.²⁰

Notably, items involving highly specialized manufacture and prestige goods are identified as among the types of property that are not readily obtainable. In other words, they have actual scarcity to them. The researchers went on to conclude that, while generally communal in many aspects, hunter-gatherer societies in general are not necessarily as egalitarian as we may imagine them to be:

Indeed, as detailed in the introductory paper in this forum by Bowles et al., β=0.25 implies that a child born into the top wealth decile of the population is 5 times more likely to remain in the top wealth decile than a child whose parents were in the bottom decile. Even a β of 0.1 implies that a child born into the top wealth decile is twice as likely to remain there as is one born into the bottom decile. These results suggest that in hunter-gatherer populations, even those with extensive food-sharing and other leveling devices (Cashdan 1982), the offspring of those better off will tend to remain so, and conversely.²¹

Unlike a literal ledger, no party in the transaction knows what the full ledger of shell beads looks like. If you and I are involved in a transaction, neither of us knows exactly how many shell beads exist in our region. But we do know their properties and how hard they are to make, and we know how often we see them worn by others, which helps us judge their rarity and what we could consider trading for them.

Shell beads, and commodity monies more broadly, serve as nature’s decentralized ledger. By handing shells to someone else in exchange for something of value, we update the state of the ledger, and it is by physical possession that the full state of the ledger is maintained and updated. All participants understand and interact with parts of this natural ledger, but none of us know the full ledger state.

Who controls this ledger? For the most part, the answer to that question is nature. And in practical terms, that means no human or group controls it. Making shell beads requires expending energy and time — in the right way with the right materials — which means nobody can cheat. Some coastal participants could spend their surplus time directly making shell beads, whereas other inland participants could spend their time accumulating other surplus resources, and then trading some of those surplus resources for shell beads. Either way, shell beads were a measure of surplus time and resources, a measure of savings and value, and often with a lot of ceremony attached to the process.

For the remaining part, or the edge case, the answer to who controls the ledger is that whoever has the most advanced technology controls the ledger. This commodity money ledger system works if all participants are somewhat equal in productive capability, which was the case for much of the world for thousands of years. If an extremely advanced civilization comes from across the ocean and has specialized metal tools, and they figure out how the shell money system works, then they can probably make an order of magnitude more shell beads per unit of work than anyone else. They can therefore devalue everyone’s shells by flooding the market with them, and they can collect a lot of resources in the process because it will take time for the tribes to realize that this new civilization can churn out shells much faster than anyone else, and that shell beads in general are becoming less rare and less valuable over a period of months or years due to this rapidly expanding supply.

As we’ll see in the next chapter, the story of commodity money is a story about technological progress. Various commodity monies serve as honest and fair ledger systems up until technology reaches a point where one group gains an unequal advantage, which then forces everyone else to adapt or lose.

⁸ Ignace Gelb, Sumerian Language.

⁹ William Goetzmann, Money Changes Everything: How Finance Made Civilization Possible, 15–25.

¹⁰ Justin Pack, Money and Thoughtlessness, 51–70.

¹¹ See for instance Marcel Mauss, The Gift; Marshall Sahlins, Stone Age Economics; and Paul Einzig, Primitive Money.

¹² Elise Berman, Avoiding Sharing.

¹³ Paul Seabright, The Company of Strangers: A Natural History of Economic Life, 2–5, 91–105.

¹⁴ Eric Smith et al., Wealth Transmission and Inequality Among Hunter-Gatherers, 21.

¹⁵ Szabo, Shelling Out.

¹⁶ Dror Goldberg, Famous Myths of ‘Fiat Money’, 962–963.

¹⁷ Marc Shell, Wampum and the Origins of American Money.

¹⁸ Bin Yang, The Rise and Fall of the Cowrie Shell: The Asian Story.

¹⁹ National Science Foundation, Shell Beads from South African Cave Show Modern Human Behavior 75,000 Years Ago.

²⁰ Smith et al., Wealth Transmission, 21.

²¹ Smith et al., Wealth Transmission, 31.

Chapter 2

The Evolution of Commodities as Money

As the prior chapter explored, humans in small kinship and friendship groups don’t need money; they can organize resources among themselves manually, with informal oral ledgers at most. They can keep track of who offers a repeated surplus to the group and who always seems to be operating at a deficit. Within small groups, people naturally solve the problem of barter with flexible social credit before the problem of barter even comes up.

However, groups that regularly trade with outside groups, or develop farming and begin to reach larger static populations than the typical tribal size, inevitably start identifying and making use of some form of money, which gives them a more liquid, divisible, portable, and widely accepted accounting unit for storing and exchanging value with people they don’t know. In addition to still using social credit systems, they also rely on nature’s ledger, so that they can sidestep the double coincidence of wants that would otherwise reduce the success rate of trading.

The usage of collectible proto-monies, since they take so much labor to produce, often seems arbitrary to outsiders of that culture. Why spend so much time making shell beads, for example? Isn’t that a waste of resources, in a harsh, low-technology, hunter-gatherer environment where every resource is valuable and where more than a third of children don’t even make it to adulthood? Shouldn’t surplus time be spent on something else? The answer is that this work is a good use of resources during periods of abundance, and ends up more than paying for itself, because a standardized and credible medium of exchange and store of value makes all other economic transactions more efficient.

As an economy becomes more complex, there are a greater number of possible combinations of barter between different types of goods and services. For example, if an economy produces five different products, then there are 10 different unique trading pairs. If an economy produces 20 different products, then there are 190 unique trading pairs. An economy with 100 different products has 4,950 unique trading pairs. At this point, most types of barter other than for the basics would be wildly inefficient.

So, if a society requires more complex or trustless interactions than flexible social credit will allow, then that society requires some standard unit of account — or money — that serves as one side of the trading pair with every other good or service.

Specifically, among the assets that a society trades, one or two of the most scarce, divisible, durable, portable, and liquid tend to rise to the top. An apple farmer that needs some tools (a blacksmith), meat (a cattle rancher), repair work (a carpenter), and medicine for her children (a doctor), can’t spend the time going around finding individuals that have what she needs, that also happen to want a ton of apples at that moment. An extensive barter system like this between neighbors doesn’t develop naturally. Instead, she simply needs to be able to sell her (highly seasonal and short-lived) apples for some durable and widely accepted savings unit that she can use to buy those things with over time as she needs them.

In 1776, Adam Smith discussed the emergence of money as a solution to the barter problem in his Wealth of Nations. Credit theorists object to this example and order of events around the topic of barter in general, but that objection and the broader debate around it are addressed in detail in Chapter 4 of this book. After Smith’s exploration of the topic, commodity money as a detailed topic tends to be heavily emphasized by those in the Austrian school of economics, founded by Carl Menger in the 1800s, and further advanced by Ludwig von Mises, Friedrich Hayek, and many others.

In this way of thinking, money should be divisible, portable, durable, fungible, verifiable, and scarce. It also usually (but not always) has some utility. Different types of money can be thought of as having different scores along those metrics:

•Divisible means that the money can be sub-divided into various sizes that are suitable for different sizes of purchases.

•Portable means that the money is easy to move across distances, which means it must pack a lot of value into a small weight.

•Durable means that the money is easy to save across time; it does not rot or rust or break easily.

•Fungible means that individual units of the money don’t differ significantly from each other; one is as good as any other.

•Verifiable means that the seller of the goods or services for the money can easily check that the money really is what it appears to be.

•Scarce means that the money supply does not increase quickly.

•Utility means that the money is intrinsically desirable in some way; it can be consumed or has aesthetic value, for example.

Summing those attributes together, money is the most salable good available in a society, meaning it’s the good that is the most sell-able — the most capable of being sold. Money is the good that is most universal, in the sense that people want it, or realize they can trade for it and then easily and reliably trade it for something else that they do want. In his article On the Origin of Money, Menger described that an ideal money transports value across both space and time, meaning that it can be transported across distances efficiently or saved for spending in the future.²² In addition, a key aspect of salability is liquidity, meaning that someone should be able to buy or sell large amounts of it relatively easily, and without losing much value to wide price spreads or lack of sufficient trading volumes. Liquidity in many ways is a measure of acceptability: The more widely accepted and widely held something is, the more liquid the trading for it tends to be.

Scarcity is often what determines the winner between two competing commodity monies. However, it’s not just about how rare the asset is. In fact, extreme rarity can be bad for liquidity and make a commodity into a bad (unsalable) form of money. An important concept to be familiar with here is the stock-to-flow ratio, which measures how much supply there currently exists in the region or world (the stock), divided by how much new supply can be produced in a year (the flow).

For example, gold miners add about 1.5% new gold to the estimated existing above-ground gold supply each year,²³ and unlike most other commodities, most of the gold does not get consumed; it gets repeatedly melted and stored in various shapes and places.

Gold does not rot, rust, or corrode as readily as most other materials do. It is chemically inert and therefore barely forms any compounds. It can be re-melted countless times and can even be dissolved in certain types of acid and then filtered back out. It can be blown up and scattered, but those pieces don’t rust into nothingness like other materials would, and therefore the pieces are retrievable. Other than trace amounts that are thrown out in electronic circuit boards or sunk to the bottom of the ocean in shipwrecks, most gold ever mined is still in human control (and even those lost gold amounts are technically retrievable, at the right price). It’s practically indestructible.²⁴

The combination of continuously mining gold and rarely losing any of the mined gold has resulted in gold having a stock-to-flow ratio of about 100/1.5 = 67 on average, which is the highest stock-to-flow ratio of any commodity. The world collectively owns 67 years’ worth of average annual production, based on estimates by the World Gold Council. The supply growth rate has varied between 1% and 2% over the past century, which is a remarkably low and narrow band.²⁵ Even in the 1970s when gold went up by an order of magnitude in terms of its dollar price, it couldn’t affect the annual supply growth as a percentage of existing holdings by much at all. Prior to that point, the only periods where the refined gold supply increased at an accelerated rate were when industrial societies found a new continent and explored easy deposits, or if they invented new techniques for profitably extracting previously uneconomical deposits.

If an asset has a monetary premium on top of its pure utility value, then market participants are strongly incentivized to try to make more of it. Only assets that are highly resistant to increases in supply relative to the total existing supply can withstand this challenge, and thus can become and remain widely accepted money on a global scale.

On the other hand, if an asset is so rare that barely anyone has it, then it may be extremely valuable if it has utility, but it has little use as money; it’s not liquid and widely held or accepted, and so the frictional costs of buying and selling it are high. Certain atomic elements like rhodium for example are rarer than gold but have low stock-to-flow ratios because they are consumed by industry as quickly as they are mined. A rhodium coin or bar can be purchased as a niche collectible or store of value, but it’s not useful as widely accepted societal money and therefore doesn’t arise as such naturally. The same is true for meteorites or other unusually rare things. As of 2022 there have been 1,878²⁶ known meteorites discovered in the United States, and there are tens of thousands that have been found in other jurisdictions, which makes meteorites rare and valuable collectibles but not good money. Things like rhodium bars or meteorites simply don’t have enough liquidity or divisibility to be useful as money.

So, a long-lasting, high stock-to-flow ratio tends to be the best way to measure scarcity for something to be considered money — along with the other attributes on the list above — rather than absolute rarity. A commodity with a high stock-to-flow ratio is hard to produce, and yet a lot of it has already