Banking, Cash, and the Future of Money

Post Syndicated from Steven Cherry original https://spectrum.ieee.org/podcast/at-work/innovation/banking-cash-and-the-future-of-money

Steven Cherry Hi this Steven Cherry for Radio Spectrum.

We’re used to the idea of gold and silver being used as money, but in the in the 1600s, Sweden didn’t have a lot of gold and silver—not enough to sustain its economy. The Swedes had a lot of copper, though, so that’s what they used for their money. Copper isn’t really great for the job—it’s not nearly scarce enough—so Swedish coins were big—the largest denomination weighed fortythree pounds and people carried them to market on their backs. So the Swedes created a bank that gave people paper money in exchange for giant copper coins.

The Swedes weren’t the first to create paper money—they missed that mark by about several hundred years. Nor will they likely be the first to get rid of paper money, though they may have the lead in that race. A few years ago, banks there started to refuse cash deposits and to allow cash withdrawals, until a law was passed requiring them to do so.

A new book about the history and future of money has just come out, imaginatively titled, Money. It’s not specifically about Sweden—in fact, those are the only two times Sweden comes up. It’s about money itself, and how it has changed wildly across time and geography—from Greek city-states in 600 B.C. to China in the eighth century and Kublai Khan in the thirteenth, to Amsterdam in the seventeenth, Paris during the Enlightenment, and the U.S. in the nineteenth century and cyberspace in the twenty-first.

It’s a wild ride that the world is still in the middle of, and it’s told in a thoroughly researched but thoroughly entertaining, and I mean laugh-out-loud entertaining, literally—I had to finish the book last night downstairs on the couch—told as a series of stories by one of radio’s great storytellers. Jacob Goldstein was a newspaper reporter before joining National Public Radio’s popular show, Planet Money, which he currently co-hosts, and he’s the author of the destined-to-be popular tome, Money, newly minted by Hachette Books. And he’s my guest today. He joins us via Skype.

Jacob, welcome to the podcast.

Jacob Goldstein Thanks so much for having me. And thank you for that very kind and generous introduction.

Steven Cherry Jacob wasn’t fair to the title of the book, and I wasn’t entirely fair—

Jacob Goldstein I didn’t want to be petty, but that thought crossed my mind—.

Steven Cherry —and I wasn’t entirely fair about what the book is about. The full title is Money: The True Story of a Made Up Thing, which hints at what I take your book’s thesis to be: Money is whatever we trust for the exchange of goods and services. Money is whatever we trust to be money.

Jacob Goldstein That’s right. And, you know, I’m not sure like on one level, I worry that that’s a little bit obvious. But I do think there is this thing that happens. And it was quite striking to me as I was doing the research for the book. And that is in whatever period people are living in, whatever monetary regime, they—we—seem to think that whatever we’re doing as money, whatever we’re using for money, however we’re doing money, is like some kind of natural law. It’s like the way money must be is the way we’re doing it now. And everything else is just crazy or weird. And the point I was trying to make in the subtitle of the book is That is not so. Right? We are constantly inventing and reinventing money. And, you know, it has changed many times in the past and it will continue to change in the future.

Steven Cherry We can’t tell the whole story of money here in 20 or 30 minutes. But let’s touch on the history in order to understand some of the things you say about its future. You say that it’s easy to think of money as growing out of a barter economy, but there has never been a barter economy. We went straight from more or less self-sufficiency, maybe augmented by status-seeking gifting, to empowering cowrie shells and other things as a way to store value over time—a kind of proto-money.

Jacob Goldstein Yes. So the piece about barter is really to refute this kind of standard historical story of money. For a long time the set-piece story about the origin of money was it’s very inconvenient to barter, right, because for you and I to trade—to do business with each other, whatever—you have to have what I want and I have to have what you want. But if we could just have some intermediate thing—some piece of silver, a dollar bill—that would solve the problem. Which is a very tidy story. But anthropologists in the 20th century started raising their hands and saying, sorry, economists, it just doesn’t appear that the world works that way. And what they described instead is a much more, I don’t know if organic is the right word, a much more social kind of construction of money where you have lots of small nonindustrial societies with lots of rules about giving and getting. And what you have to give somebody’s family if you’re going to marry them or somebody’s family if you killed somebody in their family. And those kinds of norms really seem to be the roots of money.

Steven Cherry You look at the history of the world, the beginnings of money, and kind of summarized things by saying the first writers weren’t poets, they were accountants, which as a writer, I find a sobering thought and you must too.

Jacob Goldstein I mean, I respect accountants. I feel like they do something very useful. Let’s not be too highfalutin.

I respect accountants, like, I respect them more now that, you know, now that I’ve written the book. That period that is Mesopotamia, essentially the classic cradle of civilization several thousand years ago, and what happened there, apparently, obviously, it’s a long time ago…. But what seems to have happened there is people initially would give each other like a clay sort of ball with maybe a cone in it or a ball, a sphere in it as like an IOU. So I would give you a clay ball with a cone in it. And that would mean, I don’t know, I owe you six sheep. And then from there, people were like, wait a minute, maybe we don’t have to put a little cone inside the ball. What if we just pressed it into the clay on the outside? And the notion is that, that is proto-writing. And then these cities start to spring up, the civilization gets more complex, and you get this essentially class of accountants who are working at the temple—which is kind of like a temple/city-hall—and they develop Cuneiform. They develop the first kind of writing, which is making marks in clay tablets, basically to keep the ledgers of the temple of the city-state.

Steven Cherry In the 5000-year history of money, the gold standard takes up three percent of that time. But it’s a pretty important century and a half and it still influences how we think of money. So maybe tell us how it began.

Jacob Goldstein I think you’re right. I think it does. Gold and silver were money for quite a long time, for thousands of years. But when economists use the phrase the gold standard, then in this very particular period of time from, what, 1830-ish, give or take a few years, to basically the 1930s—that century-ish.

And what happened was, it started in Britain, which was the most important economy of the world. And lots of countries had sort of used gold and silver and kind of gone back-and-forth. And it’s hard to have two different metals as money because their values can change. So Britain feels like, all right, we’re just going to be on the gold standard. And because Britain was so important, lots of people followed them. The 19th century, as it progressed, was this first great wave of globalization. Lots of other countries followed onto the gold standard. And so that by the end of the 19th century, most of the major economies of the world were on this kind of uniform gold standard.

Steven Cherry Yeah, I said a century and a half because we officially went off the gold standard in the 1970s, but it was really barely more than a century: Even before we officially went off the gold standard, you say FDR, in 1933, for all intents and purposes, took us off it.

Yes, the depression was really the big turn. And I think, you know, just this year, 1933 is an incredibly momentous year in the history of money. So what’s happening is, the Depression, obviously. And people didn’t realize it at the time—and I feel like the vernacular version of the story doesn’t really include this fact—but a core problem with the depression, maybe the core problem with the depression, was the gold standard. And that—among economists now—is not controversial. That’s what everybody thinks. And what happened was, you know, there was this crash in 1929 of the stock market and the economy started to plunge.

And, you know, now what happens when there’s a crash and the economy starts to plunge, is the Federal Reserve, the central bank, can essentially create more money and make it easier for people who are in debt to stay afloat—make it easier for businesses that are in trouble to stay open. But that was not the case then. It was, under the gold standard, the Federal Reserve wound up doing essentially the opposite. The Federal Reserve raised interest rates, which took up a bad crash and turned it into the Great Depression. And that sent prices falling and banks collapsing.

And so Roosevelt gets elected in ’32, takes office in ’33, and he, against the advice of almost all of his advisors who tell him that going off the gold standard will mean, quote, “the end of Western civilization,” basically goes off the gold standard. He says, you know, the key rule under the gold standard is a dollar is worth a fixed amount of gold or a fixed amount of gold is worth a dollar. It was like 20 dollars and change got you an ounce of gold. And that had been the case decade after decade. He’s like, we’re not going to do that. We’re not going to do that. A dollar is going to get you less gold than it used to. And that is why I say and most people say he was really the one who took us off the gold standard. And I should say ’33, when he did that, was when the Depression started to get better. Now, clearly, it didn’t get all better until WWII, but very clearly the turn things are going down before then and they start going up after them. And it’s true in many countries, as each country goes off the gold standard you see each country starting to get better from the depths of the Depression. Now, for a few decades after that, to your point, it was true that ordinary people could no longer exchange dollars for a fixed amount of gold, but other countries could change their currency for dollars and then other countries could change dollars for a fixed amount of gold. But that was basically a formality. And Nixon ended that formality in ’70 or ’71.

Steven Cherry One of the great things about your book is, I thought I knew the story of the gold standard and William Jennings Bryan and the Cross of Gold, and you tell that story, too. But then you come along with something really interesting and crazy, like the story of Irving Fisher, who you describe as a Yale economist, a health food zealot, a Prohibitionist, and a fitness guru who filled a floor of his New Haven mansion with exercise equipment. It turns out when he wasn’t exercising and making his hapless employees join him, he devoted much of his life to trying to untie our idea of money to gold and instead to something a little bit more like the Consumer Price Index? Tell us about the money illusion.

Jacob Goldstein Sure. I’m glad you like Irving Fisher. I love Irving Fisher. You know, I had been covering economics for, I don’t know, 10 years. When I wrote this book and I didn’t really know about Fisher. I feel like he has largely been forgotten, in part because in 1929 he said the stock market was on a permanently high plateau, like, two weeks before the market crash. So bad investing advice, but great economist. OK, the money illusion. So the money illusion was this idea that he articulated that is really very resonant today. And the basic idea of the money illusion is we get confused by inflation and deflation. So a simple example is, you know, if you if your parents say they bought their house, whatever, 40 years ago and they paid $100,000 for it and they sold it this year and they got $400,000 for it, they might think, great, I made, you know, $300,000. I made 4x my investment—I did great on that house. In fact, they are wrong—because of inflation. Right? Because $400,000 today buys you less than $100,000 bought 40 or 50 years ago. It may be semi-obvious in that case, but that kind of misunderstanding creates a lot of problems. It was one of the problems in the Depression, when you had deflation, when you had prices falling by like 30 percent. And it’s very hard for people to take like a wage cut of 30 percent, even though the stuff they buy gets 30 percent cheaper. So they end up—businesses end up laying off workers. So this idea that we are confused by inflation and deflation is really important. And it is, frankly, a big part of the reason that the Federal Reserve today tries to maintain this low, steady, two-percent rate of inflation.

Steven Cherry You describe the travails of the euro. How it miraculously worked for a while and how it stopped miraculously working. It seems it failed in some of the same way as the gold standard itself, even though everyone was off it.

Jacob Goldstein Yeah, that’s really insightful. That is correct. And in some ways, it is, in fact, quite similar. One of the fundamental features of the international gold standard that, you know, high 19th-century gold standard was because each currency was fixed to a set amount of gold. It also meant that each currency’s relationship to every other currency was the same. I don’t have the numbers in front of me, but if one dollar get to four pounds today, one dollar will get you four pounds forever. Everything is in the same relationship. And the euro effectively did that to all of the countries in Europe.

It meant that the money in Greece was the same value as the money in Germany as the money in Italy, as the money in France. And that is okay when everybody is doing fine—or badly. But when the economies diverge, when, say, Germany is doing great and Greece is doing really badly, that is actually quite bad. You know, when the currencies are separate and they diverge, then Greece, if it had its own drachma, can say, oh, we need to wait, we need to put some more money in the system. We need to make it easier for people to borrow, so that, you know, we can get unemployment down. Business will invest and hire. But when Greece gave up the drachma and joined the euro, they lost the ability to do that. And so in the same way that under the gold standard, all these countries are linked together, under the euro, all these countries are linked together.

Steven Cherry You point out that America is a confederation of states, but we don’t treat Arizona the same way the Europeans treated Greece. And in fact, this was anticipated. The chancellor of Germany at the time said we need to either be politically unified as well as fiscally, or neither.

Jacob Goldstein That’s right. And I think that is still an open question. I mean, I think in the long run for the euro to survive. Europe, the eurozone needs to become more like a United States of Europe. And interestingly, they do seem slowly to be moving in that direction. This year in response to the pandemic and the economic crisis that went with it, the E.U. authorized borrowing at the EU level. A lot of money. So that is a new thing. And that is more like being a single country. Like in the US, the federal government borrows trillions of dollars and sends that money to people in Arizona and in Florida and in Maine. And that is now what the European Union in a smaller way is starting to do. So they do seem to be moving in that direction. And it does seem like in the long run, they either got to be a lot more like one country or give up on sharing a currency.

Steven Cherry The first time I saw a millennial pay for a cup of coffee with a credit card, I was shocked, but now I do it myself.

Jacob Goldstein Do you mean the phone—use the phone? It’s pretty good.

Steven Cherry That that day is coming.

Jacob Goldstein Okay.

Steven Cherry I mentioned, early on, the Swedes working their way toward ending cash and they’re not alone. Is that something you foresee?

Jacob Goldstein I mean, it seems like in the long run it will happen, right? I don’t think I have super insight into what’s going to happen, but it certainly seems directionally like that is the way we’re going. One interesting countervailing trend is the fact that more and more paper money is going out into the world. Even if you account for the growth of the economy, the amount of paper dollars in the world is growing faster than the economy.

Now, there is a gap between what we do in our everyday lives, which is pay for a cup of coffee with a credit card or our iPhone and what’s going on with paper money. A lot of that paper money is hundred-dollar bills. There are more hundred-dollar bills than one-dollar bills. You know, there’s like, 40 hundred-dollar bills for every man, woman, and child in America. And pretty clearly, a lot of that is just crime.

Paper money is really good for crime or tax evasion, which is crime. Some of it is, you know, people in other countries where the banks are not stable, the currency is not stable, they’re holding hundreds. So that is not a crime. This economist, Ken Rogoff, has said we should get rid of big bills, but I don’t know. I mean, sure, in the long run, I suppose cash will go away.

You know, there are a lot of people who don’t have bank accounts. And so, you know, a standard refrain is the end of cash would be bad for those people. And that is true. But it’s also worth pointing out that it is bad for them now not to have a bank account. If you don’t have a bank account, you tend to get screwed. You have to carry cash on you, which is not safe. You have to go to a check-cashing store. You have to pay a high fee. So like the problem of people not having bank accounts gets lumped into the problem of not having cash. But that’s a problem in either world and it’s a problem. You know, the government could solve that by giving people bank accounts or debit cards. So that seems like a solvable problem that’s often lumped in with the end of the cash. It seems worth solving on its own.

Steven Cherry Well, people want the post office to go back to acting a little bit like a bank. And that seems like a good idea to me.

Jacob Goldstein Yes. And it seems like a reasonable role for the government, frankly. Money is very much a government thing—certainly now, but really always. And giving people a way, today, when even people who don’t have a bank account have a smartphone, it seems like a very solvable problem.

The Hoover Institution seems about as mainstream conservative as it gets. But you quote, an economist affiliated with it is calling banks—and we mean ordinary banks like Wells Fargo and Ulster Savings of Kingston, New York, which holds many mortgage—huge crony capitalist nightmares. Our banks, huge crony capitalist nightmares. And more to the point. Can you imagine a world without banks?

Jacob Goldstein As a reporter, I’m not going to weigh in on whether they are huge crony capitalists nightmares. But to your point, it is striking that—that is John Cochrane, who is a very, very pro free market, classic style economist who told me that. And, you know, the reason he said that is banks—well, banks do this very special thing in the economy. They create money, right?

When banks make loans, they are actually creating money. And that is this public function. How much money there is matters to everybody—creating money is this kind of public thing. They’re able to do it because the government, you know, guarantees are deposits at the bank. And the Federal Reserve, which is part of the government, promises—that’s a standing promise—that it will lend money to banks in a crisis. And in exchange for those guarantees, banks are very heavily regulated by the government. You would say not always regulated well; some people say not always regulated enough; but they are heavily regulated. So that is what the conservative economist is talking about when he describes it as a huge crony capitalist nightmare. It is this web, this close linkage between the government and the banks.

And to your question about a future without banks, I mean, the reason you basically need to—or at least the reason we have decided to—have that linkage is: Banks are fundamentally unstable. And that’s not because they’re evil or anything like that. It’s just the basic structure of the most plain-vanilla Main Street bank is, you have your money there on deposit that you can take out all of it at any moment. But also that money is loaned out to somebody to buy their house. Your mortgage rate is there that you don’t have to pay back for 30 years.

And so the nature of any bank is if everybody with a deposit goes and ask for their money back at any time, the bank doesn’t have it. And that is a big problem. And so the way we have solved it is by creating this whole web, this old crony capitalist thing, in the words of this economist and what he has suggested and what a lot of economists going back to Irving Fisher, who you mentioned before, suggested all the way back in the Depression was: Why do we have to do it this way? Why do we have to have this fundamental problem that we do all this work to solve? What if we just stopped, started from scratch and imagined a different world? So the problem is that banks are doing these two different things. They’re holding our money, they’re letting us get direct deposit, letting us pay our bills online. That’s one thing they’re doing. Then the other thing they’re doing is they’re making these loans that people may or may not pay back. Not everybody pays back a loan. There’s fundamental risk in lending. And there are moments when lots of people don’t pay back their loans. And that’s when we have financial crises. Why not separate those two things? So on the one hand, you would have a money warehouse, call it, where you would deposit your money, you get your direct deposit there, you pay your bills there—the basic things we do with the bank day-to-day, your checking account. Now, you might pay a fee for that because they’re providing a service. Fair. Fine.

And then you would have another kind of thing, another kind of company that is making loans. But that money is coming from people who, (a), know they might lose it and (b), cannot demand it back at any time, which is basically like, we have bond mutual funds today, and that’s basically how they work. You invest your money and the bond fund essentially is lending out your money and you can, in that case, ask for it back. But, you know, you might lose money if the people who borrow don’t pay back the money, you will lose money. The government doesn’t have to come in and bail you out. So, like, that idea actually seems quite reasonable to me and it would solve a lot of problems.

Now, politically, it doesn’t seem like it’s going to happen anytime soon. But you could imagine if there were another financial crisis, another big bank bailout, it is the kind of big change that we’ve seen before and it’s imaginable to me.

Another thing that might be politically undoable involves your final question about the future of money in the book, which involves something called modern monetary theory—yet another way in which money might evolve. What is modern monetary theory?

So modern monetary theory is a set of ideas about how money works. That has become popular with a small group of economists who tend to be associated with the political left. Stephanie Kelton is maybe the most prominent and she was an adviser to Bernie Sanders a few years ago. And their basic idea is this. We have been too worried about the government running deficits. They don’t say you can always run deficits, but they say there are a lot of times when we would be better off if the government just spent more money. To, you know, get people working. Get the economy going. And the standard response to that in traditional economics has been, well, if that happens, interest rates are going to go up. Inflation is going to go up. And that is going to be bad.

And what the modern-monetary-theory theorists say is, well, if inflation goes up, what we can do is we can raise taxes. We should keep spending and keep spending, keep helping people, keep doing stuff in the economy and wait for inflation to actually go up. And to be fair, they say there’s different things you can do. But one of the important things they say you should do when inflation goes up is raise taxes because raising taxes takes money back out of the economy. And it is a way to fight inflation.

They also say attach to their set of ideas. We should have a jobs guarantee. The government should offer everybody a job. So those are the basic pieces. The government should be more willing to run deficits. The government should offer a jobs guarantee. And one of the key ways you can fight inflation is raise taxes.

Steven Cherry As I read the book there seems to be a sort of historical line that can be drawn from Irving Fisher, the money-illusion fitness-nut guy to Alexandria Ocasio-Cortez, who seems to be an endorser of modern monetary theory—and by the way, who happens to be my mother’s congresswoman. Is that fair to say?

Jacob Goldstein I like all the Queens shout-outs.

Steven Cherry Is that fair to say? And what is that historical line?

Jacob Goldstein Well, let me think about that. Certainly an easier line, a more obvious line for me, is from Irving Fisher to … whoever … Jerome Powell, Janet Yellen—to the people, to the modern chairmen and -women of the Fed. Irving Fisher solution to the money problem and to the gold standard was we should manage the dollar not based on gold, but just based on how much the stuff everybody buys costs. What we want is for prices to be basically stable. And that is essentially the way the Fed works now. So that to me is the clearer line. I think to draw a line from him to modern monetary theory is a bit more of a stretch. I mean, if you zoomed out more, you could say, well, in both cases they’re saying, look, the way we do money now is wrong, is suboptimal, and we could be doing this better. So I think at an abstract level, there’s that connection. But I think, practically speaking, he’s pretty close to the way money, in fact, works now.

Steven Cherry You seem sympathetic to Fisher’s ideas and maybe modern monetary theory, but you also write in the book for modern money to work—to have banks and a stock market and a central bank—there needs to be tension. Investors and bankers and activists and government officials all need to be arguing over who gets to do what and when. Does modern monetary theory eliminate too much of that tension?

Jacob Goldstein It may I mean, you know, one of the things working on the book has done for me is it’s made me humble in terms of trying to be prescriptive or predictive. I’m able to think about different things and talk about them. But, you see time and again, really smart people who know a lot being just wrong about the world, about the present, about the future. So, I mean, one thing I will say about modern monetary theory is just in terms of the political realities, the notion that Congress will raise taxes to fight inflation seems like a thing that might not happen. And there is an argument that, well, you wouldn’t have to have Congress vote every time. Congress could create an automatic mechanism that is out of their hands. But still, people know when their taxes go up and they tend not to like it. And so, one place to look at and think about with modern monetary theory is that particular crux—do you really think Congress will set up a system that will automatically raise taxes to fight inflation when necessary?

Steven Cherry In the fall of 1933, President Roosevelt wrote in a letter to a Harvard economist, “You place a former artificial gold standard among nations above human suffering and the crying needs of your own country.” You say in the book, the most important word in that sentence is “artificial.” And I was reminded of something you wrote earlier in the book: “The Incas had rivers full of gold and mountains full of silver. And they used gold and silver for art and for worship. But they never invented money because it was a fiction they had no use for.” The most important words in that sentence are “fiction” and “use.” Money is a useful fiction—maybe the most useful fiction we have because it shares with some other primordial fictions the same character. I’m thinking of love and faith. And that character is trust. Is that the basis of all of this?

Jacob Goldstein I think so. I mean, certainly today, when we have fiat money, money that is backed by nothing, the dollar is only backed by our trust in the United States government, the United States economy. It’s this notion that our country as an entity, as a political entity, which obviously is another kind of fiction, will persist. And function. So it’s more obvious today, but I think even if you look back to a time when people are using, say, gold itself or silver itself as money, the gold- or silverness of the thing is not the money part. The part that makes it money—his thing we know we will be able to exchange for other things—is trust that other people will also think it’s money. It’s money if everybody thinks it’s money. And if everybody doesn’t think it’s money, it’s not money.

Steven Cherry Jacob, your book is a highly useful—and as I said, wildly entertaining—nonfiction. And I thank you for writing it and for joining us today.

Jacob Goldstein It’s very kind of you to say. I really had fun.

Steven Cherry We’ve been speaking with Jacob Goldstein, author of a new book just released: “Money: The True Story of a Made Up Thing,” about the past, present, and future of this most important made-up thing.

This interview was recorded September 2, 2020. Our audio engineering was by Gotham Podcast Studio in New York. Our music is by Chad Crouch. My thanks to the folks at Hachette for helping this along.

Radio Spectrum is brought to you by IEEE Spectrum, the magazine of the Institute of Electrical and Electronic Engineers.

For Radio Spectrum, I’m Steven Cherry.

Additional Resources:

The Last Days of Cash: How E-Money Technology Is Plugging Us into the Digital Economy (IEEE Spectrum special report on the future of money)

/static/future-of-money

The Murderer, The Boy King, And The Invention Of Modern Finance (Planet Money podcast)

https://www.npr.org/2020/09/04/909876702/the-murderer-the-boy-king-and-the-invention-of-modern-finance

The Economist Who Believes the Government Should Just Print More Money (New Yorker profile of Stephanie Kelton)

https://www.newyorker.com/news/news-desk/the-economist-who-believes-the-government-should-just-print-more-money

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