In the weeks before our dinner, trillions of dollars in wealth had suddenly vanished. I asked her where all that money went.

“Money is fiction. It was never there in the first place.”


This theory — that money emerged from barter — is elegant and powerful and intuitive, but it suffers from one key weakness: there’s no evidence that it’s true. No example of a barter economy, pure and simple, has ever been described, let lone the emergence from it of money.

The barter story reduces money to something cold and simple and objective: a tool for impersonal exchange. In fact, money is something much deeper and more complex.

People in pre-money societies were largely self-sufficient. They killed or grew or found their food, and they made their own stuff. There was some trade, but often it was part of formal rituals with strict norms of giving and getting. Money arose from these formal rituals at least as much as it did from barter.


Once you know that anybody who is going to get married needs a string of cowrie shells, ore that everybody who is doing to attend the ritual sacrifice needs a long-tusked pig, you have an incentive to accumulate these things — even if you have no immediate need for them. Someone is going to need them soon enough. These objects become a way to store value over time. They are not quite money as we know it, but proto-money; they are money-adjacent.

Money isn’t just some accounting device that makes exchange and saving more convenient. It’s a deep part of the social fabric, bound up with blood and lust. No wonder we get so worked up over it.


The first writers weren’t poets, they were accountants.

For a long time, that’s all writing was. No love notes. No eulogies. No stories. Just IOU six sheep.


The more some central authority decides who makes what and who gets what, the less a society needs money. In the Americas, thousands of years after the Mesopotamians, the Incas would create a giant, complex civilization without any money at all. The divine emperor (and the government bureaucrats who worked for him) told people what to grow, what to hunt, and what to make. Then the government took what they produced and redistributed it. Incan accountants kept detailed ledgers in the form of precisely knotted strings that recorded vast amounts of information. 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.


But in every case, the citizens — the polices — wanted a say in who gave what to whom. They needed a way to organize both public life and everyday exchange without a top-down, micromanaging ruler or a bottom-up web of kinship relations. They needed money.


Before the arrival of coins, poor Greeks would work on the farms of rich landowners, but they didn’t get anything like a wage as we would understand it. They would agree to work for a season or a year, and the landowner would agree to give them food and clothes and a place to sleep. In the decades after coins arrived, that changed. Poor people became day laborers, showing up in the morning and getting paid at the end of the day. The practice of signing on to work for a year at a time vanished. Poor workers no longer had to stay on a farm for a year; they could leave if they were badly treated or if they found a better arrangement. But no one was responsible anymore for feeding them and clothing them and giving them a place to say. They were on their own.


The spread of coins — the rise of money — made people more free and gave them more opportunities to leave the life they’d been born into. It also made people more isolated and vulnerable.

Not everybody liked what coins were doing in Greece. Aristotle complained about Greeks who thought of wealth as “only a quantity of coin,” and called getting rich in retail trade “unnatural.” Complaints like these would follow money forever, but they didn’t matter much in the end. Once coins took root in Greece, they took over the world.


More and more people moved out of a feudal(-ish) economy that ran on tribute, and into a market economy that ran on money. Now people could specialize in what they and their land were best suited for.


This paper money is circulated in every part of the Great Khan’s dominions; nor dares any person, at the peril of his life, refuse to accept it in payment. All of his Majesty’s armies are paid with this currency, which is to them of the same value as if it were gold or silver.


Pieces of paper that were just paper, that weren’t even pretending otherwise be treasure vouchers or silver IOUs, still worked as money.

This is the radical experiment that Marco Polo witnessed: money as almost pure abstraction, backed by nothing. Partly this is a testament to the sheer power of the Mongol state: use this paper as money or I’ll kill you. But partly, after 300 years of using paper money, people in China had figured out that paper money worked not because it was backed by silver or bronze, but because everybody agreed paper could be money.


Contracts started to stipulate not just how much money was to be paid, but the total weight of the coins in a payment. History ran in reverse. Coins became less like money and more like lumps of precious metal.

A second problem mad things even worse. Because of international price differences, people could profit by taking full-weight silver coins out of England and trading them for gold in Paris or Amsterdam. As a result, even when the British mint did make good new silver coins, people almost immediately took those coins out of circulation to go trade them for gold in another country.

So the British never had enough silver coins, and the silver coins they did have were terrible coins that nobody trusted. England needed more money. Not more wealth, just more tokens so people could buy and sell stuff.


In time, people started using the receipts themselves to buy and sell stuff. But this was just a substitution of paper and metal; it wasn’t adding more money to the world. The next step was the big one, the leap that not only links 17th-century goldsmiths with modern banks, but also explains why modern banks are both so essential and so dangerous.

Goldsmiths started giving people loans. No longer did you have to actually give the goldsmith your gold to get a claim check. You could just give him a promise to pay him back, with interest. In exchange for your promise, he would give you some of those claim checks that were circulating as money. Suddenly, there was more money circulating than there used to be — the goldsmith had created money out of thin air. The goldsmiths were solving the not-enough-money problem.


Just 2 weeks after the king stopped paying his bills, the treasurer of the navy worried that he had “taken notes which is now not money.”

The thing that makes money money is trust — when we trust that we will be able to buy stuff with this piece of paper, or this lump of metal, tomorrow, and next month, and next year. One of the perpetual questions that still hovers over money is: Who can we trust? The British had tried trusting the government, but government-minted coins weren’t doing the job. So they turned to goldsmiths, and that didn’t work out so well. It would take another generation before they finally found something that worked: a solution that was neither purely private nor purely public, but a combination of the two, with the interests of the government and the interests of bankers and the interests of the people all pushing against each other.


For a while, when he was in his 20s, Pascal had a religious crisis and gave up gambling. “Who has placed me here? By whose order and warrant was this place and this time ordained for me? The eternal silence of these infinite spaces leaves me in terror.”


What is maybe most surprising about this solution is how unsurprising it seems to us. So obvious! What is so extraordinary is that, in thousands of years of gambling, as far as we know, nobody had figured it out before, because people did not think about the uncertain future as something you could calculate. The future was determined by chance, or the gods; it was not determined by math. It set out, for the first time, a method whereby humans can predict the future.


He would often play the role of the house, or the banker, in games where the odds slightly favored the house. He kept winning. His bets eventually grew so large that he had his own gold chips minted.


Life annuities, life insurance is a bet on how long the insured will live, but the winners and losers are reversed. As a buyer, I win if I buy a policy and then die right away, so my family gets a big payout when I’ve only paid a little bit. But of course it only works if the life insurance company has the money to pay. If the company runs out of money because it’s been selling policies too cheaply, my family is out of luck.


It is one of the fundamentally useful things finance does: matches people who are willing to give up money now for the possibility of more money later with people who need money now and are willing to pay back more money later. Finance moves money around in time. “The essence of finance is time travel. Saving is about moving resources from the present into the future; financing is about moving resources from the future back into the present.”


Five days before the exchange opened, the city passed a new ordinance, which said the exchange would only be allowed to open a few hours a day. The limited hours sound like a pain, but there was a good reason for making this rule. If the market had been open all day, buyers and sellers would have trickled in and out. The spread between the price buyers were offering and the price sellers were asking would have been wide. People would have to either make deals they didn’t want to make or go without trading at all. This is what economists call a “thin market.” The limited hours forced all potential buyers and sellers to show up at the same time — they turned the exchange into a “thick market,” where hundreds or even thousands of people would show up to trade at the same time. This made it easier for buyers and sellers to find each other and agree on a price both thought was fair.


Today, if the price of a stock suddenly starts falling, it’s routine for the CEO to go on TV and say the people betting against the stock are spreading rumors. People’s retirements are invested in our company! Think of the widows and orphans! Everybody wants the market to go up; people betting stocks will fall seem like the bad guys.

But the point of the stock market is not to go up. The point of the stock market is to find the right price for stocks — the price that best reflects all available information about the performance of the company and the state of the world.


So in 1609, just a few years after the VOC was created, the city of Amsterdam chartered a public bank — a bank owned not by money changers or investors, but by the city itself. The purpose of the bank was not to make a profit, but to solve Amsterdam’s money problem. Along with the bank came a new law that said if you had bills of exchange coming due in Amsterdam, you had to go to the bank to settle up.

Merchants opened accounts at the bank. When a bill came due, they could pay it (or get paid) simply by having the bank transfer money out of (or into) their account by changing the numbers in the bank’s ledgers. They didn’t have to worry about all those different coins anymore, or about counterfeits. The account at the bank — the number on the bank’s ledger — was their money. And it worked better than coins.

John Law saw Amsterdam getting rich because it had a bank that created reliable money for everyone to use, and a stock market where anyone could invest, and colonies on the other side of the world.


Their natural disadvantages are: smallness of territory, barrenness of soil, want of mines, long winters, unwholesome air, a dangerous coast, difficult entry to their rivers, the sea to defend against on one side, and powerful neighbors on the other…

Despite all that, the Dutch prospered because they solved the money problem.

… they are becoming a rich and powerful people.

Scotland was in the exactly the opposite situation.


Government did then what governments do now — they taxed people, and they borrowed. But Europe’s monarchies tended to tax and borrow in a sort of random, ad hoc way. One year, the king would have a big, one-off lottery. (Like a tax, but more fun!) The next, maybe sell a few annuities and borrow from the rich. Maybe he’d pay them back, maybe he wouldn’t.


The BoE was a huge success. It created a new, safe way for ordinary people to trade some money now for the possibility of more money later. They could lend, through the bank, to the government, in a regular, predictable way, and the law promised they’d be paid back. And because the bank was lending out more money than it had in the vaults, it created more money for England as a whole, in a way that was much more stable and reliable than a few random goldsmiths giving people claim checks.


Like the BoE, Law’s bank raised money by selling stock to investors.


Remember the first 7 words of that last sentence: “Everyone believes that it will hold up.” They are the essence of banking (and, for that matter, of money). If everyone believes a bank will hold up, it will almost certainly hold up. If, on the other hand, people think a bank is going to fail, it will fail — even if its finances are in great shape.


A pretty good working definition of money is: it’s the thing you pay taxes with. In a world where different things are competing to be money — bills of exchange, silver and gold coins, notes from private banks — the thing the government accepts for taxes is going to win. It’s going to become money.


So Law would allow French investors to trade in their bonds for shares in the Mississippi Company. Then the company would collect the debt from the king, but at a lower rate of interest over a longer period of time. This would reduce the interest payments for the government but still provide a stream of income for Law’s company.

Law made his pitch to the wealthy bondholders. What would you rather have, he asked them, unreliable payments of 4% interest from a dodgy boy-king or all the riches in the New World?

The French chose 4% interest.


To pay for these acquisitions, Law planned to sell new shares in the Mississippi Company. People saw that the company was growing, and they had had money in their pockets — money that Law’s bank was printing. Everybody wanted to buy shares. Here Law made a genius move. He said: you can’t buy the new shares unless you already own the old shares. So everybody rushed to buy the old shares, and the price started shooting up.


A share in the Mississippi Company, just like a share of Apple, or GM, or any other corporation today, entitled its owner to a share of all the company’s future profit, forever.


Most of them died of disease and starvation, which was what usually happened when Europeans went there. People from around Europe flocked to Paris to get rich trading Mississippi Company stock; they did not flock to Mississippi. So Law pushed through new laws for transporting army deserters, prostitutes, and criminals to America. It was a desperation move; things weren’t going well.


Economists have this odd phrase: “the real economy.” It means, roughly, all economic activity that happens outside of finance. The carpenter who builds your house works in the real economy. The banker who lends you money to buy the house does not. When an economy is working well, the real economy and finance support each other. The banker gives you a loan so you can buy the house the carpenter built. Everyone (theoretically) wins.

But there are times when the real economy and finance become disconnected. Sometimes, finance lags behind the real economy. There’s not enough money, or loans, to go around, and nobody wants to invest in anything.

At other times, finance races out ahead of the real economy. There’s too much money floating around, it’s too easy to get a loan, and everybody wants to invest. People start buying not because they want a future stream of income from their investments, but because they speculate they can turn around and sell for more in a day or a month.


Paper money could be good for France’s economy. But there was a problem. Unlike the Netherlands, which was a republic, or Great Britain, which had a powerful Parliament, France was an absolute monarchy. The king could do whatever he wanted. And inevitably, the king or the people working for him would get carried away by the power of the bank, and they’d print too much money, and the system would break.

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.


It wasn’t all magic. The first power plants burned dirty coal, polluting the city. A few decades later, Edison built a huge power plant on the east side of Manhattan.


Because of the brain-melting scale of a few centuries of continuous improvements, a day’s labor buys 20K times as much light as it did just 200 years ago. This happened because people figured out lots of clever ways to get more output for each hour of work. Not just light; we can now produce profoundly more food and clothes and everything else than our grandparents could. We work less and get more. In real terms, almost everybody has more money than their ancestors could have imagined.


We celebrate people who create jobs, but in the long run, we get richer by destroying jobs — by figuring out how to do the same amount of work with fewer people. But for the people caught up in the destruction, it sucks.


Many of the people who could make clothes were making a good living by the standards of the time, and they had the freedom of working for themselves. The fact that the jobs paid well was part of their undoing. If you’re a worker, getting paid a lot for your work is great. But if you are the cloth merchant paying all these spinners and weavers and croppers, at some point, you start thinking, there’s got to be a cheaper way to do this.


But for the Luddites, things didn’t get better. Things didn’t even get better for their kids. For the whole 1st half of the 19th century, as England was building the 1st modern industrial economy on the planet, and productivity was going through the roof, average wages for workers barely budged. Factory owners got rich. Workers who were good at building factories or repairing machines did pretty well. But it was a bad time to be a skilled artisan whose job could be done by a machine.


The traditional economist’s response to this is: these problems are temporary. Technology means everyone can have more money in the long run. But one thing the Luddites have to teach us is the long run can be really, really long.


This is the dream of gold as money: natural, objective, eternal money, money without human foolishness, money without government. In the 19th century, when belief in free markets spread across the Western world, politicians and bankers and intellectuals fell in love with the gold standard. They dreamed of gold as money that flowed naturally around the world like water.

It did not end well.


Here’s how countries thought about money and wealth when Hume came on the scene: gold (and silver) are wealth. So if we want our nation to be wealthy, we should pile up as much gold as we can. The way to do this is to run a trade surplus — sell more stuff to other countries than they sell to us. That way, more gold will come into the country than will leave it. Our pile of money will get bigger. We’ll be richer. To make this happen, we should limit imports (quota) or put high taxes on them (tariffs).

This, Hume said, was all wrong.

Hume used a thought experiment to make his case. Say four-fifths of the gold and silver in Great Britain disappeared overnight. Poof! What happens next? Farmers keep growing wheat. Workers keep weaving cloth and digging coal. And now, because gold and silver are scarer, each piece of gold and silver — each coin — becomes 4 times as valuable. If it used to take 4 pieces of silver to buy pay a week’s wages, now it only takes 1 piece of silver.


Having every major economy in the world on the gold standard solved lots of economic problems. It made international trade easier. Because every country’s currency was always convertible to gold at the same rate, the relative value of different currencies stayed the same. In essence the international gold standard was like having a single international currency.


In the 2nd half of the 19th century, as one country after another joined the international gold standard, the world’s economy grew faster than the world’s gold supply. The amount of stuff people wanted to buy great faster than the amount of golf available to buy stuff. As a result, demand for gold increased, and gold got more expensive. Under the gold standard, when gold gets more expensive, the price of everything else falls.

In Hume’s thought experiment, where gold disappears overnight and the price of everything falls, nothing really changes domestically because relative prices stay the same. Workers’ wages fall just the same amount as the price of goods, so everybody can buy the same amount of stuff. But Hume, in his too-beautiful-to-live thought experiment, largely left out an essential function of money: debt.


Deflation is bad for debtors and good for creditors.


Here is a thing that always happens with money: whatever money is at a given moment comes to seem like the natural form money should take, and anything else seems like irresponsible craziness. This myopia peaked with the gold standard. After 20 years on the gold standard, people had come to believe that the gold standard was obviously the only natural way to do money. Every civilized country does it. Who would ever consider doing money differently?


That year, there were new gold discoveries in the Klondike. Around the same time, people were figuring out better ways of extracting gold from ore. Now the supply of gold was growing faster than the world economy, and prices started rising. Under the gold standard, the world’s supply of the basic form of money is driven not by economic needs or political demands. It’s just, how much gold do miners happen to be pulling out of the ground this year? It’s a weird way to run a currency.


If I bought a house for $100K in 1975 and sold it for $400K in 2020, it may have felt like a windfall, but I actually lost money on the deal — $400K in 2020 bought less than $100K in 1975.


If I get a pay cut of 1%, and prices fall by 2%, I’m actually getting a raise. My new salary buys more stuff than my old salary.

But of course nobody thinks this way.

The money illusion was especially strong under the gold standard. Indeed, the gold standard, in a way, was built on the money illusion. The whole point of the gold standard was that the value of a dollar didn’t’ change, right? A dollar was the same amount of gold, year in and year out. This argument made Fisher crazy.

“Our dollar is now simply a fixed weight of gold — a unit of weight, masquerading as a unit of value. What good does it do us to be assured that our dollar weighs just as much as ever? Does this fact help us in the least to bear the high cost of living? What we really want to know is whether the dollar buys as much as ever.”


The solution, Fisher thought, was obvious: redefine the meaning of money. Instead of defining the dollar as fixed amount of gold, define it as a fixed basket of stuff. “We want a dollar which will always buy the same aggregate quantity of bread, butter, beef, bacon, beans, sugar, clothing, fuel, and the other essential things for which we spend it.” Fisher’s idea was brilliant — and very close to the way the dollar works today.


At the time, people didn’t talk about inflation the way we do today. They talked about the high cost of living, but usually in a vague, qualitative way. They thought of the prices of particular goods increasing, but not of some aggregate, quantifiable price level.


Today, the Fed is one of the most powerful institutions in the world. It can create trillions of dollars out of thin air, affecting approximately everybody who uses money anywhere on Earth.

But when the stock market crashed in 1929, the Fed was less than 20 years old. It was a weird central bank, which at first nobody even wanted to call a central bank, because America had just spent 100 years fighting over whether to have a central bank at all.

The story of that fight is the story of figuring out how to do money in a democracy. What should the government do and what should be left to the free market? Who gets to profit and who gets bailed out? And perhaps most fundamentally: Who gets to print money?


The idea of the government printing money was so ridiculous as to be out of the question. During the American Revolution, the Continental Congress had printed paper money to pay for the war, and then printed some more, and some more, and soon it had become worth almost nothing. The standard source of paper money was private banks, which were granted charters by state governments. Each bank printed its own paper money, redeemable on demand at the bank for silver and gold. Everybody agreed that was okay.

The fight — the endlessly recurring power-and-money-in-America fight — was over whether Congress should allow the creation of a single, national bank. Certainly it would be convenient. But a single, national bank would also be a huge concentration of power in private hands.


The Civil War was the moment when people stopped saying “the US are” and started saying “the US is” — when it went from being a bunch of different states to being a single country. Destroying the world of thousands of different kinds of money issued by state-chartered banks and creating the world of one kind of paper money — uniform bills issued by national banks — was a small part of that shift. Money is part of what makes a country a country.


The European were starting to realize that a central bank — a bank with a government granted monopoly on printing paper money, and the obligation to manage the nation’s money — could make panics less frequent and less severe. The key move was for the central bank to lend money freely to sound borrowers when everybody was panicking.

If people know that the central bank will lend to keep their bank in business tomorrow, then they wouldn’t rush to pull their money out today. And if they don’t rush to pull their money out today, there’s no panic, no financial crisis.


Yet the panic didn’t convince Americans that they needed a central bank. Instead, one banker wrote, most people were “laying the blame for these difficulties upon the ‘selfish and reckless management of corporations,’ on ‘over-speculation,’ the ‘greedy of banks’ or the wily practices of ‘Wall Street.’”

Of course banks are greedy! Of course corporations are selfish, and Wall Street is wily! Blaming a financial crisis on these qualities is like blaming a flood on the wetness of water. If Wall Street greed caused financial crises, we’d have a crisis every week. The important question is: How can we design a monetary system that channels that greed and selfishness and wile toward socially useful ends, and limits the potential harm inherent in finance?


Because they thought America needed a central bank, and they knew Americans were wary of both centralization and banking, the cabal cooked up a classic American compromise: a network of not-quite-central banks scattered around the country. Also, they weren’t going to be called central banks. They were going to be called “reserve associations.”


The Democrats couldn’t live with a bunch of central banks controlled by private bankers. So, contrary to the cabal’s plan, the regional reserve associations — now renamed Federal Reserve Banks — would be overseen by a board of governors in Washington, whose members were appointed by the president.

America was on the gold standard, and Congress constrained the Reserve Banks’ ability to print paper money. The banks could only create $10 in paper for every $4 worth of gold they had in the vault. And, finally, profoundly, Federal Reserve notes would be “obligations of the US” — not private money issued by central banks, but government money issued by a new, weird hybrid public-private central bank that was actually 12 different banks but was also, sort of, a central bank.

It was a horse designed by a committee of committees, a camel of a central bank, and if it sounds kind of like a good idea and kind of a mess, it was.


He wanted the governor to declare a bank holiday — a weird euphemism that sounds like a cheap package vacation but actually means closing every bank in the state so people can’t pull their money out.


One thing sure to make depositors nervous is seeing the bank in the next town over go bust. So even in good times the US banking system was like a giant circle of dominoes, with everybody looking anxiously around the circle to see if anything was wobbling. In the 1800s and early 1900s, there were massive, nationwide banking panics every 10-20 years.


While the mechanics are different today, the Fed still operates on the same basic principle: when the economy starts to get worse, the Fed creates money and makes it cheaper to borrow. This makes it easier for debtors to stay afloat and encourages businesses to borrow money to invest and hire people.


The international gold standard tied the world’s economies together. This was good when they rose together, but in the early ’30s, the gold standard was a weight pulling most of Europe and NA to the bottom of the ocean. Banks collapsed across both continents. The center of the financial universe was London, and as people panicked they traded their British pounds for gold. By the fall of 1931, the BoE was about to run out of gold. So the BoE did something that was both unthinkable and the only thing it could do: it stopped giving people gold in exchange for paper money.


In the 5 weeks after Britain went off the gold standard, people traded in $750M for gold from the Fed.

The Fed knew how to fight this gold drain: it raised interest rates. The higher interest rates are, the higher the incentive for people to keep their money in interest-bearing bank accounts, rather than turning their bank deposits into gold. The higher interest rates worked. People stopped exchanging their dollars for gold.

But raising interest rates also had an unintended (but entirely predictable) consequence: farmers and businesses now had to pay higher interest on their debts, which drove more of them out of business. This in turn made unemployment even worse and made prices fall even more.

Raising interest rates was the exact opposite of what the Fed should have done. Today, the Fed raises interest rates when it is worried that the economy is overheating — when almost everyone has a job, and prices are rising faster and faster. It lowers rates when the economy is weak. By raising interest rates in the fall of 1931, the Fed put its boot on the throat of a country that was lying on the ground after getting the snot kicked out of it for 2 years. The Chairman of the Fed said the rise in rates was called for “by every known rule,” which is to say the Fed did exactly what the gold standard expanded.

Decades later, economists showed that the Fed’s policy of making money scarer and raising interest rates — following the rules of the gold standard — turned what would have been a nasty but ordinary downturn into a cataclysm. The Fed, and the gold standard it managed, caused the Great Depression.

Today, the gold standard is a thing some people refer to with nostalgia. Politicians sometimes still talk about returning to it. But people who know what they’re talking about know this would be a disaster. In 2012, 39 economists surveyed opposed returning to the gold standard. Not a single one supported it. Among today’s economists, the gold standard is not a controversial issue. Almost all of them think it’s a terrible idea.


In the weeks leading up to this moment, things had gone from bad to insane. Now, on top of all the human suffering of the Depression — the unemployment and hunger and homelessness — a wave of bank runs worse than any that had come before broke out across the country. As banks collapsed and states declared bank holidays, money itself began to disappear.

People improvised. More than a hundred cities printed paper IOUs that circulated as temporary money.


That week, while the banks were still closed, Congress rushed through an emergency banking law. It spelled out how officials would decide which banks could reopen. It also gave the government the right to force all American to sell their gold to the government.


Roosevelt understood that money is money because we believe it’s money. When people lost confidence in their banks, they ceased to think of their deposits as money, so they withdrew their deposits in the form of paper bills. When they lost confidence in paper, they turned it into gold. These changes weren’t neutral. With each step America was sliding backward into a world with less money that worked less well.


Roosevelt made it a crime for people simply to own gold. You could go to jail just for keeping a few hundred dollars of gold coins in your desk drawer.


Then, “all hell broke loose in the room.” One banker-turned-advisor told Roosevelt that he was leading the country into “uncontrolled inflation and complete chaos.” Roosevelt’s own budget director agreed. The 2 men “fought like tigers — pacing up and down and argued every which way,” trying to persuade Roosevelt to change his mind. The president laughed it off. He pulled a 10-dollar bill out of his pocket. “How do I know that’s any good? The fact that I think it is, makes it good.” They argued until midnight. The president, unfazed, went to bed. “Well,” the budget director said, as the advisors walked out of the White House, “this is the end of Western civilization.”


The world did remain on a pseudo gold standard for decades; foreign governments could still trade dollars for gold (at a rate of $35 per ounce, as set by Roosevelt in 1934), but ordinary people could no longer do so. Finally, in 1971, the US broke the link to gold entirely. It became the job of the Fed to manage the value of the dollar — not in terms of gold, but in terms of the stuff ordinary Americans buy.


The believers in the gold standard gave it the power of nature. They didn’t so much argue as simply took as given the fact that gold-as-money was the natural order of things, and that any other policy was not only unwise but also unnatural and therefore doomed to fail.

Roosevelt recognized that there was nothing natural about the gold standard; it was as artificial as any other monetary arrangement. The gold standard was a choice people had made — even if they didn’t recognize it as a choice. Roosevelt’s great genius was simply to say: we can choose something else.


Here is the standard story of the 2008 financial crisis:

  1. Shady lenders gave ridiculous mortgages to unqualified buyers of overpriced houses.
  2. The ridiculous mortgages were then bundled together, sliced up, and sold off to investors.
  3. When housing prices started to fall, the unqualified buyers couldn’t pay back the ridiculous mortgages.
  4. The investors who bought the bundles of ridiculous mortgages blew up and took the economy down with them.

Mutual funds are pools of money that typically are invested in stocks or bonds. If you have a retirement account, there’s a very good chance that you are an investor in one or more mutual funds. When investors buy shares in a mutual fund, they are actually buying an ownership stake in all the stocks or bonds (or both) that the fund owns. The value of the mutual fund shares rises and falls every day with the value of the stocks and bonds in the fund.


A bank borrows money from depositors, who can ask for their money back at any time. Then the bank turns around and makes long-term loans. The fundamental bank thing that the bank is doing is borrowing short-term and lending long-term. The money-market funds and asset-backed commercial paper markets were doing the same thing: taking money that investors could demand at a moment’s notice and turning around and lending it out. In the shadows of the regulated banking system, a whole new system of quasi-banks had sprung up.


Everybody thought we had solved bank runs in the Depression. The government started guaranteeing the money people deposited in the bank so people didn’t need to rush to the bank at the first sign of trouble anymore. The Fed stood ready to lend to sound banks that were in a temporary crunch. The government stood behind everybody’s bank account. Our money was safe.


In the 1930s, the government had put a fence around ordinary people’s bank accounts and said: Okay, what’s inside this fence is no longer a loan to the bank that you, the depositor, may or may not get back. Your bank deposit is your money. The government is going to insure the money inside this fence to make sure you get your money back. And we’re going to regulate the hell out of banks, and make them pay for the insurance, to keep that money safe.


But at the time, the Germans’ neighbors were terrified. The French, British, and Soviets thought German reunification could bring back the aggressive, expansionist Germany that had destroyed Europe less than 50 years earlier.


There were profound, seemingly irreconcilable differences in the way the French and the Germans thought money should work. Deciding suddenly to have the same money would be stranger than deciding suddenly to speak the same language. It would be more like deciding suddenly to have the same culture. How do you even do that?

The French saw money as a tool elected officials should use to achieve their desired ends. France’s central bank took its order from French politicians. The politicians often wanted to stimulate the economy by creating more money and driving down interest rates, even if it meant higher inflation.

The Germans, on the other hand, thought money couldn’t be trusted to politicians. The temptation for the government to create more and more money, and drive inflation higher and higher, seemed too great. The Germans had lived through hyperinflation in the 1920s, when the value of the mark fell by the minute. The Germans learned how tenuous the value of money is, and after the war they rebuilt their economy around protecting that value. They were willing to suffer through recessions rather than risk inflation. Politicians appointed technocrats to run the central bank and then left them alone. “Not all Germans believe in God, but they all believe in the Bundesbank.”


Pohl, the head of the Bundesbank, started negotiating terms of surrender for the Deutschmark. He wanted the new currency to be controlled by a European Central Bank that was run by technocrats whose main job was fighting inflation (not stimulating the economy), and who were not answerable to politicians. Ideally, the bank’s headquarters would be in Germany, for safekeeping. Basically, he wanted to keep the Deutschmark, but the other countries use it. But even that was not enough.

The value of money, Pohl and his colleagues explained in 1990, would soon depend on the actions of every single country that shared the currency. For the system to work, all the countries needed to keep deficits and inflation low. But in the long run that wouldn’t be enough. A common currency would only work, the German central bankers wrote, if the countries agreed to a “comprehensive political union” — if they became more like a single country, a US of Europe.


For a long time, people and governments in countries at the core of Western Europe (German, France, the Netherlands) had been able to borrow money more cheaply than those on the periphery (Portugal, Spain, Italy, Greece). The countries on the periphery had a history of higher inflation and higher deficits, and lenders demanded higher interest rates to compensate for that risk.


In 2009, Greece’s new PM stood before the parliament and said the Greek government had been telling a massive lie about the amount of money the Greek government was borrowing and spending. The country’s deficit wasn’t 6%, but 12%.


Rising interest rates were a potential deathtrap. In order to meet the higher interest payments, countries had to raise taxes or cut spending. This would make unemployment, which was already high, go even higher. This, in turn, would mean lower tax revenues, which would make it harder to pay off the debt.

There was a traditional way out of this trap: the central bank created money and bought government bond on the open market. This lowered interest rates, which encouraged businesses to borrow, invest, and hire more workers, which in turn led to more tax revenues, which made it easier for the government to pay its debt. There was another benefit, as well: the lower interest rates tended to drive down the value of the currency, which made the country’s exports cheaper for foreign buyers. Too much of this policy was a bad thing because it could make inflation grow out of control, but in moderation it led to more spending, more hiring, and more exports. It was the perfect solution to a financial crunch.


There was something perversely delightful about details like these. For the sensationalists in the German press, the depraved Greeks were the perfect counterparts to hardworking, willing-to-suffer-to-keep-inflation-down Germans.

The narrative omitted entirely the way in which German had enabled — indeed, profit from — the borrowing and spending in Greece and the other eurozone countries that suddenly found themselves in trouble. Germany’s economy was driven by exports — largely be exports to other countries in the eurozone. But Germany didn’t buy that much stuff from the rest of Europe. If the countries had different currencies, this imbalance would have driven up the value of the Deutschmark, which would have made German exports more expensive, and Europeans would have bought less German stuff. It was only because of the euro that this didn’t happen. German stuff stayed cheap because everybody was using the same money.

The money from selling all this stuff to other Europeans was piling up in Germany. What did the Germans do with all that money? They loaned it to the Southern Europeans so they could buy more stuff from Germany.

As with the gold standard, there was a desire to tell a simple morality tale, in this case about prudent savers in Northern Europe and wasteful borrowers in Southern Europe. But as with the gold standard, the story fell apart when you looked closely at what was going on. The prudent savers and the wasteful borrowers were 2 sides of the same coin. “After all, the borrowing would have been impossible without the lending. It is stupid to finance profligacy and then complain about the consequences of one’s own choices.”


But there was a crucial difference between the US and Southern Europe: the US was borrowing in dollars, a currency China had no control over. As a result, even though the US owed China $1T, the US had the whip hand.


The Europeans — at least, the ones who believed in “ever closer union” — always meant to get around to creating a unified economy, with the same rules for everyone. They knew that, for the euro to work, Europe needed to be more like a single country. “It cannot be repeated often enough: Political union is the indispensable counterpart to economic and monetary union,” Chancellor Kohl had said years earlier. “Recent history, and not just that of Germany, teaches us that the idea of sustaining an economic and monetary union over time without political union is a fallacy.”


The problem with Greece and Portugal had been a problem of political will; Europe and the IMF had enough money to bail out those countries. Spain and Italy were something else, though. Their combined government debts were over a trillion euros, far more than the EU and the IMF could credibly guarantee. They were so much that, in order to guarantee them, you would literally need the power to print money out of thin air.


A new kind of money that was born out of some combination of hope (for a united Europe) and fear (of a united Germany) had taken away the sovereignty of democratic countries that were home to hundreds of millions of people. Their money, and therefore their fate, was now in the hands of foreign central bankers.


Cash is a beautiful technology. It lets me walk up to a stranger, handover a few pieces of paper, and walk away with an armload of stuff. The stranger doesn’t have to know anything about me. I don’t have to know anything about her. Nobody else has to know anything about our exchange. And we don’t need any record of the transaction. The cash itself is the record.


Despite what ordinary people said when you asked them about privacy (“We’re for it!”), people’s actions revealed they didn’t really care all that much about privacy. As people started buying stuff online, they didn’t bother with private digital cash. Instead, they used their credit cards. Eminently traceable, completely not secret, subject to significant fees. Also profoundly convenient.


Electronic money has turned out to be a solution in search of a problem.


What the cypherpunks needed, out there on the virtual barricades of the digital revolution, was a kind of untraceable electronic cash that didn’t force them to trust a corporation. What they needed was a kind of digital money that didn’t require them to trust anyone at all. They needed to be able to trust the money itself. Just like gold.

But this was a really hard thing to create. In the case of simple paper money, it hadn’t been easy. In that thousand-year-old paper bill from China, half of the space was given over to a warning that counterfeiting was punishable by death. And that bill itself was probably a counterfeit!


The basic idea was to require computers to do a tiny bit of computational work before sending an email. The work might take a few seconds — short enough to be irrelevant for ordinary people, but long enough to destroy the business model of spammers who had been sending thousands of emails per minute.


Chaum’s digital money was like fiat currency, controlled by a central bank. Back’s was more like gold, at least in one respect: just as anyone with the resources and the will could mine gold, anyone with the resources and the will could create hashcash.


Bitcoin: An anonymous(ish), money(ish) thing that buyers and sellers could exchange over the internet without any bank or tech company in the middle. Satoshi laid out the whole thing in that 9-page paper.


“For years I was frustrated and defeated by what seemed to be insurmountable barriers between the world today and the world I wanted.” It was a typical sentiment for a thoughtful 20-something struggling to find a place in the world.

“But eventually I found something I could agree with wholeheartedly. Something that made sense, was simple, elegant, and consistent in all cases.” What he had found was a thread of radical libertarianism called anarchy-capitalism that held that the market was freedom, and government was tyranny. The noble thing to do was to fight tyranny by doing business on the black market.


What the people who say bitcoin is a store of value mean — or, at least, a more plausible thing to say — is that bitcoin has become a speculative investment. Bitcoin is a thing people buy because they think they are going to be able to sell it for more in the future — though they recognize they might have to sell it for less. This is not, in general, a useful quality in money.

The history of money is largely the history of stuff becoming money without people really realizing it. Banknotes and then bank deposits started out as a record of a debt and sort of crept their way into being full-blown money. Shadow banking grew for decades before anybody thought to call it shadow banking. It was only in moments of crisis — the moment when the thing suddenly threatened to become not-money — that everyone looked around and said, well, I guess banknotes and bank deposits and money-market mutual funds are money now.

The history of electronic money is exactly the opposite. Someone has a very clever technological breakthrough. Then they climb up to the mountaintop and proclaim to the world: “Here is a new kind of money!” And then it doesn’t really become money. Or at least it hasn’t yet.


Everybody else says: What are you talking about? What we have now is real money. What you’re talking about is just some crazy idea you made up!

Usually, that’s the end of it. But once in a while, something happens — a financial crisis, or a major political shift, or some new technology, or some combination of all 3 of those. And then suddenly everybody starts listening to those fringy people with the strange ideas about money, and there’s something new: paper money backed by gold, or paper money backed by nothing, or numbers on a computer.


The obvious fact is that hundreds (and other large bills) aren’t particularly useful for everyday life but are extraordinarily useful for committing crimes and for evading taxes (which is itself a crime).

Cash is les sand less necessary for daily (honest) life. Since cash makes crime easier, and it’s not going to disappear on its own, should governments get rid of cash to fight crime?


Banks are private companies that create and destroy a public resource — money. Because money is so essential, the government offers a massive but piecemeal safety net for the banks. Central banks are lenders of last resort. Government insurance programs back deposits. Regulators from multiple agencies try to keep banks safe, but sometimes fail to do so.

When banks were bailed out after the financial crisis of 2008, people raged against “too big to fail” banks. The anger is justifiable, but the problem isn’t that banks are too big or that bankers are too greedy; the problem is with the nature of banking. Banking is inherently prone to crises. And in any big financial crisis, the government has to choose between bailing out banks (whether they are big or small) or allowing failing banks to take down the whole economy.


The root of the issue is that basic banks do these 2, very different things:

  1. They hold our money and make it easier for us to get paid and make payments.
  2. They make loans.

The dazzlingly simple argument from all of these great economists comes down to this: split those into separate businesses. Variations on this idea are usually called “100% reserve banking” or “full-reserve banking” or “narrow banking.”

In this new world, one kind of business — call it a money warehouse — would hold our money.

A different kind of business — call it a lender — would make loans. The money for those loans would come from investors’ money, and the investors would be prepared to lose that money if they loans didn’t get paid back.

In this would, there is no such thing as a bank run.


The second problem is weirder and more interesting. If all we did was ban banks from taking deposits and lending money, a vast amount of money would disappear. If we stop banks from creating money, where is all the money going to come from? The short answer is that central banks would have to create much more money. The power dynamic of money would shift from private banks to central banks.


Mosler had recently come to believe that most people fundamentally misunderstood how money worked. They were still stuck in a gold-standard mentality decades after the gold standard had disappeared. He pointed out that, unlike in the gold-standard world, a country that could print its own fiat currency, and borrows in that currency, never needs to default. It can always print more money to pay its debts.

Printing more money can sometimes lead to inflation. But it doesn’t always lead to inflation. He thought the essential thing for understanding an economy was not how much money the government was printing, but what was going on in the real world. Did everybody who wanted a job have a job? Were all the factories and offices operating at full capacity? Only if those things were true and the government kept putting more money into the economy and buying more goods and services would it start driving prices up and create inflation.

But what if the economy wasn’t operating at full capacity? In that case, as the government put more money into the economy and started buying stuff, it would drive businesses to hire more workers. Prices wouldn’t start rising, Mosler argued, until the economy got to full employment.


Mosler, like a lot of rich people, didn’t like higher taxes. But added to this basic dislike, he now had a bigger theory of why they were unnecessary. Inflation was low; there were unemployed workers in America; rather than raising taxes, the government could simply spend more money.

The very idea that the government needs to tax citizens to spend money is backward, Mosler argued. This money that the government is collecting in taxes — where does it come from? What is the origin of a dollar? A dollar enters the world when the US government buys something and the US Treasury puts dollars into the bank account of the seller. When the government collects taxes, it is just taking back dollars it originally created to buy stuff.


The essential message: stop worrying about deficits all the time. The government can print and spend as much money as it wants, as long as there are people who are looking for work and unused resources exist in the economy.


She was interested but skeptical. She wanted to understand how government spending really worked. Not the theory, but the thing itself. She spent months studying the arcane details — reading Fed manual, talking to people whose job was to move money in and out of government accounts at the Treasury Department. Where does the money come from? Where does it go? Her conclusion: the government creates dollars — puts new money into circulation — by buying stuff. It takes money out of circulation by taxing or borrowing.


With this abundance, they said, the government could do much more. Perhaps most important, they argued, the government could and should offer a job to any American who wanted one. If inflation starts to rise, the government can cool tings off by raising taxes to take money out of the system.


Traditional economists have questioned many of the MMT arguments. Lots of people disagree with its fundamental tenets. But that last point — the idea that we should trust Congress to fight inflation — may be the hardest part to swallow.

The way we do money now is undemocratic. Politicians appoint central bankers to control a nation’s money. And then, to a large extent, the politicians leave the central bankers alone. If the central bankers want to create trillions of dollars and bail out shadow banks in a crisis, they can. If the central bankers want to jack up interest rates to fight inflation, they can — even if high rates mean lots of workers will lose their jobs. We have chosen to create this world. We have chosen to tie our own democratic hands and let central bankers do what they think is best.

MMTers are saying that it doesn’t have to be this way. Money can be democratic. We don’t have to throw people out of work to fight inflation. But to do that, we’d have to decide that we trust ourselves — that we trust our elected representatives — to control money itself.