The History of Money - Part 1 | Omid Malekan | Ask Altucher! EP05

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The History of Money - Part 1

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Jay The Engineer: anyway, so today, Ask Altucher Show brought Omid and you know, obviously James is hosting the, the show, but, uh, basically someone in the, in the, in the US they're like, Hey, you guys should talk about the origin of cash and then lead into crypto.

James Altucher: Well, okay. It's a very interesting topic because in Omid, I'm gonna, I'm gonna make an intro basically to you, Omid Mallon's been on the podcast many times, most recently discussed his latest book, A Rearchitecting Trust. Which basically is like a history of money and a history of, of Bitcoin. And you were also, uh, really involved with a lot of city groups Bitcoin decisions for a long time, and you recently retired from there.

But, uh, it's a very interesting thing going all about all the way back because money predates recorded history. In fact, probably the first recorded history are people keeping track of IOUs in the marketplace. So they would be like sticks where you would make notches for every time. [00:01:00] Oman bought, you know, an apple for me.

I would make another notch on the stick for Oman. And that was the origins of basic accounting. And some of those sticks are 30,000 years old.

Omid Malakan: Yeah. And um, there's also a theory that numbers or counting was originally invented for. Commercial transactions. Um,

James Altucher: I believe it cuz. What el? What El Why else would you need to count?

Omid Malakan: right. Um, so there are two theories on the origins of money. Uh, one is the more popular one is the barter theory, which was, um, actually really popularized by Adam Smith. Um, but the idea there was before there was money, we had barter societies.

Barter societies were highly, highly inefficient. So people invented money cuz it was easier to trade your wheat for money and then use that money for labor down the line than to actually price everything and everything else. Um, the other [00:02:00] theory of money is the credit theory and that theory, which I think is more credible, pun intended, is that barter never existed cuz it just would've been a nightmare.

Um, instead people just did favors for each other. And I was like, I'll give you some wheat today and then next week you'll help me with something and we'll call it even. Uh, and that money was invented as a way to settle these favors occasionally.

James Altucher: Well, let me ask you in, you know, as societies grew, so let's say three, four or 5,000 years ago, we started, uh, uh, you know, having societies that were bigger than tribes. Maybe it was even longer ago than that, and so suddenly you had to deal with people you didn't know. Maybe if two tribes came together in a marketplace and each tribe was 150 people, suddenly you have to have a little more trust.

Involved and you know, if we're, [00:03:00] if it's just, if it's just 15 people living in a cave, okay, you owe me next week and I'll kill you or whatever. If you don't, you know, do it. But when, when they decided got a little better, you needed a way to, to an account for things and a way to maybe transact right then and there.

Omid Malakan: Yes. And actually the an anthropologists, they really believe in the credit theory cuz they've also observed this in more primitive societies in modern times. And basically that's the idea that within the tribe there are many forces, social, cultural, or the threat of violence. Um, Where people sort of live up to their deaths and their favors, but across tribes there isn't, um, you don't want to trust each other.

Uh, and, um, alternatively, across time, like even within the same tribe, if you, someone does you a favor and you're like, oh, you know, I don't know if this person's gonna remember that they owe me a favor [00:04:00] 10 years from now, that's when I would want to cash it in. If you just exchange it for money. Um, then it becomes permanent.

James Altucher: Right, and so, but then there's, the question was barter. Something that was very broad in general. So for instance, if I made axes and you made grains, would I tradees for grains or would we barter in the sense that, okay, we're both gonna trade our objects for some common thing like. I don't know, animal skins or seashells or whatever.

And then we we're able to transact with this more common, we, we barter for those seashells and then we're able to transact in seashells. Uh, what was it? Cause I would think. Really the invention of money was an enormous increase in productivity because let's say I have an ax, I make axes, that's all I do.

I've gotta find someone who's going to use that ax. So it means I have to [00:05:00] specifically find like a hunter or, or someone who chops down trees or whatever, whatever people use axes for. Back then, and that would make it much slower to make a transaction cuz first I have to find someone to take my axes and then go down the chain of bartering until I could finally get someone who sells me food or whatever.

Omid Malakan: Yeah, and again, I, I'm actually of the school of thought that that is so precarious that it never existed in the first place. Uh, the other reason which was problematic is just pricing things would've been a nightmare in a, in a, in a world where there's no money, you have to price everything in terms of everything else.

Uh, with just cognitively, people can't do that. So the what, what in, uh, economic nerd speak is called the unit of account function of money, which is, it just gives you. A single thing to price all other things in including labor. That in of itself is, uh, [00:06:00] one reason why having money makes society a lot more productive.

James Altucher: So what do you think happened? So what do you think was the first money? Was it, was it, I mean, there's various things. Was it animal skins? Was it shells? Did they, when did they start making coins?

Omid Malakan: So it. The origins of money is very interesting and diverse, and different things happen all over the world, uh, but sometimes in parallel. Um, but originally, yeah, people use what we call commodity money, which is anything that has some other value other than being the money. So, and, and that could be, um, it could be grains, uh, it could be shells, it could be, uh, metals.

Um, eventually, Most societies in the east and the west settled on using metals just because they are, uh, they're more durable. It's easier in some ways to determine the quality of a hunk of gold than [00:07:00] it is a bag full of grains. Um, but then now we have a new problem, which is if you just use non-standardized metals, gold, silver, copper, whatever, um, Well now we have a new source of inefficiency in the economy.

It's like me and you are gonna do a trade for that ax. And you are like, well, here's some silver, but I have a problem, which is one I have to judge the quality of your silver. Is it pure? Is it an alloy? Is it, I don't know if there's a full silver, there probably is. But um, and then I also have to judge the quantity of your silver.

Like I literally have to weigh it. Um, And this is where coins come into the picture, because with coins we have standardized quantity and quality, so again, even more efficient money.

James Altucher: But how do you know if there isn't, even when a, [00:08:00] a government or a local, you know, force is minting, metal coins, how do you know for a given thing of silver, there isn't like just a bunch of copper in the middle that you can't see?

Omid Malakan: You never know for sure, uh, unless you do your own tests. But the idea has always been that if you have some kind of a powerful figure, like a sovereign, the emperor, the king, whoever, if they are the ones who, uh, have a monopoly on minting the coins, then you at least have more of an assurance of its reliability than it was if it was just a stranger doing it.

James Altucher: Yeah, I mean, this is a very. Important topic, which is, and this is related to, to Bitcoin later on, which is that a government lives or dies literally based on people's trust in their money. Like, uh, you know, and, we'll, we'll get to this as well. The first paper currency was made by a kingdom in [00:09:00] China around 600 bc and it was, it was paper money.

It represented, I guess some quantity of metal. I'm not really sure, but. Because it's paper, it's really worthless technically. And so at the top of it, in the same place where we put in God we trust, they put, if you counterfeit this, you will be beheaded. That was the first kind of like way to build and instill trust in the money.

Like we will kill you if you damage the trust in this money.

Omid Malakan: Yeah, I, I believe it was the bark of the mulberry tree, and it was the, uh, I think it was the Mongols, under Genghis Khan. Um, yeah. Uh, but, but paper money has also always existed as a receipt for metal money. Um, that's how it came about in the West. That's why we call 'em bank notes because you would go to the bank and they would have gold, and then they would give you a paper receipt to claim some of the gold, and then you could just.

Use that as money. But the original idea that, you know, one way to put it in [00:10:00] modern technology terms is for money to be useful, it needs network effects. So the, the more people are willing to accept any money, then the more productivity everybody who uses that money has. So if you have a government issue, the money.

And then, um, have laws like what we call legal tender laws that say, Hey, if you live in my kingdom, you have to use this money. Um, and then also governments, a lot of times they will borrow in their own money, they will pay salaries, like of soldiers in their money and they will collect taxes in their money.

Uh, the whole idea being that we want to get to some kind of a society wide standard because then, Commerce is easier for everyone. Uh, with the big trade off, of course, that now we are putting a lot of trust in the hand of the issuer of that currency.

James Altucher: Well, and, and you've all. Yuval Harari brings us up in the book, [00:11:00] um, I forget if it was SAPs or Homos, where he basically says that, you know, as, as we've just been kind of pointing out, money is just a story that we believe in. And because of, because the paper dollar is, doesn't really have any value, it's a piece of paper.

But if, if you believe in it, if you believe in the value of that dollar, and let's say I live 5,000 miles away and I believe in the value of the dollar. That those beliefs that we share are enough for us to trust each other in a transaction, which never would've occurred if, you know, if, if there wasn't money, for instance, or, or if money was much more complicated.

But, but getting back to money as, as gold or money as silver, it seems arbitrary that it was gold or silver. Like how did it end up gold or silver? Because it then, then the richest country is just whoever has it seems like arbitrary cuz. The richest country's gonna be the one that has the most gold mines and silver mines in it.

Omid Malakan: It is somewhat arbitrary and. And, uh, [00:12:00] societies have also used different metals for money and a lot of times it's actually had to do with what they had enough of, but not too much of for the exact reason that you say. Um, cuz there've been instances in history where, um, you know, like silver was predominant in Europe, but then, uh, once the new world was discovered and invaded and colonized and there was a lot of silver in it.

It, it flooded the European economy with silver. Then some people are like, well, let's switch the gold. Um, there've also been other times where, uh, you actually have a shortage. There's just not enough of whatever metal that you're using, so you can't make as many coins as the economy requires, and then you end up switching to a different metal.

So it, it, it's very varied, but for whatever reason, gold and silver, Have in more recent centuries, uh, sort of like occupied whatever the sweet spot is. [00:13:00] But even then there's been controversy because silver is, uh, easier to mine and there's more of it than gold. So whether you base your money, even if it is pegged to a metal standard on silver versus gold, uh, has been a very interesting political issue.

James Altucher: But like, you know, you, you said earlier how bartering would occur when, when we would be able to trade objects that have value or, or some form of money exchange. The, the original money was like commodity money or something would've some other value other than as money. People always say gold is a a real thing.

It's a hard asset. But does it really have value other than as money? I mean, yes, there are industrial uses for gold, but I actually, the same industrial uses occur for silver, which is, you know, 2% of the value of gold. So, uh, there's not really that many uses for gold.

Omid Malakan: no. And, and to go back to, um, [00:14:00] the point that you've all made, uh, about like money just being a myth in a way. You don't want it to have too much utility. Uh, because that almost erodes the mythology. Like if we think of gold as this magic shiny metal that's hard to get out of the ground and uh, is the thing that will preserve your wealth and like, you know, you, you give it as dowry to marry your children or something, then it holds a special place in our imagination.

But if we also think of gold as like, oh, oh yeah. And also like, you know, I can make cookware out of it, it somehow takes away from that. And, and this applies to many things, right? Like, why are diamonds valuable? Why are handmade, uh, Rolex automatic watches valuable? Like there, there's almost a, um, negative correlation between the utility of something versus how much we as a society accepted as a good store of value.

James Altucher: So, so now what, how, like right now we've talked about [00:15:00] how some form of barter, not pure barter like we discussed earlier, but, but the idea of commodity money was originally, you know, a kind of barter and it, and, and there was problems with that because, I don't know. One tribe might have a bunch of seashells and another tribe might have a bunch of animal skins, and you still have to do too many conversions and you, you know, everybody would've to trust everybody's own money.

But when it all became kind of similar from country to country, it's either gold or silver or some other kind of metal. You know, there's a little bit more, I can take Roman money, for instance, and exchange it for Persian money because at least it's all silver so I can melt it down for roughly. You know, equivalent value.

So, so the question is the problem. So the, so problems are solved with each evolution of money, and those problems ideally make society more productive, make transactions faster, make transactions more and more global. So the fact that, [00:16:00] you know, Persia might have used silver and grease, might have used silver, made it possible to do this.

International transactions even thousands of years ago. How did, how did we then evolve? I mean, the problem with that is that if you have a, a lot of things to buy, or let's say your town was invaded and you have to move and you were a wealthy person, you had to carry a lot of gold around all the time, which kind of put a target on your back.

Like that's a, a problem with, with purely, if we all just use metal as a currency, still we'd be in big trouble because, Jeff Bezos wouldn't be able to move very far. He'd be sitting on like, this mountain made out of gold. So, so, so, so obviously there's a problem. So whenever there's a problem, there's some sort of evolution and, uh, we, we evolved into paper money, but that seems very complicated because A, there are trust issues.

B, who decides. Now you really need a strong central authority to decide what the paper money is [00:17:00] worth and to enforce it for anybody who doesn't believe that the paper money is worth something. So, so I think they kept up this illusion that you could exchange the paper money for gold whenever you want, or silver or whatever, but what's, what's the evolution of the paper money?

Omid Malakan: So it started with that convenience point that you made, that people, particularly like if you're traveling to a, uh, a different city or something to do business, you don't wanna always be walking around with this heavy bag of golder, silver clinking in your pocket. Um, so then what you do is you go and you store your metal money with a goldsmith or a bank or a money changer, and then they give you a receipt.

Like that's where the paper initially comes in. It's like, all right, this gives you the right to get back your 10 coins whenever you want. Um, and, and receipts are a lot more flexible cuz you can make it for one coin or 10 coins. Uh, and they're lighter and they're easier to hide in your clothes or something so you don't get robbed.

James Altucher: Right. So now I can go [00:18:00] to the market and I, and let's say you're selling apples, I can say to you, Hey, I wanna buy an apple. Look. Here's the receipt. You can now use it. We all know the money changer down the road. He's Jewish, so he's the Jewish looking guy. Um, so I give you the receipt and you can u that was a sort of paper money, uh, as a receipt.

Omid Malakan: No, it, it was, and, and that's what we call economic. No speak. Again, that's representative money. It's not commodity money. Um, so it, it's, the value is the fact that it represents something else. And in this case, it represents the right to go and claim, uh, you know, silver coins in Europe or uh, copper coins in China.

Um, but eventually you could see a situation where if everybody trusts this at some point, like no one's bothering to go collect. The metal money, unless they want to go, you know, travel across the ocean or something. Because like, yeah, we all [00:19:00] know the guy down the, down the road, he's got the coins and now all that circulates is the paper.

Um, but that poses an interesting dilemma for the, the goldsmith or the bank who's issued the paper, which is if almost nobody ever shows up to collect the metal, Commodity money that you're holding? Do you have to hold all of it? What if you just held 90% of it and the other 10% you invested it in a business enterprise or even loaned it out,

or Actually,

James Altucher: that's the beginning of like fractional bang is what you're suggesting.

Omid Malakan: we're banking.

Really? Yeah.

James Altucher: I would imagine also there were a lot more madoffs back then.

Omid Malakan: Possibly, but also we're talking about much more primitive societies and a lot of times the primary, [00:20:00] um, money changer or bank or goldsmith was like a very trusted, reputable family. Uh, you know, like this is where the Medici's come from. Um, and it's. Again, social morals and pressures and the threat of violence being what it is.

Then maybe actually in a small city with like 50,000 people where there's one family that's trusted as the family that holds the metal and issues the paper money, maybe they're less likely to turn out to be fraudulent than a Madoff type figure.

James Altucher: You know, that's a good point because it's not like people could escape to Switzerland or some island. You know, everybody pretty much stayed in the city that they were born in because it was unsafe to wander, you know, afar by yourself. And so in order for a family, like let's say the Medicis or or whatever families came before them to retain status, they're only gonna be trusted.

They have to be trusted cuz they have to stay in town. [00:21:00] And the only way they could be fully trusted is if they make sure, probably through their own use of military force, that their currency is tru, that their receipts are are trusted.

Omid Malakan: Right, the two go hand in hand. And, and of course you have, they're still governments and, uh, governments has have been creating rules around banking and money forever. Um, but at the end of the day, because this is all just mythology, there is something fragile and somewhat precarious about it. Uh, and I think the simplest evidence of that is there have been thousands, probably of different currencies throughout the ages that have at some point had some significant level of adoption in their local region, and none of them survived to this day.

So that means something.

James Altucher: What does it mean?

Omid Malakan: It means that. Money is precarious and that mythology [00:22:00] is something that can grow, but it can also shrink. Uh, and one of the ideas that I try to explore in the book is the more it grows, the more likely that whoever stands behind it ends up betraying it. And some people would even argue that we're witnessing the US and the dollars version of that today in the sense that our currency is now the.

Global standard and the global reserve currency, but we've used that as an opportunity to print a lot of it, which some people are not happy about. We've increasingly also weaponized it with things like sanctions, like we enforced on Russia, and there's a long history of this, of like some emperor's coin becomes so powerful and so universally accepted that that emperor starts doing.

Uh, nefarious things with it, or even just like diluting the value of it, inflating it, just because they think they [00:23:00] can get away with it, and that leads to the demise of the myth and the currency.

James Altucher: Well, you know, for a long time, I mean forever basically, until very recently, All paper currency, it seems was backed by some commodity, like gold or silver. So, so I guess at some point they switched from viewing receipts as money to actually a local force, whether it's a bank or a government or whatever.

Uh, uh, issuing real money with pictures on it and a, you know, a one or a 10 or a 20 on it to repre represent how much it signifies and it becomes standardized throughout that. Society. And so, and then we saw in, in, I guess it was 1971. I mean, so, so there's a problem with this though, which is that what if your country doesn't have any gold or silver, you can't make money that represents that gold or silver.

Like you have to start invading other countries with gold or silver or, or go to the [00:24:00] new, the new land, uh, you know, north America where there's more gold and silver. So you, and you have to find, This is metal, but what if your, what if your economy is growing faster than your supply of, of the metal that is back in your currency?

And so this was sort of happening in the United States in the sixties we're, it's not that the eco, the economy was growing, but also we were spending an enormous amount of money on Vietnam and LBJs, you know, great society programs, which included, you know, welfare and student loans and all these things.

And so Nixon finally said, look, we're not gonna keep digging gold just to like, Match our need for money. You're gonna just have to trust purely the dollar.

Omid Malakan: Yeah, so the, the, the metal backing of money, one way to think about it is that it becomes a constraint on anybody abusing the mythology behind it. Um, so like, if your currency is backed by gold and, and that, that doesn't necessarily mean that you are like issuing gold coins. Even if you say, look, see that big fancy [00:25:00] building with the columns over there, that's the central bank.

And inside there there's a lot of gold. And if you really wanted to, you could take your government issued paper money over there and get some gold for it. So don't worry about it. We're not gonna abuse it, we're not gonna inflate it. We can't print too much of the paper money cuz there's only so much gold.

Um, but as you said, that comes with its own constraints and problems. A lot of times the most common has been things like war. Uh, where the government needs to print or borrow a lot more than it ordinarily does, and it just doesn't have the gold. Um, there are other problems with the, um, a metal standard or a gold standard, somewhat less nefarious.

Uh, and one of them is that it gives the issue of the currency less control over the money supply,

uh, and, and the credit cycle.

James Altucher: well, let me ask you what happened in Germany in the twenties when suddenly, you know, it took a trillion [00:26:00] marks to buy, uh, a loaf of bread. Like was, was, were, were German marks, uh, backed by gold? I don't even know.

Omid Malakan: I actually don't know. I have not studied that period closely. I mean, but the things that we do know that, um, the, uh, in the aftermath of World War I, the devastation that they suffered, plus the reparations. That they had to pay to the allies, and I think they had to pay those refer reparations in the currency of the allies.

Uh, so the Germany economy was almost like constantly exporting capital to its neighbors, uh, which then crippled its domestic economy and the currency.

James Altucher: Right, so, so, so one key in, one key thing, which can cause hyperinflation, which is what everybody's worried about in the us but this is not a problem we have. One problem many countries have is what Germany had in the 1920s, what South Amer, what most countries in South America had in the 1980s, um, and on and on.

What Zimbabwe had in whenever that was, the 1990s, [00:27:00] is that if you borrow money in another country's currency, You, you, you risk hyperinflation if you can't pay that money back. Cause you have to print more of your own currency to convert into, uh, dollars, for instance, to pay the money back. And it's just, it's just a death spiral.

You end up printing trillions of marks in the case of, of Germany. Whereas the US doesn't have that problem. That's one key thing that helps us avoid hyperinflation and that's why people are concerned if, if. If suddenly everybody starts transacting for oil in something other than the dollar, it could mean we might owe, we might not be able to A, lend as many dollars to people, and B, we might owe money in currencies, not the dollar.

If we're buying oil, which we do.

Omid Malakan: Yeah, and I think hyperinflation is actually the wrong thing to be concerned about. Cause hyperinflation is, is fairly rare. Uh, I think the bigger problem is if you just have a sustained period of elevated [00:28:00] inflation as we did here in the US and the seventies and and part of the eighties, that in of itself could be very devastating.

Um, and that to me is a more reasonable concern about what could happen to the dollar, but it's not just a dollar. We are in this very unusual time in history where, Virtually all of the world's money is only backed by a promise by a government. So it's fiat money. There is almost no currency that's backed really significantly by any kind of commodity, like gold or silver.

Uh, and some countries have currencies that are pegged to other currencies, but we could talk about this when we get into crypto. But I always think it's ironic when you hear. Economists and other experts say, oh, well Bitcoin can't be money. You know, because money is something that's issued by a sovereign and there's a central bank behind it, and they, they adjust interest rates, [00:29:00] but that's only been money for like 0.01% of the time.

That money's been a thing. The history of money has always been changing.

James Altucher: Even in the us, I mean a lot of. In the 18 hundreds, banks, local banks would issue their own currency. So if you were in Montana, you could get like literally a $3 bill from the bank in Montana. And it was good because that bank was supporting it. It's not like in 1830 people would go from Montana to Chicago to buy a coat.

You would have to buy everything in your local town and you would use the local currency. So it's kind of only a recent thing that all money now is issued by governments.

Omid Malakan: Yes. And not only that, but we're coming out of a period after Covid where all governments. Significantly increase the supply of their money at the same time. So it's not surprising then that we are going through a global period of high inflation.

James Altucher: Just outta curiosity, like on the this subject. [00:30:00] There's a lot of different directions to go on the subject of inflation, but if the price of eggs inflates and many other things like that, wh the, the big problem really is wages have to keep up with it. If wages kept up with it, no problem, but why aren't, why isn't right now, wages keeping up with just everyday inflation.

Omid Malakan: Some wages are very sticky. So if you think about people who have. Contracts for what they make. Um, employers are generally hesitant. They don't, they don't just give raises for the sake of giving raises. There has to be some kind of a market dynamic that forces them to, um, then there's the issue of automation and technology and innovation.

Plus frankly, like, you know, people are sometimes hesitant to ask for more. Um, but. Things are starting to pick up, aren't they? I don't follow the, the macro data that

James Altucher: Yeah. Yeah. And [00:31:00] inflation supposedly has been going considerably down pretty quickly right now. Um, maybe because of the rate hikes, maybe because of the stock market's gone down and so many people are invested in the stock market, maybe just cuz of fear of a recession coming. Uh, but it seems like one of those things where, and this is a, a big debate, but, and a, and a different debate, but whether the Federal Reserve knows what they're doing, you know, or whether market

Omid Malakan: No comment.

James Altucher: Yeah. Whether the market for, well, that's the whole thing with the Bitcoin, is that there's no central authority that decides the value of your, of your, of the dollars that are in your pocket. But it's, it's, I remember I had a, a Federal Reserve deputy governor on the podcast early in the pandemic, and he said the main worry that Federal Reserve had then was deflation because there was so much demand for the dollar around the world because the dollar was the safe and is still the safest currency that they couldn't even inflate the dollar.

And inflation is not necessarily bad if your economy is growing. I mean, look, the, the dollar has quote [00:32:00] unquote lost 97% of its values in the past 100 years. Like what? The dollar, what used to be a dollar in 1913 is now worth 3 cents now in terms of what it can buy. But at the same time, it's the biggest period of growth and innovation in world history.

I mean, we've put a man on the moon, we've created the internet, you know, we've. Practically curing cancer in the next few years. So, so inflation hasn't necessarily been a bad thing. It's, it's healthy when people feel the growth in their country.

Omid Malakan: Yeah. I think the only things we can say that our absolutes is hyperinflation is bad. And extreme deflation is but bad. Those, I think, are universally acknowledged as being scenarios to avoid

James Altucher: A deflation when it's not accompanied by product increases in productivity. So like, like the apple.

Omid Malakan: deflation. Yeah.

James Altucher: Yeah, like, like phone, like when, when you get more in a, in a phone this year than you got 10 years ago, like more apps and more speed and so on. The phone in a sense has deflated like the price. If you're paying the same [00:33:00] price, but you're getting so much more.

There's, that's kind of a deflation in, in, in the currency, but it's not like the deflation experienced, for instance, in the Depression where people just hid their money in a mattress and were afraid to use it. So that was, that resulted in deflation.

Omid Malakan: Right. Yeah. If, if people become convinced that the value of money is only gonna go up, then they don't want to spend it, they want to hoard it, uh, which then diminishes economic activity, but,

James Altucher: is, which could be what's happening now, wh when interest rates go up, it means the demand for the dollar will go up, which means you don't wanna spend your dollar for other things because you're getting a higher interest rate in your savings account.

Omid Malakan: That's the hope of the Fed. Um, but, uh, what was I, oh, the, the, the politics of this is also very interesting because they're always winners and losers. So they're certainly people who really benefit from high inflation, like debtors for example. They get to repay their debt with. Um, diminished value, but then there are people who really lose with it, which [00:34:00] are people who don't have a lot of debt, but earn some kind of a wage where it's gonna be difficult for them to raise prices.

Um, and, and this is for anyone who's a student of history, the back and forth on this is, uh, is, is always been very interesting and played a big part in US politics. Um, like, um, you probably know James, the famous, uh, I think was it William Jennings Bryant speech, the Cross of Gold Speech, which is considered one of the greatest political speeches in American history.

And he was making the, an, uh, argument against the gold standard. He actually wanted a by metallic or a more silver oriented standard because it's more inflationary. And at the time you had people who were farmers who were like, look, we got mortgages, we got a lot of debt. Uh, and our crop prices are too low.

Like we need some inflation to economically right ourselves.

James Altucher: Right, and there, there was practically no inflation back then in, in the 18 hundreds, like [00:35:00] almost zero. And that, and, and having a gold standard or a silver standard to some extent, like you said earlier, controls. Inflation a little bit and, and doesn't, doesn't allow the government to control inflation, which, which with pure paper money, that's not backed by anything.

The government pretty much controls everything and that, and that's a big problem, which will, again, there was an evolution of money and we'll talk about Bitcoin in, in a bit. But, uh, it's interesting just the story of money though, like again, What you refer to as the mythology of money. Like it's so hard.

Like you have to, you have to really be a mass hy hypnotist to convince people that this little piece of paper is worth one entire dollar. Like if you, if you really look at the US dollar, Like there's, there's this beautiful calligraphy and design, so okay, maybe you'll trust that if you don't trust that it's in God we trust.

So if you don't trust the United States, United States, America is on the top. But if you don't trust the United States, America, maybe you trust God [00:36:00] cuz it's in God we trust and, and then you have not only God, but look. The kind of the God of America is George Washington, like he's the first president.

He's, he was the most, supposedly the most honest president. So maybe you trust George Washington. His picture's right here, he backs this dollar. And then if you don't trust that, it's like a contract. There's the signature of the treasurer of the United States and the Secretary of Treasury, and then there's this number, like a 8 7 4 2 6 0 2 4 A.

Like why do we need to have that number? But it kind of signifies. You know that this was really printed in the United States, and if you don't trust that there's this, you know, this, there's a, the words, this certificate is legal tender for all debts, public and private, and then there's Washington DC and there's a seal on it with an eagle, and then you turn it over, there's.

If you don't believe any of that, maybe you believe in this, a pyramid with a floating eye [00:37:00] above it, like this is ancient history and there's, then there's like Latin or some other language written there. This is like, it's not just us, the, the, the people in Washington, DC it's, it's ancient history. It's 5,000 years old.

These pyramids, like, we're gonna, maybe you trust that. And on and on. Like it doesn't stop the, the ways in which, you know, the, the mythology of the dollar is written all over the dollar.

Omid Malakan: And, and you, we can also see this in our personal lives, like in, in, uh, sapiens, uh, Yuval Harari talks about like the other big myths, like religion being one of them. I think the three are language, religion, and, uh, and money. But the funny thing is like there are plenty of people today that walk around and they're like, I'm an atheist.

I don't believe in religion. And you're like, yeah, fine. You're like a perfectly sane person. But if somebody comes up and me is like, I, I just don't believe in money and I'm never going to use it, you'll be like, wow, you've completely lost your mind. You need help. It's that pervasive of a myth.

James Altucher: Well, and, and the thing is, you get in, obviously you get in real [00:38:00] trouble if you counterfeit money. So, so again, just like the Medicis in, you know, medieval Italy or Renaissance Italy, there's, there's, I mean, the US you'll go to jail for a really long time if

Omid Malakan: The Secret Service. Yeah, as, as

James Altucher: mean,

Omid Malakan: you probably know, the Secret Service was actually originally, um, It, its job was to do things like crack down on counterfeiting of money and dollars. It just so happened, I think the story, wasn't it, that like their office was the closest to the White House, so when they decided the president should get additional protection, it would become something that they do too.

But their,

their original purpose, I'll, I'll have to verify this, but I'm pretty sure that original purpose had to do with, um, making sure that. People are not counterfeiting money cuz people counterfeit money. Then it erodes the integrity of that money and if the integrity is erodes, then people stop using it and then it collapses in value.

James Altucher: I remember in the, in the nineties there was, um, early [00:39:00] nineties, there was this period, um, the area where the so-called silicone alley was created where all these web design agencies, uh, sprung up. There was more, um, print shops, like you needed a post of printed, you'd go to these print shops and they had these, you know, the latest technology and copy machines and.

Now a hundred dollars bills always had anti-counterfeiting features and then it evolved to $20 bills. But these, these one group of guys, they were using their copy machines to literally print one and $5 bills and $10 bills and just using them in, you know, local DE's where nobody would question if they were counterfeit enough cuz they were so small.

So, so, you know, counterfeiting has been like a big deal. Now it's all the way down to the do the dollar. I think there are anti-counterfeiting, uh, features of it,

Omid Malakan: Yeah, I just

James Altucher: serious thing.

Omid Malakan: So the Secret Service was, according to their own website, was founded in 1865 to stop counterfeiting, cuz that after the Civil War, the a third of all currency circulation in the US was counterfeit.[00:40:00]

James Altucher: That's crazy. And, and I knew this, um, one artist, uh, J s g Boggs, who he was ingenious, he would paint. Dollar bills for himself and they would always have something wrong. Like maybe it would be like his picture on the $10 bill instead of, you know, whoever it is. Uh, so he would always do something where it was clear that it was not money, it was a, it was fake, but he was constantly being arrested by the Secret Service because he was painting money.

Cuz here's what he would do. He would go to a restaurant and at the end of the meal they would give him the bill and he would say, listen, I don't have any money, but how about I give you, One of my paintings, and he would take out of his pocket a painting he did of a $10 bill and use that to pay $10 worth of.

His meal. And so two people would be sitting at the tables next to him in these restaurants, one, the Secret Service who would arrest him and the other collectors who would, who would then buy from the restaurant, the [00:41:00] $10 painting plus the receipt. And that's how they collected his art. Uh, it was a fascinating thing though, mixing the art with the money like that because Cuz uh, cause uh, cuz money's beautiful too, because of all this symbolism.

Omid Malakan: The door. Yeah, it's fascinating.

James Altucher: But people should look up, like if you Google Jsg Box, he has some really beautiful paintings of, of fake money. So, uh, but o so obviously though, you know, paper money has its problems and, and needs. To evolve too, like the, one of the problem we discussed is the, the Federal Reserve, this central authority, which doesn't really necessarily know what they're doing.

Like the Federal Reserve does a lot of good, particularly in times like these where, you know, maybe banks need more trust behind them and, and or Becca collapse. But, uh, but they also control the value of the dollar without your permission. Like they can either raise interest rates or they can print money.

By the way, what does it, can you define what does it mean actually when they print money?

Omid Malakan: So I think it's [00:42:00] time to introduce another category of money, which is that. Throughout history, money comes in two forms. There's token money, which is money that has some kind of a physical representation, like a metal coin or a paper bill. And then there's ledger money, which is money. That's just, uh, a balance that's recorded on the ledger of some kind of an authority.

Could be a bank, a FinTech, the government itself, uh, and.

James Altucher: what does that, what does that mean? Like, it means like when I transfer money from, let's say, Wells Fargo to Bank of America. On some ledger in Wells Fargo for my account, money Subtracted and on Bank of America in some digital ledger in a computer. Money's added, but no actual currency goes from one bank to the other.

Omid Malakan: That's right and, and the vast majority of money in existence today is ledger money. Uh, even like, you can go on the Federal Reserve and look up the statistics. I think there's only something like 2 trillion, uh, [00:43:00] in physical bills and notes out there, but over $20 trillion in dollars that are nothing more than really in modern times database entries at either commercial banks like Bank of America or the Fed itself.

And, and this is true in every country, in every currency, in part because. Ledger money is a lot more convenient. If you think about like large transactions, you wouldn't want to buy your house, um, by showing up with duffle bags full of cash. Although I, I was recently told that that's standard practice in Argentina because it's dollarized, um, across long.

James Altucher: market, a blue market, and the regular market in Argentina to, uh, to signify the different, and then there's the bitcoin market to signify the different types of currency there.

Omid Malakan: Right. Um, and then ledger money is more useful across long distances. Like you, you wouldn't want to ship money, um, to another country if you are making an investment there. It's more useful for capital markets. [00:44:00] Like imagine if every time you traded stocks you'd have to pay in cash. And more recently, it's really a big part of the digital economy, like one of the great.

Innovations of ride share services like Uber was that they integrated credit card payments into the app. So you no longer had to do this awkward thing that you, and I remember that you take a cab and it gets there and the cab driver's like, that'll be 1850. And you're like, I only have a 50. Do you have change?

And it's very, uh, cumbersome. So there are many benefits to ledger money, but there's a couple of big downsides. And one of them is that you have to trust whoever is maintaining the ledger to do a good job of it. It's one of the reasons why banking and fintechs are highly regulated, like you wouldn't want it to be like Bank of America accidentally deleted your balance and then your money's gone forever.

James Altucher: And this is really a software issue, like how did they avoid when they started doing this, how did they avoid like, Not having major software [00:45:00] issues where people would just lose their bank accounts and the bank would have no record of it, so they wouldn't be able to confirm or deny.

Omid Malakan: Uh, it's, well, one is you would have a record of it. So

you, you, you would go and deposit your money and then they would give you a receipt that says like, you have this deposit here, and they give you statements monthly that attest to that, but really like, Auditors controllers, government regulators.

There's a very, very complex apparatus whose job it is to make sure that these ledgers maintain integrity, which is not something that you need for token money. Like the $20 bill in your wallet is a $20 bill in your wallet. You could lose it possibly if you lose your wallet. But it's not like accidentally gonna suddenly disappear.

Nor importantly enough, can a corporation or a government just snap its finger and make that [00:46:00] $20 bill go away or be worth, you know, $1. Uh, and this is an interesting segue when we get into the world of cryptocurrencies, cuz a lot of people, when they think about something like Bitcoin, they focus on the supply.

It's decentralized. There's only ever gonna be 21 million of it. There's no central bank that can print more, et cetera. But I think just as importantly, there is the integrity that the whole complicated blockchain infrastructure provides, which is that, um, while it is kind of a kind of ledger money, right, the blockchain is a ledger, it's a database.

It has unique properties of token money, one of which is that if you have a Bitcoin in your wallet address, nobody can deny you access to your Bitcoin in the way that banks routinely actually like, deny people access to their own money. Um, and it's not gonna just like suddenly disappear because of a mistake [00:47:00] or an accident.

James Altucher: Well, so, so what is so, so let. Let's list. So, so we're gonna talk about crypto and Bitcoin and the next evolution of currency. In part two of this question, the history of money. But let's just list what right now, the, the, the, up until Bitcoin, the state of money has evolved to being, you know, paper money combined with, um, 90% this sort of digital ledger money, like money just kind of stored in a database.

What would you say are the problems. And we didn't really answer the question of how do you, how does one print money? I guess the idea is the Federal Reserve just, it just increases what's on the ledger. But, but I'm not sure why. But we'll talk about that in part too. But what are the problems of, of this digital ledger money, which is most of the money we use and spend right now?

Omid Malakan: So that's two. One is the supply issue, which is that it's because it's trivially easy. You know, the, the TLDR of it is that for the Federal Reserve to create new dollars, it just putting a number into a database, like at least in [00:48:00] the old days, you had to physically print more money, uh, to a certain extent.

But now it's all done electronically. Um, and then the other thing is this question of access, uh, which is that in with ledger money, you are trusting the preserver of the ledger of the bank to always give you access. And there are many legal reasons where banks don't. In fact, there are many legal reasons where they're obligated to deny you access, right?

If law enforcement goes to them and tells 'em to freeze your money, uh, and then in the. Geopolitical sense. You have things like economic sanctions. So those are two of the big downsides or risks of ledger money as controlled by governments and corporations. And then when you get into the world of a cryptocurrency like Bitcoin, there is, you know, the, the supply goes up, but it goes up algorithmically on a preset schedule.

And nobody can suddenly be like, [00:49:00] oh, well there's a pandemic going on. We need to print more Bitcoins. And then your access. My access, actually, literally anybody else's access is guaranteed by the technology.

James Altucher: So, so, so those are, are the two main problems I would say. There's a few others, but, so just to, to summarize, one is, If, if suddenly the Federal Reserve quietly decided to just double the amount of money in the system, then the dollars in your pocket would would lose, Val would be cut in half in value because unless the economy was itself doubled in innovation, in productivity, there's no reason why there should be twice as many dollars in the system.

And so, so that's what really causes inflation, which means the value of the dollars in your pocket go down and you had no say over that. And then problem number two. Is what, what were you saying? Problem number two was

Omid Malakan: Problem number two is access.

James Altucher: Oh, right, so, so like, you know, if, if, if the government decides it doesn't like you, they [00:50:00] could basically shut off access to your bank account. And that happens, by the way. So

Omid Malakan: By the way, if your bank decides, yeah, I mean, if your bank decides that, that, that they don't like you, they could do that or they could deny you a bank account in the first place.

James Altucher: Right, which has been a, a major problem in, in some areas of society. So there's a variety of problems there. I would say there's additional problems. One is, uh, There's, there's the possibility of human error, like we discussed. What if your bank just loses track of your money somehow there's a software bug or, or there's a criminal or whatever.

Uh, another is, there's fees in the system because I have to use a bank. Uh, uh, and by the way, some people are, are, don't, don't have enough money to put money into a bank, and so they have their own issues. But because I have to use a bank, uh, I have to pay fees. And let's say I was gonna wire you money, I gotta go through my bank, then the local reserve bank, then the Federal Reserve, then your local reserve and, and so on.

There's fees along the way. So I think you, o Omid were the one who told me like how many, how much [00:51:00] fees are baked into the financial system worldwide.

Omid Malakan: I think total the revenues of the world's payment providers is somewhere in the vicinity of 3 trillion a year.

James Altucher: 3 trillion, so, so.

Omid Malakan: that's not, you know, they're, it's either fees, so, so you send the wire, they charge you a fee, use a credit card, the store has to pay a fee. But also if you think about like forfeited interest, like if you have money in a checking account at a big bank right now, they're not gonna pay you interest on it.

You know, that 5% interest that you could be earning now goes to them. So cumulatively that's, you can think of it as a tax on the entire economy.

James Altucher: Right, and, and with crypto, because you're avoiding all of these systems that was kind of, you know, glued together in a hodgepodge sort of way. Crypto solves all these problems. Furthermore, you don't have to. And, and this is the kind of the topic of your book, rearchitecting Trust. You don't have to trust your bank, uh, with crypto, like your, your, your bank could go outta [00:52:00] business, but you still have immediate access to your money.

It's in a sense you bank yourself. Uh, and, uh, you know, there's a lot. We, we've, we've seen this, like for the first, you know, Satoshi invented Bitcoin in around 2009, or he released it in 2009. And that was right after the financial crisis where people were worried every bank was going out of business. Fast forward 14 years, suddenly everybody's worried.

Once again. Every bank this is, was actually the dream come true for Satoshi in 2009. Banks have actually gone out of business now again, and Bitcoin shoots up as a result because this is the problem that was meant to solve and it actually does solve it.

Omid Malakan: If you look at survey data in the US when they ask them about what kind of institutions people trust, uh, a lot of times the least trust, trusted institutions are government and then, Banks and Wall Street, and one way to think about the existing fiat money system is that it is a system that is [00:53:00] controlled by the governments and banks.

When you move into the crypto domain, it is a system that's that's actually mostly controlled by no one. Um, but to the extent that there are any decisions that have to be made, they are made by the community, and that's why there are certain people who are actually very passionate about this being a new paradigm about how we create money and then preserve its integrity.

James Altucher: And so in part two we're gonna cover a lot of this. Plus, uh, we'll cover what happens when there's Central Bank digital currencies, cuz that brings up some of the old problems again, in a scary way, maybe even worse, even though it has a crypto sort of feel to it. Uh, so, so money could evolve. We could see money evolve even further, more, uh, or further.

And, uh, uh, but in the meantime, this is part one, the history of money. If you have any questions about what we discussed here, just tweet out at me at j [00:54:00] Altucher or tweet out at, at omid, uh, malan oms, m a l e K A A N O M S, and we will answer again on the, on this podcast. Uh, but History of Money Part two, uh, written by Mel Brooks.

I feel like that's, what is it? History of Money part two. Uh, we will be in a, in a, a couple weeks after this one. So we have time to, you have time to ask questions and that's gonna cover kind of all the new evolutions and money and what even might be coming down in the future. So, Omid, thanks so much for, for your expertise.

It was so fascinating. I didn't really know a lot of these things, and that's the history of Money Part one.

Omid Malakan: Thanks James.