Funny Money Isn’t Funny

If you combine numerical mindedness with a love of history, you end up being curious about the history and nature of money. That history is extraordinarily complex and fascinating, and difficult to summarize. But after reading a dozen books on this topic over the past dozen years, I think I can share some important insights—and maybe these just might enable you to make more of it.

(A quick disclaimer: nothing I write here should be construed to give any investment advice whatsoever.)

So, here’s my semi-chronological observations about “filthy lucre.”

1. It made us rich.

That is less of a “duh” point than it seems; the invention of money parallels civilization, and you should never long for an intimate barter system, because that would likely entail your starvation. In nearly every history of money, civilization starts with barter, but recently historians have found little evidence that barter ever existed in anything one might label a “civilization.” When money was invented, people could trade so much more easily, avoiding barter’s two big problems: “double coincidence of wants” and “indivisibility.” It’s hard to trade my cow for a friend’s handful of blueberries; she may only want a quarter pounder, or perhaps she’s a vegan, and I might prefer raspberries anyway. Money solves these problems, enabling me to specialize, which gives me more time to breed more cattle—which, along with shells, buckskins, and salt (so, “shelling” out “bucks” for a “salary”), have all been used as money.

2.  Early money was stuff. 

Usually, gold (often for kings), silver (for wealthy people), and copper (for the rest of us). But it worked quite well. Each of these is useful, costly to create, stable, divisible, and easy to recognize. As a result, each is desired. Which means precious metals are both portable and stable in value, and therefore, a good store of wealth (those raspberries go bad pretty quickly.) In short, for 5,000 years, gold in particular was money for nearly everyone. One exception: the Aztecs and Mayans, who valued gold artistically, but had cocoa beans for money, which not only “grew on trees” but also allowed business transactions to be concluded with some quick hot chocolate.

3.  Weighing and assaying lumps of gold or silver is still rather a bother. So, when in 600 BC a person thought of something called a “coin” with a fixed amount of metal tested for purity and stamped with a unique insignia, this invention caused an incredible explosion of commerce, and a sea change in the world. 

Enter Greece. The Athenians co-opted this invention from Lydia, created a commercial empire, and governments quickly discovered you can make money by…making money. They took it over. Given gold’s scarcity, could they create more coins without doing the dirty work digging around for gold? Perhaps adding a little copper to the coin, without changing the weight and that insignia?

4.  Inflation began, along with leverage, escalating debt, and calls for debt forgiveness 2500 years before modern calls to forgive student loans. Adding base metals to gold or silver (thus: “debasement”) became a hobby of governments. Of course people would not normally accept this “bad money” and would rather embrace someone else’s “good money,” but kings had an answer: require people to accept or even solely use the government’s debased money. Thus, legal tender laws are created out of necessity, incentivizing Americans in the mid-1960s to spend the government’s nickel-clad quarters and hoard any pre-1965 silver quarters they found. The “bad clad” money chased out the good-as-silver money.

5.  But as long as paper isn’t invented, coins are actually difficult to really inflate. In the Roman empire, their silver content declined, and the copper coins got smaller, but that debasement took a couple centuries to play out. 

Side note: of course, our coinage no longer has any silver or gold, and even the lowly “copper” cent is 97.5% zinc. It’s not because gold, silver, and copper randomly “became too expensive”—they became too expensive because we printed too much money.  Of course, we print money because we have both paper and printing presses, so it’s no surprise our inflation has been greater than the inflation in the Roman Empire. When paper is invented (first by the Chinese, only slowly coming to Europe in about the 1300s), paper gold “receipts” became as good as gold. Governments eventually learned paper could stand for gold, and unlike gold, you can print paper. Which governments did—during the French Revolution in 1789, and up to today.

6. The temptation to fund projects by printing rather than taxing is irresistible; governments justifiably outlawed counterfeiting, but eventually outlawed or harassed  private minters. In America’s Civil War, we instituted paper money, suspending the conversion of gold notes to the yellow metal, but adding “In God We Trust” to the paper notes, perhaps thinking that God’s inclusion would excuse the exclusion of gold. In a rare moment of easy to understand and honest economic analysis, the Fed, in 1975, wrote this: “The decrease in purchasing power incurred by holders of money, due to inflation, imparts gains to the issuers of money.” That would be the Federal government, not (most) individuals: in Venezuela, an oil rig worker would work for a month, and his salary would officially purchase…a chicken. In 2018, an egg would cost 200,000 bolivars, and a liter of gas one bolivar. In the black market, one US dollar could theoretically buy just under a million gallons of gas.

7. Here’s one example of how that “gain” to governments happens: if you buy $100,000 of stock and its price doubles, and at the same time prices overall have doubled, you have to pay up to $20,000 of tax on your capital gain. Of course, your real gain is zero, but the government received $20,000 (well, $10,000!) That would be “imparts gains to the issuers of money.” Pretty clever!

8. In the U.S., we still have, sort of, a right to print or mint our own private money, if it doesn’t look too much like the legal tender money. I think. About 30 years ago, the FBI seized one ounce copper “rounds” with Ron Paul’s image on the obverse, alleging that they were too similar to our…I’m not sure what. The treasury also said these private coins’ inscription of “Trust in God” was too similar to “In God We Trust.” My roll of 20 is still missing, likely in some FBI vault.

9. The 19th century American economy experienced the best growth on the planet, partly because of sound money, though over leveraging led to occasional financial panics. Pivot to the Fed, which was supported by bankers wanting “more elastic” currency and, of course, their own prosperity. “Give me control over a nation’s currency,” the banker Mayer Rothschild is alleged to have said, long before the Fed’s creation two days before Christmas in 1913, “and I care not who makes its laws.” Financial bubbles grew and popped, as bubbles are wont to do. Though the Fed’s primary job in 1929 was to prevent bank failures, it failed at that. Naturally, we gave it more responsibilities.

10. With “let it be,” or fiat, money, all it took was a financial crisis in 2008 for the Federal Reserve to do some more mischief, chief of which is called “QE,” or quantitative easing. Congress can spend $100 billion, with the treasury borrowing the funds, selling bonds to the public, and then the Fed can write an IOU for $100 billion, paying off those very bonds, and viola, it imagines money into existence. To reverse this QE, the Fed sells those bonds, and/or issues more, which will raise interest rates, which will increase our debt payments. And when the Fed lowered interest rates to near 0% in 2008, keep in mind that for 5000 years, interest rates had been in the 5-10% range. If you claim to see a flying pink elephant holding hands with an umbrella-toting unicorn, I can assure you that there is something very wrong with that picture, and a world of zero percent interest rates with rising prices is just as unnatural. When the inflation inevitably heated up and the Fed raised rates back to that 5%, this came close to breaking the system. When banks enjoy the happy gas of low interest rates, borrowing money at about 0% and investing in securities that pay 2%, a 5% interest rate can cause catastrophic bank risk. 

11.  Inflation is, and always has been, a “monetary phenomenon.” This was Milton Friedman’s famous insight, and it’s pretty much tautological—or true by definition. As much as the New York Times blames inflation on supply chain issues, Putin, or government’s Covid payments, or others blame it on greedy unions or greedy businesses, I’ve never seen the Times blame the 40% increase in the supply of money. That omission explains why the Johns Hopkins economist Steve Hanke has his own rule: “95% of what you read in the financial press is either wrong or irrelevant.” And because inflation first hits asset markets, and poor people are less likely to own assets like stocks and homes, it benefits the wealthy and hurts the poor disproportionately. When the central bank sets artificially low interest rates (either today, or in the 1920s in Germany), astute investors can make lots of money buying real estate, stocks, and bonds—until the adjustment happens, at least. 

That previous sentence is my subtle piece of financial non-advice.

12.  Having a dollar as the world’s “reserve currency” is a neat privilege; we print dollars, import stuff, export the dollars, and foreigners keep the dollars, hopefully forever. It’s quite a deal, until it isn’t. Today, the percentage of world GDP generated by BRICS (Brazil, Russia, India, China, South Africa) has risen to 32.1%, while the “G-7” western nations account for 29.9% of world GDP. By 2028, the BRICS share will likely hit 35%, and the “G-7” percentage will drop to less than 28%. “Every night I ask myself why all countries have to base their trade on the dollar,” Brazil’s President Lula da Silva has said. If and when those dollars come back home, we will have some unique challenges.

So, what is the solution? The economist Frederick Hayek argued for private money, and when people scoffed at him, saying no one would make their own private money, he said that he might. Eventually people did, with bitcoin’s inventor, Mr. “Satoshi Nakamoto," being the most successful. The question is, will governments allow the competition? Right now, nearly every government on the planet—including ours—is working on central bank digital currencies that, in theory, can track your spending and nudge your behavior. Think twice before you jaywalk! And they can expire: so if you don’t spend your stimulus check, it disappears into monetary heaven; that way, they can control the velocity of money and add juice to GDP. 

How this ends, I have no idea, but economists always give sage predictions, like this one from Herb Stein in 1985: “If it cannot go on forever, it will stop.” 

The progressive economist John Kenneth Galbraith admitted that “the study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.” I’ve been studying money for decades, and I’m still not even sure what money is. Is my stash of 300,000 frequent flier points “money”? My one ounce gold coins? My wife’s gold jewelry? Or those Ron Paul coins gathering dust in a vault somewhere?

It used to be that, about 130 years ago, Americans would have animated discussions in pubs about greenbacks and “crosses of gold.” We’ve lost much of our monetary IQ, surrendering it to experts, who tell us not to worry. Most teens don’t know whose image is on the dime. If we don’t know that history, the mischief will repeat.

Perhaps the “love of money is the root of all evils.” But the power to conjure money into existence is a bit like that love on steroids.