Lyn Alden, an expert on the history and future of money, provides a masterclass on money. Topics include the definition of money, the emergence of money, the progression of money over time, the transition to fiat, the impact of nation states on money, and predictions for the crypto future.
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Quick takeaways
Banks emerged throughout history to address the need for increased portability and credit in monetary transactions.
Central banks played a significant role in the transition to fiat money, relying on trust-based systems without intrinsic value.
The limitations and constraints surrounding gold necessitated the development of alternative forms of trust-based money.
Blockchain technology offers a solution to the longstanding trade-off between speed and scarcity in money, enabling the creation of digitally scarce assets.
Deep dives
Banks and the Role of Credit and Portability
Banks emerged throughout history to address the need for increased portability and credit in monetary transactions. They facilitated the transfer of legal ownership of money and provided credit services. From the earliest forms of banking in regions like Babylon, the temple administrators maintained ledgers to record debts and credits. Over time, banking evolved to meet the needs of global trade, such as the Silk Road, where monetarized networks emerged, enabling the transfer of value across regions. Money changes or hawaladars, for example, facilitated the transfer of gold-backed paper notes between trusted partners in different cities. These early banking systems increased the liquidity of money and transformed money across space. The evolution of banking continued with the development of more advanced paper technologies and improved communication, leading to larger institutions issuing paper banknotes not tied to specific individuals but rather entitling the bearer to a certain value of gold. Banking played a key role in making money more portable, divisible, and facilitating credit services, easing the burden of physical gold transportation and verification.
The Rise of Central Banks and the Fragmentation of Money
With the rise of paper money and increased use of banknotes, central banks emerged as entities responsible for regulating and overseeing the monetary system. While private banks facilitated credit and provided various financial services, central banks gained significance in modern times. Centralization became necessary to abstract the slow-moving nature of gold and improve the speed and efficiency of transactions. However, centralized systems also introduced challenges and vulnerabilities. In the event of economic crises or wars, central banks found it challenging to honor redemption requests or maintain stability. Moreover, the power and control exerted by central banks over monetary systems led to increased centralization and abstraction of gold and other physical assets. Central banks began holding and managing reserves of gold, while currencies around the world transitioned away from the gold standard, relying on trust-based systems instead. This transition marked the entrance into the era of fiat money, where the value of currencies is based on the trust and authority of central banks, despite its underlying lack of intrinsic value.
Limitations of Gold and the Need for Trust
Although gold served as a dominant commodity money for a considerable period, various limitations emerged, hindering its role in modern transactions. Gold's slow settlement speed, verification challenges, and limited portability presented practical obstacles in a rapidly changing global economy. Gold's physical nature made it difficult to transport, verify, and divide, which led to the abstraction of gold from physical possession. Banks and central banks became trusted custodians of gold, issuing paper claims, and allowing for the ease of transfer and settlement. However, inherent trust became crucial in this abstracted system, granting increased power and control to institutions. The limitations and constraints surrounding gold necessitated the development of alternative forms of trust-based money. While gold retains its value as a store of long-term value and a medium of ornamentation, it has largely been demonetized and relegated to collateral or reserves to support the fiat currency system.
The Challenges of Modern Monetary Affairs
The current state of monetary affairs indicates a temporary local maximum fraught with disadvantages. The increasingly centralized and abstracted nature of money has resulted in issues of dilution, rapid currency depreciation, and lack of safeguards. Trust plays a vital role in modern monetary systems, and decentralized trust arrangements tend to be more resilient. Developed countries with more decentralized systems tend to grow at a slower pace due to the balanced separation of powers, making significant monetary dilution less likely. However, this stands in contrast to authoritarian regimes where centralized monetary systems allow for rapid currency devaluations. The existing paradigm comprises numerous currencies around the world, resulting in a fragmented monetary landscape akin to a barter system. The book, titled 'Broken Money', delves into the intricacies of this state of affairs, highlighting the limitations and challenges presented by the current monetary system.
The evolution of money and the rise of digital currencies
This podcast episode delves into the history and evolution of money, from commodity money like shells and gold to the advent of centralized banking and fiat money. It explores how money has always been a technology and how different forms of money have addressed the need for trust and efficiency in trade. The episode discusses the current era of fiat money and its inherent instability, as well as the emergence of digitally native currencies like Bitcoin and stablecoins. It highlights how these new technologies offer the potential for both speed and scarcity in money, allowing for global competition and the disruption of traditional currency systems.
The power of network effects and the challenges of transitioning to a new monetary regime
The podcast emphasizes the power of network effects in the realm of money and currency. It explains how the dominant currency, in this case, the US dollar, retains its position due to the vast network effect it enjoys as the global reserve currency. However, it also acknowledges the growing desire for alternatives, with the emergence of digital currencies and the ability to pierce financial borders. The episode discusses the challenges faced by new currencies in competing with established ones and the potential for a transition to an internet-native money system. It notes that while there is a growing demand and interest in alternative currencies, the network effects of established currencies present significant barriers to overcome.
The potential future scenarios for money and currency
According to the podcast, the current era of fiat money is showing signs of strain, with increasing debt, trade deficits, and interest expenses. This raises the likelihood of higher average background levels of inflation and the potential for major currencies to adopt characteristics similar to emerging market currencies. The podcast also discusses the role of digitally native assets like Bitcoin in competing with unstable currencies and the potential for these assets to gain adoption in countries with weaker currencies. While there are challenges ahead, the episode suggests that the future could see a shift towards internet-native currencies, allowing individuals and economies to have more choice and control over their money.
The disruptive power of blockchain technology in the realm of money
The episode highlights the disruptive power of blockchain technology in reshaping the concept of money. It explains how cryptocurrencies like Bitcoin offer a solution to the longstanding trade-off between speed and scarcity in money. By providing a decentralized, secure, and fast ledger, blockchain technology enables the creation of digitally scarce assets that can compete with traditional currencies. The podcast emphasizes that technologies like Bitcoin and stablecoins enable individuals to have more control over their money, bypassing the restrictions imposed by central authorities. While challenges and uncertainties remain, the potential of blockchain technology to offer a new paradigm for money is seen as a significant development in the evolution of financial systems.
When we think of people to walk us through the history of money and where it's all headed, it's hard to think of a guest more qualified than Lyn Alden.
This episode is a masterclass where we answer seemingly simple questions like "What is Money?" to the future of money and how Lyn thinks the next great transfer of wealth will play out. ------ ✨ DEBRIEF | Ryan & David unpacking the episode: https://www.bankless.com/debrief-lyn-alden-and-the-history-of-money ----- 🏹 Airdrop Hunter is HERE, join your first HUNT today https://bankless.cc/JoinYourFirstHUNT ------ BANKLESS SPONSOR TOOLS:
🔗 CELO | CEL2 COMING SOON https://bankless.cc/Celo ------ CHAPTERS 0:00 Intro 6:34 What is Money? 10:03 Double Coincidence of Wants 14:18 How Does Money Emerge? 19:46 Progression Of Money Over Time 28:00 Society vs Society 33:14 The Transition to Fiat 39:07 Settlement Time Of Gold 47:53 What Are Banks? 59:14 The Technology Arc 1:04:26 How Nation States Impact Money 1:13:33 Ledger's and Army's 1:16:36 Bretton Woods 1:31:01 Is The Fiat Era Ending? 1:38:13 The Crypto Future 1:44:05 Future Predictions ----- RESOURCES
