This is the Lex Friedman podcast, and here is my conversation with safety in a moose. Let's start with a big question. What is money and what is the role of money in the history of human civilization?

Money is a medium of exchange. The thing that defines money is that it is a good that you don't buy for its own sake because you want to consume it itself or because you want to employ it in the production of other goods, which is what capital goods are. So we have consumption goods, we have capital goods. Money is distinct from those two because it is a good that is acquired purely to be exchanged later on for other goods. So it's not something that you acquire for its own sake. You acquire it so that you can then later on exchange it. And that's a market good. That's a market good like all other goods. You acquire food because you eat it. You acquire a car to move you around. You acquire money so that you can exchange it for other goods. And that's something that many people have a hard time grasping of the concept of money as a market good, but it is a market good, just like all others. And the importance of it is that it allows us to trade, it allows us to develop the division of labor, which would not be possible at any kind of sophisticated level without money. So if, you know, if we live in a small society of 10 people, then think about all the things that we can make, all the things that we can produce. If we're only 10 people isolated from the world, there's only very few things that we can make. And therefore, we can exchange those things directly with one another. But as, you know, if we get in contact with other societies that have more people, then the opportunities for specialization increase. You know, if there's 10 people, the only thing that you can make is the very basics you need for your survival. But if you're part of an economy of 10 million people, there's much more room for specialization. You can make a car, you can make a house that's very sophisticated. And that relies on the division of labor. That relies on you specializing in doing one tiny little thing, which is not what you consume. And you trade that thing for all the things that you consume. So as the economy becomes more sophisticated and involves more people, and currently we're all part of an economy of almost 8 billion people, each one of us produces one tiny little thing, and they exchange that thing for all the things that they want. And so because we specialize, we become more productive in doing the thing that we're good at. So there's people out there who are engineers who are designing windshields in cars. It's a very specialized thing. They sell windshield design to Mercedes-Benz. And then from that, you know, that windshield design is added on to millions of cars around the world. And from that, they're able to get enough money to meet all of their needs. So the division of labor is enhanced enormously with money, because without money, it's very difficult to be able to exchange a large number of goods. It's very difficult to have a sophisticated economy with a large degree of specialization, because it's very difficult to find people who want the thing that you have and have the thing that you want. We call this the coincidence of wants. And that's really the problem that money solves. So you make apples and I make oranges. I'd like to have some of your apples, but you don't want my oranges. We have a problem of coincidence of wants. So what do I do? You want bananas. I need to find somebody who has bananas, give them my oranges, take their bananas, give you their bananas, and then I take the apples. In that case, bananas are a medium of exchange. So it's natural that a medium of exchange will evolve and will emerge in an economy as an economy becomes more sophisticated. As we move beyond 10 people and 10 goods, it's inevitable that we're going to come to a situation where we have the problem of coincidence of once. And the way to solve that is to use a medium of exchange. And it can be anything. It can be a banana, it can be food stuff, it can be any kind of good. As long as I acquire the good with the purpose of it passing it on to you, not for the purpose of me consuming it or using it, then that's a medium of exchange. So

when we look at the entirety of human society, of millions, of billions of people, you think of them, just a bunch of individuals running around. I love the term coincidence of wants. So each one of them, it's like a stochastic system, they have desires. It's like a random collection of desires, somehow rooted in our evolutionary history, but mostly random in terms of preference of banana or apple, that kind of thing. And then they also have the capacity for competence and excellence in particular kind of labor. So like specialization, they're able to be like incredible at a particular set of tasks. So there's a bunch of ants running around with consciousness and intelligence. And they have desires and they have capabilities. And then there's a coincidence of both the wants they have and the capabilities they have. And you wanted to create a system kind of um exchanges those things so when you imagine like uh what is a good what is markets when you imagine a market is like a hierarchical system what do you imagine what is a market a

market is just the name for the naturally emergent phenomena of people voluntarily exchanging things. It's- At any scale. At any scale, yeah. It could be a market of two people on an island on their own. It could be eight billion people across the planet. Naturally emerging. Yes. This is the thing I think that is very hard for many people who don't have a good understanding of economics to grasp that capitalism and markets are not something that you need a central planner or a government officer to make happen. Capitalism is just what happens when people are left to their own devices. It's just our cognitive capacity allows us to develop tools that we can use for production. And that's what we do. That's what humans have been doing since they started, you know, making spears to hunt. That's the first capital good, probably. So we're constantly accumulating capital. We're constantly trading with one another. We find an opportunity. You know, you've got a lot of oranges. I've got a lot of apples. Then I'll take some of yours. You'll take some of mine. We're both better off. This is just a naturally emergent thing. And money is what makes it enormously powerful. Money is what allows it to scale, really. Money is what allows it to go beyond small societies into just something that is global. Because with money, again, as I was saying earlier, you know, all you need to do is specialize in doing one thing, the thing that you do best, and then you exchange that for money and you don't have to worry about whether the other people involved in this want what you have and have what you want. You just sell it for money to whoever wants it and you buy whatever you want from whoever has it. And that's an enormous reduction in the mental burden of how a market economy functions. So the first thing that I would say about money is that it allows for the division of labor and it allows for the market system to grow. And the second thing is that money is a mechanism for storing value into the future. So again, as humans, we develop the capacity to think for the future. We make a spear so that we can hunt and then we see that it works. And then we take it out of the animal that we hunted it with and we keep it for the next day's hunt. And then we start making a better spear and we make a better fishing rod. And then we make a fishing net and then we make a fishing boat. And that's our ability to think of the future. And as we start building durable goods, we start thinking more and more of the the future. We start becoming more and more future oriented. And that's really the process of civilization, the process of denying our needs now in order to think for the future. So instead of spending all of our day on the beach, enjoying ourselves, we take time off from leisure on the beach and spend some time making a spear or making a fishing rod so that our productivity in hunting or fishing tomorrow is going to be higher. And so that ability to think for the future is enhanced by our ability to provide for the future. And we do that with durable goods. But then money ends up being the best mechanism for providing for the future, because the future is uncertain. So you can save your apples and oranges, you can save the spears, you can save the animal that you hunted. But these things, first they rot, they're not very good at holding on to their value over time. But even if they were, even if, you know, have objects that are durable, the problem with them is that you don't know if you need them tomorrow or next month or next year. You're not sure if you're going to be needing them. And you might end up not needing them and you might end up not finding anybody who needs them or finding somebody who needs them, but doesn't value them much and won't give you much in exchange. Money allows you the optionality of saving the most liquid good, the most saleable good. So it's something that you can sell tomorrow with the least uncertainty. It has the most liquidity, the most ability to be sold without a loss in its value. So money is our most advanced technology and our best technology for moving value the future. And so I think history really, I argue this in all my books, is that really history, we see, we can think of it as a process of our money gets harder. And so our money gets better at holding on to its value for the future. And by harder, I mean harder to produce. We find things that are hard to produce that are better at holding on to their value. So they hold on to their value better for the future. And that allows us to plot and plan for the future. That makes the future less uncertain. And that makes us more future oriented. In other words, it lowers our time preference. And the harder the money is, the better it is at allowing us to think of the future.

So people should know that you've written the book, Bitcoin Standard, from 2018, I believe. Yeah. And then a new book called Fiat Standard. The Bitcoin Standard is considered kind of the Bible in the cryptocurrency space, in the Bitcoin space, of just a very rigorous, systematic explanation of why Bitcoin, what is it, why should it be, why is it good? So you're describing in that book and in the new book, different implementations of the technology of money. In the new book, you talk about fiat money, which is another way to do money. So obviously there's a lot of different ways to do money. And maybe we haven't discovered the best way to do money yet. Our conversation today is how to do money better. Maybe we'll go back to bananas eventually. Very good reasons why we won't. Well, we can disagree. We can agree to disagree on this. I'm open-minded to the bananas. One of the biggest sources of joy to me when I first came to this country is eating bananas. And so maybe money, happiness, perishable happiness will eventually become the best medium of exchange. I don't know.-minded. Anyway, so you mentioned hard money and soft money. So there's different ways to do money. What is hard money? What is soft money? In the Bitcoin standard, I present the

argument that money is always whatever is the hardest thing to make. Historically, I think we see many examples of that so for instance in prison people use cigarettes as money because nobody can make cigarettes in prison in societies we have the example of Yap Island for instance it's an island that doesn't have any limestone but there's a nearby island that has a lot of limestone and it's very expensive obviously with primitive technology to move limestone from the from Palau to Yap so on Yap, limestones were money. Seashells, rare seashells that are not easy to find, end up serving as money in places where they're rare. Glass beads were money in West Africa where there was no glass making technology because they were imported from abroad and they were very hard to make. And I think there's a conscious effort of some people might recognize the hardness and the scarcity and choose this as money. But I think what's more important is just a natural evolutionary process whereby people choose all kinds of random things as money, bananas maybe even. But then the people who end up making these bad choices don't end up with any wealth left, whereas the people who store their wealth in the things that are hard to make end up acquiring, end up maintaining their wealth and maybe even increasing it over time. And of course, this culminated in the 19th century, in the end of the 19th century, by basically the entire planet being on a gold standard. What is the gold standard? The gold standard is basically when money is gold, or at least government currencies backed by gold. But the reason gold became money and not copper, not nickel, not bananas, is that gold is the hardest metal in the world. And it is the hardest metal to increase the supply of. And the reason for that is based in chemistry. So gold is indestructible. You can't destroy gold in any meaningful sense. It's been accumulating stockpiles for thousands of years. You know, the gold that was born by Nefertiti back in ancient Egypt is today probably in somebody's necklace or in somebody's gold coin. It's still there. So for thousands of years, humans have been digging for gold. They dig it out of the ground, they refine it, and then they put it in a jewelry or a coin, and then it just stays there. It gets melted down into new other forms. You know, the jewelry gets turned into coins or coins get turned into bars. But it's just stockpiles that are accumulating. On the other hand, every year we get better at our technology of looking for gold. There's more people all over the world, the population increases, the technology improves. So we keep finding more and more gold and we keep making the stockpiles bigger. constantly adding to a stockpile that is not being devalued, sorry, that is not being consumed, because there's no way of consuming gold. You can't eat it, you can't burn it, it doesn't rust. Because of that, we're constantly adding to a constantly growing stockpile. So if you look at the numbers, you see over the last 100 years, we've got pretty reliable data on gold production worldwide. We see that pretty much gold stockpiles increase at around one and a half to two percent per year every year so yes we we're making more every year but we're making more so we're adding to the stockpile the stockpile grows more so every year we're adding only around one and a half to two percent compare that to the second uh highest the second hardest metal historically was silver. And that increased historically at around maybe 5% per year or so. Now it probably increases at something like closer to 30% because it's now getting used extensively in industrial uses. So when you use it in industry, when you put silver in a laptop or in a camera or in a machine, effectively, you are consuming the stockpile because it's not used as money. It's taken out of the monetary stockpile. So over the last 150 years, since 1870 in particular, and I discuss this in detail in the Bitcoin standard, what happened in 1870 was Germany won the Franco-Prussian War, and Germany was on a silver standard, but the value of silver was declining. So Germany did something very smart, which is they took their indemnity from France in gold and used that big chunk of gold to switch to going on a gold standard. And since then, silver has been collapsing in value next to gold. So back then, the price of an ounce of gold was around 15 ounces of silver. Today, it's closer to 100. It's just been declining for the last 150 years. And so because of that, because of the fact that it's lost its monetary role as people shifted toward gold, the value of silver went down. And so it became economical to use it in more and more industrial applications. So the stockpile declines. And then as a result, that weakens its monetary properties more and more and more. So that's why at the end of the 19th century, I mean, at the beginning of the 19th century, gold and silver were money. By the end, it was basically only gold. And the countries that were still on a silver standard, China and India in particular, suffered enormously from it because their money was devaluing very quickly next to gold. And so Europeans who would come to China or India were able to buy things at practically a big discount.

So I hope it's okay if I ask very simple, very basic questions. There's few people in this world that are good, as good as you are at answering very basic, almost ridiculously basic questions. Because I think exploring questions like what is money is a really great way to think from first principles, to really think deeply about this world. So I really appreciate you doing that. When you say standard, what does it mean? When you say silver standard, gold standard, again with the basic question.

The term really, I think, was based out of gold. The first time this came out was the gold standard. So I said gold was money at the end of the 19th century, but it wasn't just that everybody was using gold coins and trading with gold coins, because that's got a problem of divisibility. So a lot of things are worth less than one gold coin. So how do you buy that thing? And the answer was that you created monetary instruments that were backed by gold. And so currencies, national currencies under the gold standard, were specific units of gold. And that's how a gold standard functioned. Money was gold, but you had pieces of paper that were redeemable in gold. So you could go to the central bank, you'd give them the piece of paper, the $100 bill or the $10 bill, and they'll give you gold in exchange. And they give you a specific quantity of gold in exchange. Effectively, the paper was just the receipt for gold. So

the paper exactly represented the amount of gold. Exactly.

That was the plan. That was what it's supposed to do. But arguably we never had a pure gold standard because the nature of gold means that the people who are in charge of the gold, they have an enormous amount of power because the gold is concentrated with them. And as long as not everybody shows up at the same time asking for their gold, then you can make more receipts than you have gold. And this is-

So there's always shady stuff going on, but at least that's the stated goal, is the receipt should exactly represent the amount of gold there.

And

also when you say standard, it means that governments sort of publicly stated that this is the approved, the main way of making transactions that are monetary. So this is the money. This is the official money that you should be using if you live in this country.

Yes, although I would say it's more like the other way around. It's not that the governments established gold as money. It's more like gold gave governments the credibility for their currencies. So governments were not the ones that made gold money. Gold has been money before states were invented. States, if you have a government and you'd like to have some legitimacy and you'd like to be able to deal with other governments on an equal footing, you had to go by the gold standard. You had to have a currency that was redeemable in gold so that you could trade with the rest of the world so that people could, in your country, use that currency. So it's not that governments were choosing gold. It's more like they were having to adapt their own currencies to gold in order to give their currencies credibility. So there's a dance

there though, because if they had to, then why did they switch away from it after? So there is a dance where the governments, you know, the people pressure. So first of all, the basic characteristics of the hard money pressures the governments and the people in terms of what should be used. Then the people, based on their community, the network effects, the way they, the narratives they tell each other, all that kind of stuff, they pressure the governments to take on a particular money. And then the governments, you know, they like power, they like control, all those kinds of things. They pressure the people and tell different kinds of narratives. So there's a dance going on in this evolution of what technology to use for a monetary system. So it's, the reason I, I don't know if governments had to because they clearly didn't have to because they eventually moved away from it. So there was pressure probably.

Yeah, but even after they moved away from it, central banks until today, they still hold a lot of gold reserves. In fact, if you look at 1914, when the world really went off the gold standard, the amount of gold reserves held by central banks was a tiny fraction of what it was. As time went on, central banks accumulated more and more gold. What ended up happening is they prevented their citizens from using the gold, but they continued to use it. So gold continued to be money up until 1971, because effectively the world was on a dollar standard and the dollars were backed by gold. But then after 1971, even then, you know, central banks continued to accumulate gold, because why would you as a central bank want to accumulate pieces of paper effectively or credit liabilities of another central bank that can produce them infinitely? And it's a lesson that's becoming more and more obvious to governments today, you know, as we see U.S. sanctions taking, say, Russian reserves or Afghanistanian reserves.